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, 2013

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 14, 2013, 276,411,976 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 (Unaudited)
	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	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	78
Item 4.	Controls and Procedures	79


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	80
Item 1.A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 4.	Mine Safety Disclosures	82
Item 6.	Exhibits	83
SIGNATURE		84
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)	2013		2012		2013		2012
Revenues
Premiums and fees	$	7,206	$	6,602	$	21,692	$	19,360
Net investment income	297		283		873		854
Mail order pharmacy revenues	471		401		1,333		1,189
Other revenues	65		26		139		76
Realized investment gains (losses):
Other-than-temporary impairments on fixed maturities, net	(3)		-		(11)		(6)
Other realized investment gains	30		11		203		26
Total realized investment gains	27		11		192		20
Total revenues	8,066		7,323		24,229		21,499
Benefits and Expenses
Global Health Care medical claims expense	3,913		3,561		11,864		10,584
Other benefit expenses	1,031		911		3,890		2,648
Mail order pharmacy cost of goods sold	390		324		1,096		975
GMIB fair value (gains)	-		(53)		-		(33)
Other operating expenses	1,933		1,862		5,739		5,467
Total benefits and expenses	7,267		6,605		22,589		19,641
Income before Income Taxes	799		718		1,640		1,858
Income taxes:
Current	205		228		285		574
Deferred	41		24		237		67
Total income taxes	246		252		522		641
Net Income	553		466		1,118		1,217
Less: Net Income Attributable to Redeemable Noncontrolling Interest	-		-		3		-
Shareholders’ Net Income	$	553	$	466	$	1,115	$	1,217
Shareholders’ Net Income Per Share:
Basic	$	1.99	$	1.64	$	3.96	$	4.27
Diluted	$	1.95	$	1.61	$	3.89	$	4.20
Dividends Declared Per Share	$	-	$	-	$	0.04	$	0.04

The accompanying Notes to the Consolidated Financial Statements (unaudited) 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)	2013		2012		2013		2012
Shareholders’ net income	$	553	$	466	$	1,115	$	1,217
Shareholders’ other comprehensive income (loss):
Net unrealized appreciation (depreciation) on securities:
Fixed maturities	(7)		83		(348)		169
Equity securities	(7)		-		(5)		2
Net unrealized appreciation (depreciation), on securities	(14)		83		(353)		171
Net unrealized appreciation (depreciation), derivatives	(2)		(4)		7		(4)
Net translation of foreign currencies	59		31		(15)		23
Postretirement benefits liability adjustment	12		8		73		44
Shareholders’ other comprehensive income (loss)	55		118		(288)		234
Shareholders’ comprehensive income	608		584		827		1,451
Comprehensive income (loss) attributable to redeemable noncontrolling interest:
Net income attributable to redeemable noncontrolling interest	-		-		3		-
Other comprehensive (loss) attributable to redeemable noncontrolling interest	(6)		-		(15)		-
Total comprehensive income	$	602	$	584	$	815	$	1,451

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

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Cigna Corporation

Consolidated Balance Sheets

	Unaudited
	As of				As of
(In millions, except per share amounts)	September 30, 2013				December 31, 2012
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $14,295; $15,481)			$	15,645			$	17,705
Equity securities, at fair value (cost, $149; $121)			140				111
Commercial mortgage loans			2,404				2,851
Policy loans			1,494				1,501
Real estate			89				83
Other long-term investments			1,260				1,255
Short-term investments			763				154
Total investments			21,795				23,660
Cash and cash equivalents			3,055				2,978
Accrued investment income			258				258
Premiums, accounts and notes receivable, net			1,869				1,777
Reinsurance recoverables			7,371				6,256
Deferred policy acquisition costs			1,339				1,198
Property and equipment			1,451				1,120
Deferred income taxes, net			289				374
Goodwill			6,035				6,001
Other assets, including other intangibles			2,425				2,355
Separate account assets			8,156				7,757
Total assets			$	54,043			$	53,734
Liabilities
Contractholder deposit funds			$	8,499			$	8,508
Future policy benefits			9,370				9,265
Unpaid claims and claim expenses			4,195				4,062
Global Health Care medical claims payable			1,962				1,856
Unearned premiums and fees			588				549
Total insurance and contractholder liabilities			24,614				24,240
Accounts payable, accrued expenses and other liabilities			6,065				6,667
Short-term debt			205				201
Long-term debt			5,034				4,986
Separate account liabilities			8,156				7,757
Total liabilities			44,074				43,851
Contingencies — Note 17
Redeemable noncontrolling interest			95				114
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 366; authorized, 600)			92				92
Additional paid-in capital			3,344				3,295
Net unrealized appreciation, fixed maturities	$	535			$	883
Net unrealized appreciation (depreciation), equity securities	(1)				4
Net unrealized depreciation, derivatives	(21)				(28)
Net translation of foreign currencies	54				69
Postretirement benefits liability adjustment	(1,526)				(1,599)
Accumulated other comprehensive loss			(959)				(671)
Retained earnings			13,327				12,330
Less treasury stock, at cost			(5,930)				(5,277)
Total shareholders’ equity			9,874				9,769
Total liabilities and equity			$	54,043			$	53,734
Shareholders’ Equity Per Share			$	35.64			$	34.18

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

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Cigna Corporation

Consolidated Statements of Changes in Total Equity

					Accumulated
Unaudited			Additional		Other								Redeemable
For the three months ended September 30, 2013	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		Noncontrolling
(In millions)	Stock		Capital		Loss		Earnings		Stock		Equity		Interest

Balance at July 1, 2013,	$	92	$	3,326	$	(1,014)	$	12,806	$	(5,435)	$	9,775	$	101
Effect of issuing stock for employee benefit plans				18				(32)		64		50
Other comprehensive income (loss)						55						55		(6)
Net income								553				553		-
Repurchase of common stock										(559)		(559)
Balance at September 30, 2013	$	92	$	3,344	$	(959)	$	13,327	$	(5,930)	$	9,874	$	95

For the three months ended September 30, 2012 (In millions)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Redeemable Noncontrolling Interest
Balance at July 1, 2012,	$	92	$	3,276	$	(671)	$	11,501	$	(5,176)	$	9,022
Effect of issuing stock for employee benefit plans				6				(5)		8		9
Other comprehensive income						118						118
Net income								466				466
Repurchase of common stock										(85)		(85)
Balance at September 30, 2012	$	92	$	3,282	$	(553)	$	11,962	$	(5,253)	$	9,530

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

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Cigna Corporation

Consolidated Statements of Changes in Total Equity

					Accumulated
Unaudited			Additional		Other								Redeemable
For the nine months ended September 30, 2013	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		Noncontrolling
(In millions)	Stock		Capital		Loss		Earnings		Stock		Equity		Interest

Balance at January 1, 2013,	$	92	$	3,295	$	(671)	$	12,330	$	(5,277)	$	9,769	$	114
Effect of issuing stock for employee benefit plans			49				(107)		210		152
Other comprehensive loss					(288)						(288)		(15)
Net income							1,115				1,115		3
Common dividends declared (per share: $0.04)							(11)				(11)
Repurchase of common stock									(863)		(863)
Distribution to redeemable noncontrolling interest													(7)
Balance at September 30, 2013	$	92	$	3,344	$	(959)	$	13,327	$	(5,930)	$	9,874	$	95

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

The accompanying Notes to the Consolidated Financial Statements (unaudited) 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)	2013		2012
Cash Flows from Operating Activities
Net income	$	1,118	$	1,217
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	445		406
Realized investment gains	(192)		(20)
Deferred income taxes	237		67
Gains on sale of businesses	(11)		(14)
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable	(64)		(20)
Reinsurance recoverables	348		50
Deferred policy acquisition costs	(183)		(106)
Other assets	368		166
Insurance liabilities	870		75
Accounts payable, accrued expenses and other liabilities	(524)		(394)
Current income taxes	(33)		141
Cash used to effectively exit run-off reinsurance business	(2,196)		-
Other, net	(76)		(11)
Net cash provided by operating activities	107		1,557
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities	1,671		439
Equity securities	3		8
Commercial mortgage loans	324		325
Other (primarily short-term and other long-term investments)	766		649
Investment maturities and repayments:
Fixed maturities	1,192		1,030
Equity securities	27		-
Commercial mortgage loans	144		311
Investments purchased:
Fixed maturities	(1,580)		(1,907)
Equity securities	(56)		(8)
Commercial mortgage loans	(26)		(314)
Other (primarily short-term and other long-term investments)	(1,227)		(600)
Property and equipment purchases	(414)		(329)
Acquisitions and dispositions, net of cash acquired	(84)		(3,468)
Net cash provided by / (used in) investing activities	740		(3,864)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds	1,078		999
Withdrawals and benefit payments from contractholder deposit funds	(1,029)		(927)
Change in cash overdraft position	9		19
Net change in short-term debt	(100)		123
Repayment of long-term debt	(7)		(326)
Repurchase of common stock	(836)		(85)
Issuance of common stock	132		58
Common dividends paid	(11)		(11)
Distribution to redeemable noncontrolling interest	(7)		-
Net cash used in financing activities	(771)		(150)
Effect of foreign currency rate changes on cash and cash equivalents	1		3
Net increase / (decrease) in cash and cash equivalents	77		(2,454)
Cash and cash equivalents, January 1,	2,978		4,690
Cash and cash equivalents, September 30,	$	3,055	$	2,236
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	289	$	414
Interest paid	$	203	$	186

The accompanying Notes to the Consolidated Financial Statements (unaudited) 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 was incorporated in the State of Delaware in 1981. Various businesses that are described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (“2012 Form 10-K”) are conducted by its insurance and other subsidiaries. As used in this document, “Cigna”, the “Company”, “we” and “our” 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 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 with a mission to help 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 these ongoing operations, 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 included in the Company’s 2012 Form 10-K.

The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors, including 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. In particular, as a result of the changes in segment reporting discussed further in Note 16, benefits expense amounts previously reported in Other Benefits Expense for the international health care business have been reclassified to Global Health Care Medical Claims Expense in the Consolidated Statement of Income for the three months and nine months ended September 30, 2012.

Note 2 — Recent Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”) (ASU 2013-02). Effective January 1, 2013, the Company adopted updated guidance from the Financial Accounting Standards Board (“FASB”) on reporting items of AOCI reclassified to net income. The updated guidance requires disclosures of the effect of items reclassified out of AOCI into net income on each individual line item in the statement of income. See Note 14 for the Company’s updated disclosures.

Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The FASB’s new requirements to disclose information on both a gross and net basis for certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with specific criteria or subject to a master netting or similar arrangement became effective January 1, 2013. There were no effects to the Company’s financial statements because no transactions or arrangements were subject to these new disclosure requirements.

Investment Company Accounting (ASU 2013-08). The FASB recently issued accounting guidance to change the criteria for reporting as an investment company, clarify the fair value measurement used by an investment company and require additional disclosures. This guidance also confirms that parent company accounting for an investment company should reflect fair value accounting and is effective beginning on January 1, 2014. Adoption of this standard is not expected to have a material impact on the Company’s financial statements.

Fees Paid to the Federal Government by Health Insurers (ASU 2011-06). In 2011, the 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 beginning in 2014. 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

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provided. A corresponding deferred cost will be recorded and amortized over the calendar year. The amount of the fees is expected to be significant. While the Company anticipates recovering most of the fees through rate increases, because the Company’s ultimate share of these fees remains uncertain, management is unable to estimate the impact on shareholders’ net income.

Note 3 — Acquisitions and Dispositions

From time to time the Company may acquire or dispose of assets, subsidiaries or lines of business. For further information on the Company’s effective exit from the guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) business, see Note 6. Other significant transactions are described below.

A. Joint Venture Agreement with Finansbank

On November 9, 2012, the Company acquired 51% of the total shares of Finans Emeklilik ve Hayat A.S. (“Finans Emeklilik”), a Turkish insurance company, from Finansbank A.S. (“Finansbank”), a Turkish retail bank, for a cash purchase price of approximately $116 million. Finansbank continues to hold a redeemable noncontrolling 49% interest in Finans Emeklilik, which operates in life insurance, accident insurance and pension product markets. The acquisition provides Cigna opportunities to reach and serve the growing middle class market in Turkey through Finansbank’s network of retail banking branches. Results of this business are reported in the Global Supplemental Benefits segment.

In accordance with GAAP, the total purchase price, including the redeemable noncontrolling interest of $111 million, has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair value. Accordingly, approximately $113 million was allocated to identifiable intangible assets, primarily a distribution relationship and the value of business acquired (“VOBA”) that represents the present value of the estimated net cash flows from the long duration contracts in force, with the remaining $116 million recorded as goodwill. The identifiable intangible assets will be amortized over an estimated useful life of approximately 10 years. Goodwill has been allocated to the Global Supplemental Benefits segment and is not deductible for federal income tax purposes.

The redeemable noncontrolling interest is classified as temporary equity in the Company’s Consolidated Balance Sheet because Finansbank has the right to require the Company to purchase its 49% interest for the value of its net assets and the in-force business in 15 years.

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

(In millions)
Investments	$	23
Cash and cash equivalents	54
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet)	26
Goodwill	116
Separate account assets	99
Other assets, including other intangibles	98
Total assets acquired	416
Insurance liabilities	58
Accounts payable, accrued expenses and other liabilities	32
Separate account liabilities	99
Total liabilities acquired	189
Redeemable noncontrolling interest	111
Net assets acquired	$	116

The results of Finans Emeklilik have been included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effects on total revenues and net income assuming the acquisition had occurred as of January 1, 2012 were not material to the Company for the three months and nine months ended September 30, 2012.

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B. Acquisition of Great American Supplemental Benefits Group

On August 31, 2012, the Company acquired Great American Supplemental Benefits Group (“Great American”), one of the largest providers of supplemental health insurance products in the United States for $326 million, with cash from internal sources. 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 and further enhances its distribution network of agents and brokers. Results of this business are reported in the Global Supplemental Benefits segment.

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 value. Approximately $168 million was allocated to intangible assets, primarily the VOBA asset that will be amortized in proportion to premium recognized over the life of the contracts, estimated at 30 years. Amortization will be higher in early years and decline as policies lapse. Goodwill has been allocated to the Global Supplemental Benefits segment. 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	168
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet)	144
Other assets, including other intangibles	35
Total assets acquired	1,042
Insurance liabilities	707
Accounts payable, accrued expenses and other liabilities	9
Total liabilities acquired	716
Net assets acquired	$	326

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

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 an aggregate cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 15 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 primarily with its existing cash resources.

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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 estimates of their fair values. Goodwill is not deductible for federal income tax purposes and is allocated to the Government operating segment. 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	2,541
Intangible assets	795
Other	96
Total assets acquired	4,856
Insurance liabilities	505
Deferred income taxes	214
Debt	326
Total liabilities acquired	1,045
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 Consolidated Statement of Cash Flows for the nine months ended September 30, 2012.

The results of HealthSpring have been included in the Government operating segment 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.

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, 2012. 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.

	Nine Months Ended
(In millions, except per share amounts)	September 30, 2012
Total revenues	$	22,092
Shareholders’ net income	$	1,227
Earnings per share:
Basic	$	4.30
Diluted	$	4.23

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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,
2013
Shareholders’ net income	$	553				$	553
Shares (in thousands):
Weighted average	278,054					278,054
Common stock equivalents			5,509			5,509
Total shares	278,054		5,509			283,563
EPS	$	1.99	$	(0.04)		$	1.95
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

			Effect of
(Dollars in millions, except per share amounts)	Basic		Dilution		Diluted
Nine Months Ended September 30,
2013
Shareholders’ net income	$	1,115			$	1,115
Shares (in thousands):
Weighted average	281,279				281,279
Common stock equivalents			5,336		5,336
Total shares	281,279		5,336		286,615
EPS	$	3.96	$	(0.07)	$	3.89
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

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).

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In millions)	2013	2012	2013	2012
Antidilutive options	-	3.9	1.2	3.4

The Company held 89,059,772 shares of common stock in Treasury as of September 30, 2013, and 79,439,106 shares as of September 30, 2012.

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Note 5 — Global Health Care Medical Claims Payable

Medical claims payable for the Global 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 expenses payable that is primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities, as follows:

	September 30,		December 31,
(In millions)	2013		2012
Incurred but not yet reported	$	1,669	$	1,541
Reported claims in process	210		243
Physician incentives and other medical expense payable	83		72
Medical claims payable	$	1,962	$	1,856

Activity in medical claims payable was as follows:

	For the period ended
	September 30,		December 31,
(In millions)	2013		2012
Balance at January 1,	$	1,856	$	1,305
Less: Reinsurance and other amounts recoverable	242		249
Balance at January 1, net	1,614		1,056
Acquired net:	-		504
Incurred claims related to:
Current year	12,039		14,428
Prior years	(175)		(200)
Total incurred	11,864		14,228
Paid claims related to:
Current year	10,351		12,854
Prior years	1,344		1,320
Total paid	11,695		14,174
Ending Balance, net	1,783		1,614
Add: Reinsurance and other amounts recoverable	179		242
Ending Balance	$	1,962	$	1,856

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist. See Note 6 for additional information on reinsurance. For the nine months ended September 30, 2013, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $175 million, or 1.2% of the current year incurred claims as reported for the year ended December 31, 2012. Actual completion factors accounted for $70 million, or 0.5% of the favorability while actual medical cost trend resulted in the remaining $105 million, or 0.7%.

For the year ended December 31, 2012, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $200 million, or 2.2% of the current year incurred claims as reported for the year ended December 31, 2011. Actual completion factors accounted for $91 million, or 1.0% of favorability while actual medical cost trend resulted in the remaining $109 million, or 1.2%.

The impact of prior year development on shareholders’ net income was $77 million for the nine months ended September 30, 2013 compared with $64 million for the nine months ended September 30, 2012. The favorable effect of prior year development for both years primarily reflects low utilization of medical services, and to a lesser extent, the impact of the medical loss ratio (“MLR”) rebate accrual. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:

First, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required

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by actuarial standards of practice that require the liabilities be adequate under moderately adverse conditions. As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase determined appropriate to address moderately adverse conditions for the current year incurred claims, the Company does not consider that offset amount as having any impact on shareholders’ net income.

Second, as a result of the MLR provisions of the Patient Protection and Affordable Care Act, changes in medical claim estimates due to prior year development may be offset by a change in the MLR rebate accrual.

Third, changes in reserves for the Company’s retrospectively experience-rated business for accounts in surplus do not usually impact shareholders’ net income because such amounts are generally offset by a change in the liability to the policyholder. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges. For additional information regarding the Company’s retrospectively experience rated business, see page 6 of the Company’s 2012 Form 10-K.

The determination of liabilities for Global Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2012 Form 10-K.

Note 6 — Reinsurance

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

Effective Exit of GMDB and GMIB Business

On February 4, 2013, the Company entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) to effectively exit the GMDB and GMIB business via a reinsurance transaction. Berkshire reinsured 100% of the Company’s future claim payments in these businesses, net of retrocessional arrangements existing at that time. The reinsurance agreement is subject to an overall limit of approximately $3.8 billion plus future premiums collected under the contracts being reinsured that will be paid to Berkshire. The Company estimates that these future premium amounts will be from $0.1 to $0.3 billion and, accordingly, expects future claims of approximately $4 billion to be covered by the agreement.

This transaction resulted in an after-tax charge to shareholders’ net income in the first quarter of 2013 of $507 million ($781 million pre-tax reported as follows: $727 million in other benefits expense; $45 million in GMIB fair value loss; and $9 million in other operating expenses). The reinsurance premium due to Berkshire under the agreement was $2.2 billion, of which $1.5 billion was paid in the first quarter of 2013. The remaining premium was paid in April 2013. The reinsurance premium was ultimately funded from the sale of investment assets, tax benefits related to the transaction and available parent cash.

Recoverables for GMDB and GMIB Business

The Company had reinsurance recoverables related to the GMDB business of $1.4 billion and GMIB assets of $853 million as of September 30, 2013. Approximately 88% of the combined GMDB recoverables and GMIB assets of $2.2 billion are secured by assets in trust, letters of credit, or are not subject to collection risk. Approximately $1.7 billion of the combined GMDB recoverables and GMIB assets relate to the February 4, 2013 reinsurance arrangement with Berkshire, including $0.7 billion for the cost of reinsurance (excess of premium over recorded reserves).

The following disclosures for the reinsured GMDB and GMIB business provide further context to prior year results, as well as activity in the assets and liabilities for these businesses, including the impact of the reinsurance transaction with Berkshire.

GMDB

The Company has historically estimated its liabilities for assumed and ceded GMDB exposures with an internal model using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over an extended period, consistent with the long-term nature of this product.

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In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. Each quarter, the Company tests for premium deficiency by reviewing its reserve using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. The premium attributable to GMDB from the Berkshire reinsurance transaction was approximately $1.6 billion. Because this premium exceeded the recorded reserve on February 4, 2013, the Company recorded a reserve strengthening of $0.7 billion ($0.5 billion after-tax) in the first quarter of 2013. Reserve increases after February 4, 2013 are expected to have a corresponding increase in the recorded reinsurance recoverable, provided that the increased recoverable remains within the overall limit (including the GMIB asset).

The Company’s dynamic hedge programs were discontinued during the first quarter of 2013 due to the Berkshire reinsurance transaction. These programs had been used to reduce certain equity and interest rate exposures associated with this business. These hedge programs generated losses (included in Other Revenues) of $32 million for the nine months ended September 30, 2013, $35 million for the three months ended September 30, 2012 and $94 million for the nine months ended September 30, 2012. Prior to discontinuing the hedge programs, amounts representing corresponding increases or reductions in liabilities for GMDB contracts were included in benefits and expenses. As a result of discontinuing the hedge programs, the growth rate assumption for the underlying equity funds was changed to use long-term historical averages, resulting in a decrease in the gross reserve liability and the offsetting reinsurance recoverable.

For the year ended December 31, 2012, a reserve strengthening of $43 million ($27 million after-tax) was due primarily to reductions to the lapse rate assumptions, adverse interest rate impacts, and, to a lesser extent, an increase in the volatility and correlation assumptions, partially offset by favorable equity market conditions. The adverse interest rate impacts reflected management’s consideration of the anticipated impact of continued low short-term interest rates.

Activity in future policy benefit reserves for the GMDB business was as follows:

	For the period ended
	September 30,		December 31,
(In millions)	2013		2012
Balance at January 1	$	1,090	$	1,170
Add: Unpaid claims	24		40
Less: Reinsurance and other amounts recoverable	42		53
Balance at January 1, net	1,072		1,157
Add: Incurred benefits	700		17
Less: Paid benefits (including $1,647 premium for Berkshire reinsurance transaction)	1,675		102
Ending balance, net	97		1,072
Less: Unpaid claims	20		24
Add: Reinsurance and other amounts recoverable	1,367		42
Ending balance	$	1,444	$	1,090

Benefits paid and incurred are net of ceded amounts. For the nine months ended September 30, 2013, incurred benefits reflect the February 4, 2013 reinsurance transaction. The ending net retained reserve as of September 30, 2013 is to cover ongoing administrative expenses, as well as claims retained by the Company. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include the charges discussed above.

The death benefit coverage in force for GMDB contracts assumed by the Company (and reinsured as of February 4, 2013) was $3.2 billion as of September 30, 2013 and $4.0 billion as of December 31, 2012. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 400,000 as of September 30, 2013 and 435,000 as of December 31, 2012). The aggregate value of the underlying mutual fund investments for these GMDB contracts, assuming no reinsurance, was $13.7 billion as of September 30, 2013 and $13.3 billion as of December 31, 2012.

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GMIB

As discussed further in Note 8, because GMIB contracts are without significant life insurance risk, they are not accounted for as insurance products. Instead, the Company reports GMIB liabilities and assets as derivatives at fair value. The GMIB asset is classified in Other assets, including other intangibles, and the GMIB liability is classified in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheet. Disclosures related to fair value are included in Note 8 and derivatives are further described in Note 10.

The Berkshire reinsurance transaction resulted in an increase in GMIB assets, representing the increased receivable from that transaction. As of September 30, 2013, GMIB assets included $0.4 billion from Berkshire.

In addition, the GMIB business had GMIB assets of $0.5 billion (classified in Other assets, including other intangibles in the Consolidated Balance Sheet) from two other retrocessionaires as of September 30, 2013.

Other Run-off

The Company’s Run-off Reinsurance operations also assumed risks related to workers’ compensation and personal accident business, and purchased reinsurance coverage to reduce the risk of loss on these contracts. The reinsurance recoverables were $118 million as of September 30, 2013 and 100% secured by assets in trust or letters of credit.

Other Reinsurance

Supplemental benefits business. The Company had reinsurance recoverables of $380 million as of September 30, 2013 and $402 million as of December 31, 2012 from Great American Life Insurance Company resulting from the acquisition of Great American on August 31, 2012. The life insurance and annuity lines of business written by the acquired legal entities were fully reinsured by the seller as part of the transaction. The resulting reinsurance recoverables are secured primarily by fixed maturities with book value equal to 96% of the reinsured policy liabilities. These fixed maturities are held in a trust established for the benefit of the Company.

Retirement benefits business. The Company had reinsurance recoverables of $1.2 billion as of September 30, 2013 and $1.3 billion as of December 31, 2012 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, primarily in the form of a reinsurance arrangement. The reinsurance recoverable is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer and is secured primarily by fixed maturities whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities are held in a trust established for the benefit of the Company. As of September 30, 2013, the book value of the trust assets exceeded the recoverable.

Individual life and annuity reinsurance. The Company had reinsurance recoverables of $3.9 billion as of September 30, 2013 and $4.0 billion as of December 31, 2012 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York must maintain a specified minimum credit or claims paying rating, or they will be required to fully secure the outstanding balance. As of September 30, 2013, both companies had ratings sufficient to avoid triggering this contractual obligation.

Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Global Health Care, Global Supplemental Benefits and Group Disability and Life segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $351 million as of September 30, 2013 are expected to be collected from more than 80 reinsurers.

The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of September 30, 2013, the Company’s recoverables related to these segments were net of a reserve of $3 million.

Summary. The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers and retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of September 30, 2013, based on current information. The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

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Effects of reinsurance. In the Company’s Consolidated Statements of Income, Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2013		2012		2013		2012
Ceded premiums and fees
Individual life insurance and annuity business sold	$	39	$	41	$	130	$	138
Other	90		72		273		208
Total	$	129	$	113	$	403	$	346
Reinsurance recoveries
Individual life insurance and annuity business sold	$	74	$	79	$	256	$	216
Other	125		54		(69)		150
Total	$	199	$	133	$	187	$	366

As noted in the GMDB section above, recoveries for the nine months ended September 30, 2013 are net of the impact of a decrease in reinsurance recoverables due to a change in the growth rate assumption, resulting from the discontinuance of the hedge programs following the reinsurance transaction with Berkshire.

Note 7 — Realignment and Efficiency Plan

During the third quarter of 2012, in connection with the execution of its strategy, the Company committed to a series of actions to further improve its organizational alignment, operational effectiveness, and efficiency. As a result, the Company recognized charges in other operating expenses of $77 million pre-tax ($50 million after-tax) in the third quarter of 2012 consisting primarily of severance costs that are expected to be mostly paid by the end of 2013. The Global Health Care segment reported $65 million pre-tax ($42 million after-tax). The remainder was reported as follows: $9 million pre-tax ($6 million after-tax) in Global Supplemental Benefits and $3 million pre-tax ($2 million after-tax) in Group Disability and Life. Summarized below is activity in the liability for the nine months ended September 30, 2013:

(In millions)	Severance		Real estate		Total
Balance, January 1, 2013	$	67	$	4	$	71
Less: First Quarter 2013 Payments	8		1		9
Less: Second Quarter 2013 Payments	16		-		16
Less: Third Quarter 2013 Payments	15		-		15
Balance, September 30, 2013	$	28	$	3	$	31

Note 8 — Fair Value Measurements

The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, such as when impaired.

Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.

The Company’s financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).

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The Company estimates fair values using prices from third parties or internal pricing methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available, and other market information that a market participant may use to estimate fair value. The internal pricing methods are performed by the Company’s investment professionals and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality, as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.

The Company is responsible for determining fair value, as well as the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls completed by the Company and third-party pricing services include reviewing to ensure that prices do not become stale and whether changes from prior valuations are reasonable or require additional review. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. Exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations.

Financial Assets and Financial Liabilities Carried at Fair Value

The following tables provide information as of September 30, 2013 and December 31, 2012 about the Company’s financial assets and liabilities carried at fair value. Separate account assets that are also recorded at fair value on the Company’s Consolidated Balance Sheets are reported separately under the heading “Separate account assets” as gains and losses related to these assets generally accrue directly to policyholders.

September 30, 2013 (In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	93	$	631	$	-	$	724
State and local government	-		2,196		-		2,196
Foreign government	-		1,154		23		1,177
Corporate	-		9,973		534		10,507
Federal agency mortgage-backed	-		83		-		83
Other mortgage-backed	-		66		1		67
Other asset-backed	-		284		607		891
Total fixed maturities (1)	93		14,387		1,165		15,645
Equity securities	8		71		61		140
Subtotal	101		14,458		1,226		15,785
Short-term investments	-		763		-		763
GMIB assets (2)	-		-		853		853
Other derivative assets (3)	-		3		-		3
Total financial assets at fair value, excluding separate accounts	$	101	$	15,224	$	2,079	$	17,404
Financial liabilities at fair value:
GMIB liabilities	$	-	$	-	$	841	$	841
Other derivative liabilities (3)	-		21		-		21
Total financial liabilities at fair value	$	-	$	21	$	841	$	862

(1) Fixed maturities included $517 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $65 million of appreciation for securities classified in Level 3.

(2) The GMIB assets represent retrocessional contracts in place from three external reinsurers that cover the exposures on these contracts. See Note 6 for additional information.

(3) Other derivative assets and other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 10 for additional information.

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December 31, 2012
(In millions)

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Financial assets at fair value: