Edgar Filing: CIGNA CORP

cigna10q.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _____ to _____

Commission file number 1-08323

CIGNA Corporation

(Exact name of registrant as specified in its charter)

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

Two Liberty Place, 1601 Chestnut Street

Philadelphia, Pennsylvania 19192

(Address of principal executive offices) (Zip Code)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]		Accelerated filer [ ]
Non-accelerated filer [ ]		Smaller Reporting Company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes _ No x

As of July 18, 2008, 274,856,896 shares of the issuer's common stock were outstanding.

CIGNA CORPORATION

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Statements of Income	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity	3
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
	Item 4. Controls and Procedures	59

PART II.	OTHER INFORMATION
	Item 1. Legal Proceedings	60
	Item 1A. Risk Factors	61
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 4. Submission of Matters to a Vote of Security Holders	62 63
	Item 6. Exhibits	64
SIGNATURE		65
EXHIBIT INDEX		E-1

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

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CIGNA Corporation
Consolidated Statements of Income
	Unaudited						Unaudited
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In millions, except per share amounts)	2008			2007			2008			2007
Revenues
Premiums and fees	$	4,202		$	3,757		$	8,053		$	7,465
Net investment income		265			279			530			559
Mail order pharmacy revenues		286			277			582			548
Other revenues		129			79			272			173
Realized investment gains (losses)		(19	)		(11	)		(5	)		10
Total revenues		4,863			4,381			9,432			8,755
Benefits and Expenses
Health Care medical claims expense		1,900			1,729			3,644			3,448
Other benefit expenses		917			834			1,845			1,670
Mail order pharmacy cost of goods sold		227			225			466			444
Guaranteed minimum income benefits (income) expense		(49	)		96			255			120
Other operating expenses		1,455			1,169			2,736			2,332
Total benefits and expenses		4,450			4,053			8,946			8,014
Income from Continuing Operations
before Income Taxes		413			328			486			741
Income taxes (benefits):
Current		132			163			209			295
Deferred		8			(52	)		(51	)		(48	)
Total taxes		140			111			158			247
Income from Continuing Operations		273			217			328			494
Income (Loss) from Discontinued Operations, Net of Taxes		(1	)		(19	)		2			(7	)
Net Income	$	272		$	198		$	330		$	487
Earnings Per Share - Basic:
Income from continuing operations	$	0.98		$	0.76		$	1.18		$	1.72
Income (loss) from discontinued operations		-			(0.06	)		0.01			(0.03	)
Net income	$	0.98		$	0.70		$	1.19		$	1.69
Earnings Per Share - Diluted:
Income from continuing operations	$	0.98		$	0.75		$	1.17		$	1.68
Income (loss) from discontinued operations		(0.01	)		(0.07	)		-			(0.02	)
Net income	$	0.97		$	0.68		$	1.17		$	1.66
Dividends Declared Per Share	$	-		$	0.010		$	0.040		$	0.018

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

CIGNA Corporation
Consolidated Balance Sheets
				Unaudited As of June 30,						As of December 31,
(In millions, except per share amounts)				2008							2007
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $12,111; $11,409)				$	12,476						$	12,081
Equity securities, at fair value (cost, $143; $127)					145							132
Commercial mortgage loans					3,456							3,277
Policy loans					1,533							1,450
Real estate					49							49
Other long-term investments					557							520
Short-term investments					39							21
Total investments					18,255							17,530
Cash and cash equivalents					805							1,970
Accrued investment income					215							233
Premiums, accounts and notes receivable					1,642							1,405
Reinsurance recoverables					7,158							7,331
Deferred policy acquisition costs					848							816
Property and equipment					789							625
Deferred income taxes, net					917							794
Goodwill					2,837							1,783
Other assets, including other intangibles					963							536
Separate account assets					6,986							7,042
Total assets				$	41,415						$	40,065
Liabilities
Contractholder deposit funds				$	8,627						$	8,594
Future policy benefits					8,100							8,147
Unpaid claims and claim expenses					4,171							4,127
Health Care medical claims payable					1,096							975
Unearned premiums and fees					450							496
Total insurance and contractholder liabilities					22,444							22,339
Accounts payable, accrued expenses and other liabilities					4,700							4,127
Short-term debt					428							3
Long-term debt					2,090							1,790
Nonrecourse obligations					13							16
Separate account liabilities					6,986							7,042
Total liabilities					36,661							35,317
Contingencies — Note 14
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)					88							88
Additional paid-in capital					2,493							2,474
Net unrealized appreciation, fixed maturities	$	26					$	140
Net unrealized appreciation, equity securities		7						7
Net unrealized depreciation, derivatives		(30	)					(19	)
Net translation of foreign currencies		38						61
Postretirement benefits liability adjustment		(125	)					(138	)
Accumulated other comprehensive income (loss)					(84	)						51
Retained earnings					7,412							7,113
Less treasury stock, at cost					(5,155	)						(4,978	)
Total shareholders’ equity					4,754							4,748
Total liabilities and shareholders’ equity				$	41,415						$	40,065
Shareholders’ Equity Per Share				$	17.26						$	16.98

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

CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity
(In millions, except per share amounts)
	Unaudited
Three Months Ended June 30,	2008						2007
	Compre-			Share-			Compre-			Share-
	hensive			holders’			hensive			holders’
	Income			Equity			Income			Equity
Common Stock, April 1				$	88					$	40
Effect of issuance of stock for stock split					-						48
Common Stock, June 30					88						88
Additional Paid-In Capital, April 1					2,488						2,485
Effect of issuance of stock for employee benefit plans					5						23
Effect of issuance of stock for stock split					-						(48	)
Additional Paid-In Capital, June 30					2,493						2,460
Accumulated Other Comprehensive Income (Loss), April 1					38						(171	)
Net unrealized depreciation, fixed maturities	$	(111	)		(111	)	$	(118	)		(118	)
Net unrealized depreciation, equity securities		(1	)		(1	)		-			-
Net unrealized depreciation on securities		(112	)					(118	)
Net unrealized depreciation, derivatives		(3	)		(3	)		(9	)		(9	)
Net translation of foreign currencies		(17	)		(17	)		5			5
Postretirement benefits liability adjustment		10			10			36			36
Other comprehensive loss		(122	)					(86	)
Accumulated Other Comprehensive Loss, June 30					(84	)					(257	)
Retained Earnings, April 1					7,142						6,375
Net income		272			272			198			198
Effects of issuance of stock for employee benefit plans					(2	)					(57	)
Common dividends declared					-						(3	)
Retained Earnings, June 30					7,412						6,513
Treasury Stock, April 1					(4,942	)					(4,577	)
Repurchase of common stock					(222	)					(346	)
Other, primarily issuance of treasury stock for employee
benefit plans					9						128
Treasury Stock, June 30					(5,155	)					(4,795	)
Total Comprehensive Income and Shareholders’ Equity	$	150		$	4,754		$	112		$	4,009

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

CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity
(In millions, except per share amounts)
	Unaudited
Six Months Ended June 30,	2008						2007
	Compre-			Share-			Compre-			Share-
	hensive			holders’			hensive			holders’
	Income			Equity			Income			Equity
Common Stock, January 1				$	88					$	40
Effect of issuance of stock for stock split					-						48
Common Stock, June 30					88						88
Additional Paid-In Capital, January 1					2,474						2,451
Effect of issuance of stock for employee benefit plans					19						57
Effect of issuance of stock for stock split					-						(48	)
Additional Paid-In Capital, June 30					2,493						2,460
Accumulated Other Comprehensive Income (Loss),
January 1 prior to implementation effect					51						(169	)
Implementation effect of SFAS No.155					-						(12	)
Accumulated Other Comprehensive Income (Loss),
January 1 as adjusted					51						(181	)
Net unrealized depreciation, fixed maturities	$	(114	)		(114	)	$	(124	)		(124	)
Net unrealized depreciation on securities		(114	)					(124	)
Net unrealized depreciation, derivatives		(11	)		(11	)		(10	)		(10	)
Net translation of foreign currencies		(23	)		(23	)		5			5
Postretirement benefits liability adjustment		13			13			53			53
Other comprehensive loss		(135	)					(76	)
Accumulated Other Comprehensive Loss, June 30					(84	)					(257	)
Retained Earnings, January 1 prior to
implementation effects					7,113						6,177
Implementation effect of SFAS No. 155					-						12
Implementation effect of FIN 48					-						(29	)
Retained Earnings, January 1 as adjusted					7,113						6,160
Net income		330			330			487			487
Effects of issuance of stock for employee benefit plans					(20	)					(129	)
Common dividends declared					(11	)					(5	)
Retained Earnings, June 30					7,412						6,513
Treasury Stock, January 1					(4,978	)					(4,169	)
Repurchase of common stock					(222	)					(922	)
Other, primarily issuance of treasury stock for employee
benefit plans					45						296
Treasury Stock, June 30					(5,155	)					(4,795	)
Total Comprehensive Income and Shareholders’ Equity	$	195		$	4,754		$	411		$	4,009

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

CIGNA Corporation
Consolidated Statements of Cash Flows
	Unaudited
(In millions)	Six Months Ended June 30,
	2008			2007
Cash Flows from Operating Activities
Net income	$	330		$	487
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations		(2	)		7
Insurance liabilities		62			77
Reinsurance recoverables		58			50
Deferred policy acquisition costs		(54	)		(56	)
Premiums, accounts and notes receivable		28			(73	)
Other assets		(284	)		(154	)
Accounts payable, accrued expenses and other liabilities		363			(31	)
Current income taxes		(4	)		80
Deferred income taxes		(51	)		(48	)
Realized investment (gains) losses		5			(10	)
Depreciation and amortization		117			98
Gains on sales of businesses (excluding discontinued operations)		(19	)		(22	)
Mortgage loans originated and held for sale		-			(5	)
Other, net		10			18
Net cash provided by operating activities		559			418
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		695			362
Equity securities		1			23
Commercial mortgage loans		12			452
Other (primarily short-term and other long-term investments)		145			107
Investment maturities and repayments:
Fixed maturities		351			432
Commercial mortgage loans		10			91
Investments purchased:
Fixed maturities		(1,676	)		(1,092	)
Equity securities		(17	)		(11	)
Commercial mortgage loans		(202	)		(206	)
Other (primarily short-term and other long-term investments)		(229	)		(258	)
Property and equipment sales		-			70
Property and equipment purchases		(128	)		(105	)
Acquisition of Great-West Healthcare, net of cash acquired		(1,301	)		-
Cash provided by investing activities of discontinued operations		-			42
Other (primarily other acquisitions/dispositions)		(8	)		(11	)
Net cash used in investing activities		(2,347	)		(104	)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		673			616
Withdrawals and benefit payments from contractholder deposit funds		(569	)		(619	)
Change in cash overdraft position		(8	)		7
Net change in short-term debt		425			-
Net proceeds on issuance of long-term debt		298			498
Repayment of long-term debt		-			(378	)
Repurchase of common stock		(217	)		(940	)
Issuance of common stock		35			218
Common dividends paid		(14	)		(5	)
Net cash provided by (used in) financing activities		623			(603	)
Effect of foreign currency rate changes on cash and cash equivalents		-			1
Net decrease in cash and cash equivalents		(1,165	)		(288	)
Cash and cash equivalents, beginning of period		1,970			1,392
Cash and cash equivalents, end of period	$	805		$	1,104
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	205		$	174
Interest paid	$	59		$	60
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

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

The interim consolidated financial statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Form 10-K for the year ended December 31, 2007.

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

Certain reclassifications have been made to prior period amounts to conform to the presentation of 2008 amounts.

Discontinued operations for the second quarter of 2008 included a loss of $1 million after-tax related to the sale of the Brazilian life insurance operations. Discontinued operations for the six months ended June 30, 2008 also included a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.

Discontinued operations for the second quarter and six months ended June 30, 2007 reflected an impairment loss associated with the sale of the Chilean insurance operations, which was completed in the third quarter of 2007, and realized gains from the disposition of certain directly-owned real estate investments.

Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.

NOTE 2 – ACQUISITIONS AND DISPOSITIONS

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

Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West Healthcare” or the “acquired business”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare for a purchase price of approximately $1.5 billion, principally cash. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to small and mid-size employer groups. Great-West Healthcare’s offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed through a combination of cash and the issuance of both short and long term debt.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair values and may change as appraisals are finalized and as additional information becomes available. Accordingly, approximately $290 million was allocated to intangible assets, primarily customer relationships and internal-use software. The weighted average amortization period for these intangible assets is currently estimated at eight years. The remainder, net of tangible net assets acquired, is goodwill which is currently estimated at $1.1 billion. Substantially all of the goodwill is tax deductible and will be amortized over the next 15 years for federal income tax purposes.

During the next several months, the Company will complete its fair value analysis of Great-West Healthcare’s tangible and intangible net assets and finalize integration plans. The effect on tangible and intangible net assets and net income from these initiatives will continue to be refined and updated through March 31, 2009.

The results of Great-West Healthcare are included in the Company’s Consolidated Financial Statements from the date of acquisition.

The following supplemental information presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2007. The 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		Six Months		Six Months
(In millions, except per share amounts)	Ended		Ended		Ended
	June 30, 2007		June 30, 2008		June 30, 2007
Total revenues	$	4,775	$	9,800	$	9,544
Income from continuing operations	$	240	$	349	$	552
Net income	$	221	$	351	$	545
Earnings per share:
Income from continuing operations
Basic	$	0.84	$	1.25	$	1.92
Diluted	$	0.83	$	1.24	$	1.88
Net income
Basic	$	0.78	$	1.26	$	1.90
Diluted	$	0.76	$	1.25	$	1.86

Sale of the Brazilian Life Insurance Operations. On April 29, 2008, the Company completed the sale of its Brazilian life insurance operations. See Note 3 to the Consolidated Financial Statements in the Company's 2007 Form 10-K for additional information.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

Fair value measurements. Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” This standard expands disclosures about fair value measurements and clarifies how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability (exit price). See Note 7 for information on the Company’s fair value measurements including new required disclosures.

The Company carries certain financial instruments at fair value in the financial statements including approximately $13 billion in invested assets at June 30, 2008. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in the fair values of these assets accrue directly to policyholders and are not included in the Company’s revenues and expenses. At the adoption of SFAS No. 157, there were no effects to the Company’s measurements of fair values for financial instruments other than for assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits discussed below.

At adoption, the Company was required to change certain assumptions used to estimate the fair values of assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits. As a result, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance. This charge did not have an impact on the Company’s cash flows.

Because there is no market for these contracts, the assumptions used to estimate their fair values at adoption were determined using a hypothetical market participant's view of an exit price. The Company considered the following in determining the view of a hypothetical market participant:

·	that the most likely transfer of these assets and liabilities would be through a reinsurance transaction with an independent insurer having a market capitalization and credit rating similar to that of the Company; and

·	that because this block of contracts is in run-off mode, an insurer looking to acquire these contracts would have similar existing contracts with related administrative and risk management capabilities.

At adoption, the assumptions used to estimate the fair value of these contracts were determined using a hypothetical market participant’s view of an exit price rather than using historical market data and actual experience to establish the Company’s future expectations. For many of these assumptions, there is limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates.

The Company considers the various assumptions used to estimate fair values of these contracts in two categories: capital markets and future annuitant and retrocessionaire behavior assumptions. Estimated components of the charge by category (net of reinsurance) are described below, including how these updated assumptions differ from those used historically to estimate fair values for these contracts.

Assumptions Related to Capital Markets - $183 million of the $202 million pre-tax charge, net of estimated receivables for reinsurance, reflects the impact of changes in capital markets assumptions including market return, discount rate, the projected interest rate used to calculate the reinsured income benefits at the time of annuitization (claim interest rate), and volatility. These assumptions were updated to reflect risk free interest rates (LIBOR swap curve) and volatility consistent with that implied by derivative instruments in a consistently active market, under the assumption that a hypothetical market participant would hedge all or a portion of the net liability. The capital markets pre-tax charge is comprised of:

$131 million related to using risk free interest rates to project the growth in the contractholders’ underlying investment accounts rather than using an estimate of the actual returns for the underlying equity and bond mutual funds over time. Risk free growth rates were lower than the market return assumptions at December 31, 2007 which ranged from 5-11% varying by fund type. The Company believes risk free rates would be used by a hypothetical market participant who is expected to hedge the risk associated with these contracts because they would earn risk free interest returns from hedging instruments. However, the Company’s actual payments will be based on, among other variables, the actual returns that the contractholders’ earn on their underlying investment accounts.

$23 million related to assuming implied market volatility as of January 1, 2008 for certain indices where observable in a consistently active market. The Company believes that a hypothetical market participant would use these market observable implied volatilities rather than use average historical market volatilities.

$20 million related to projecting the interest rate used to calculate the reinsured income benefits at the time of annuitization (claim interest rate) using the market implied forward rate curve and volatility as of January 1, 2008. Claim payments are based on the 7-year Treasury Rate at the time the benefit is elected, and the Company believes that a hypothetical market participant would likely use the above market-implied approach rather than projecting the 7-year Treasury Rate grading from current levels to long-term average levels.

$9 million related to using risk free interest rates as of January 1, 2008 to discount the liability. The Company believes that a hypothetical market participant would use current risk free interest rates for discounting rather than a rate anticipated to be earned on the assets invested to settle the liability. The impact of using risk free interest rates to discount the liability is significantly less than the impact of using these rates to project the growth in contractholders’ underlying investment accounts because risk free interest rates as of January 1, 2008 are much closer to the discount rate assumption of 5.75% used at December 31, 2007 prior to the adoption of SFAS No. 157.

Assumptions Related to Future Annuitant and Retrocessionaire Behavior - $19 million of the $202 million pre-tax charge, net of estimated receivables for reinsurance, reflects the impact of the Company’s view of a hypothetical market participant’s assumptions for future annuitant and retrocessionaire behavior and primarily reflects incremental risk and profit charges.

The Company’s results of operations related to this business are expected to continue to be volatile in future periods both because underlying assumptions will be based on current market-observable inputs which will likely change each period and because the recorded liabilities, net of receivables from reinsurers, are higher after adoption of SFAS No. 157. See Note 7 for additional information.

The Financial Accounting Standards Board (FASB) deferred the effective date of SFAS No. 157 until the first quarter of 2009 for non-financial assets and liabilities (such as intangible assets, property and equipment and goodwill) that are required to be measured at fair value on a periodic basis (such as at acquisition or impairment). The FASB expects to address implementation issues during this delay. Accordingly, the Company will adopt SFAS No. 157 for non-financial assets and liabilities in the first quarter of 2009 and will evaluate the effects of adoption when the FASB provides implementation guidance.

Fair value option. Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits entities to choose fair value measurement of many financial instruments, including insurance contracts, with subsequent changes in fair value to be reported in net income for the period. This choice is made for each individual financial instrument, is irrevocable and, after implementation, must be determined when the entity first commits to or recognizes the financial instrument. The adoption of SFAS No. 159 did not impact the Company's consolidated financial statements, as no items were initially elected for fair value measurement. For financial assets and liabilities acquired in subsequent periods, the Company will determine whether to use the fair value election at the time of acquisition.

NOTE 4 – EARNINGS PER SHARE

Basic and diluted earnings per share were computed as follows:

(Dollars in millions, except			Effect of
per share amounts)	Basic		Dilution			Diluted
Three Months Ended June 30,
2008
Income from continuing
operations	$	273		-		$	273
Shares (in thousands):
Weighted average		277,659		-			277,659
Options and restricted stock grants				2,279			2,279
Total shares		277,659		2,279			279,938
EPS	$	0.98	$	-		$	0.98
2007
Income from continuing
operations	$	217		-		$	217
Shares (in thousands):
Weighted average		284,614		-			284,614
Options and restricted stock grants				5,387			5,387
Total shares		284,614		5,387			290,001
EPS	$	0.76	$	(0.01	)	$	0.75
Six Months Ended June 30,
2008
Income from continuing
operations	$	328		-		$	328
Shares (in thousands):
Weighted average		278,368		-			278,368
Options and restricted stock grants				2,840			2,840
Total shares		278,368		2,840			281,208
EPS	$	1.18	$	(0.01	)	$	1.17
2007
Income from continuing
operations	$	494		-		$	494
Shares (in thousands):
Weighted average		287,476		-			287,476
Options and restricted stock grants				5,685			5,685
Total shares		287,476		5,685			293,161
EPS	$	1.72	$	(0.04	)	$	1.68

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				Six Months
	Ended				Ended
	June 30,				June 30,
(Options in millions)	2008		2007		2008		2007
Antidilutive options		4.9		1.6		4.3		1.6

The Company held 75,590,075 shares of common stock in Treasury as of June 30, 2008, and 67,502,238 shares as of June 30, 2007.

NOTE 5 – HEALTH CARE MEDICAL CLAIMS PAYABLE

Medical claims payable for the Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not yet reported, those which have been reported but not yet paid (reported claims in process) and other medical expense payable, which primarily comprises accruals for provider incentives and other amounts payable to providers. Incurred but not yet reported comprises the majority of the reserve balance as follows:

	June 30,		December 31,
(In millions)	2008		2007
Incurred but not yet reported	$	945	$	786
Reported claims in process		109		145
Other medical expense payable		42		44
Medical claims payable	$	1,096	$	975

Activity in medical claims payable was as follows:

	For the period ended
	June 30,			December 31,
(In millions)	2008			2007
Balance at January 1,	$	975		$	960
Less: Reinsurance and other
amounts recoverable		258			250
Balance at January 1, net		717			710

Acquired April 1, net		70			-

Incurred claims related to:
Current year		3,698			6,878
Prior years		(54	)		(80	)
Total incurred		3,644			6,798
Paid claims related to:
Current year		2,998			6,197
Prior years		606			594
Total paid		3,604			6,791
Ending Balance, net		827			717
Add: Reinsurance and other
amounts recoverable		269			258
Ending Balance	$	1,096		$	975

Reinsurance and other amounts recoverable reflect amounts due from policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist.

For the six months ended June 30, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $54 million, or 0.8% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction in medical claims payable of $19 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $35 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.

For the year ended December 31, 2007, actual experience differed from the Company's key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $80 million, or 1.3% of the current year incurred claims as reported for the year ended December 31, 2006. Actual completion factors resulted in a reduction of the medical claims payable of $46 million or 0.7% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $34 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business.

The favorable impact in 2008 and 2007 relating to completion factor and medical cost trend variances is primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the establishment of the provision for moderately adverse conditions established for claims incurred related to current years.

The corresponding impact of prior year development on net income was not material for the second quarter or the six months ended June 30, 2008. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company's net income recognized for the following reasons:

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

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

The determination of liabilities for Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

NOTE 6 – GUARANTEED MINIMUM DEATH BENEFIT CONTRACTS

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

The determination of liabilities for guaranteed minimum death benefits requires the Company to make critical accounting estimates. The Company regularly evaluates the assumptions used in establishing reserves and changes its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. If actual experience differs from the assumptions (including lapse, partial surrender, mortality, interest rates and volatility) used in estimating these reserves, the resulting change could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition. The Company had future policy benefit reserves for guaranteed minimum death benefit contracts of $902 million as of June 30, 2008, and $848 million as of December 31, 2007. The increase in reserves is primarily due to declines in the equity market driving down the value of the underlying mutual fund investments.

Activity in future policy benefit reserves for these guaranteed minimum death benefits contracts was as follows:

	For the period ended
	June 30,		December 31,
(In millions)	2008		2007
Balance at January 1	$	848	$	862
Less: Reinsurance recoverable		16		17
Balance at January 1, net		832		845
Add: Incurred benefits		86		61
Less: Paid benefits		44		74
Ending Balance, net		874		832
Add: Reinsurance recoverable		28		16
Ending Balance	$	902	$	848

Benefits paid and incurred are net of ceded amounts. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability. As discussed below, losses or gains have been recorded in other revenues as a result of the program to reduce equity market exposures.

The following provides information about the Company’s reserving methodology and assumptions for guaranteed minimum death benefits as of June 30, 2008:

The reserves represent estimates of the present value of net amounts expected to be paid, less the present value of net future premiums. Included in net amounts expected to be paid is the excess of the guaranteed death benefits over the values of the contractholders’ accounts (based on underlying equity and bond mutual fund investments).

·	The reserves include an estimate for partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-30% depending on the net amount at risk for each policy and whether surrender charges apply.

The mean investment performance assumption is 5% considering the Company’s program to reduce equity market exposures using futures contracts. This is reduced by fund fees ranging from 1-3% across all funds. The results of futures contracts are reflected in the liability calculation as a component of investment returns.

·	The volatility assumption is 15-30%, varying by equity fund type; 3-8%, varying by bond fund type; and 2% for money market funds.

·	The discount rate is 5.75%.

·	The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.

·	The lapse rate assumption is 0-15%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

As of June 30, 2008, the aggregate value of the underlying mutual fund investments was $24.7 billion. The death benefit coverage in force as of that date (representing the amount that the Company would have to pay if all of the approximately 700,000 contractholders had died on that date) was $5.8 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.

The notional amount of futures contract positions held by the Company at June 30, 2008 was $888 million. The Company recorded in other revenues pre-tax gains of $6 million for the second quarter and $48 million for the six months ended June 30, 2008, compared with pre-tax losses of $28 million for the second quarter and $35 million for the six months ended June 30, 2007 from futures contracts. Expense offsets reflecting corresponding changes in liabilities for these guaranteed minimum death benefit contracts were included in benefits and expenses.

For further information and details on these contracts and the program adopted to reduce related equity market risk, refer to Note 7 to the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

NOTE 7 – FAIR VALUE MEASUREMENTS

The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are periodically measured at fair value, such as when impaired, or, for commercial mortgage loans, when classified as “held for sale.”

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

Fair values are based on quoted market prices when available. When market prices are not available, fair value is generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality. In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair value using methods, models and assumptions that 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 by the Company which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or input used.

The Company's financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by SFAS No. 157. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:

·	Level 1 – Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
·	Level 2 – Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.

Level 3 – Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.

Financial assets and Financial liabilities measured at fair value on a recurring basis

The following table provides information as of June 30, 2008 about the Company’s financial assets and liabilities measured at fair value on a recurring basis. SFAS No. 157 disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders (see page 19).

(In millions)	Level 1		Level 2		Level 3		Total
Assets at fair value:
Fixed maturities (1)	$	40	$	11,760	$	676	$	12,476
Equity securities		7		119		19		145
Sub-total		47		11,879		695		12,621
Short-term
investments		-		39		-		39
GMIB assets (2)		-		-		447		447
Total assets at fair
value, excluding
separate accounts	$	47	$	11,918	$	1,142	$	13,107
Liabilities at fair value:
GMIB liabilities	$	-	$	-	$	836	$	836
Other derivatives (3)		-		40		-		40
Total liabilities at fair
value	$	-	$	40	$	836	$	876

(1)	As of June 30, 2008, fixed maturities includes $325 million of net appreciation required to adjust future policy benefits for certain annuities including $13 million of depreciation from securities classified in Level 3.
(2)	Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $20 million for the future cost of reinsurance.
(3)	Derivatives other than GMIB assets and liabilities are presented net of $8 million in gross derivative assets.

Level 1: Financial Assets - $47 million

Given the narrow definition of Level 1 and the Company's investment asset strategy to maximize investment returns, a relatively small portion of the Company’s investment assets are classified in this category. These assets include actively-traded U.S. government bonds and exchange-listed equity securities.

Level 2: Financial Assets - $11.9 billion and Financial Liabilities - $40 million

Fixed maturities and equity securities. Approximately 94% of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage and asset-backed securities and preferred stocks. Because many fixed maturities and preferred stocks do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset.

Typical inputs and assumptions to pricing models include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage and asset-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.

Short-term investments. Short-term investments are carried at fair value, which approximates cost. On a regular basis the Company compares market prices for these securities to recorded amounts to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.

Other derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties, and determined that no adjustment for credit risk was required as of June 30, 2008. The nature and use of these other derivatives are described in Note 10(F) to the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

Level 3: Financial Assets - $1.1 billion and Financial Liabilities - $836 million

The Company classifies certain newly issued, privately placed, complex or illiquid securities, as well as assets and liabilities relating to guaranteed minimum income benefits in Level 3.

Fixed maturities and equity securities. Approximately 6% or $695 million of fixed maturities and equity securities are classified in this category and include:

·	$385 million of mortgage and asset-backed securities;

·	$217 million of primarily private corporate bonds; and

·	$93 million of subordinated loans and private equity investments valued at transaction price in the absence of market data indicating a change in the estimated fair values.

Fair values of mortgage and asset-backed securities and corporate bonds are determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices and spreads, and economic events. For mortgage and asset-backed securities, inputs and assumptions to pricing may also include collateral attributes and prepayment speeds. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research as well as the issuer’s financial statements in its evaluation.

Guaranteed minimum income benefit contracts. The Company estimates the fair value of the assets and liabilities for guaranteed minimum income benefit reinsurance contracts using assumptions regarding capital markets (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments), future annuitant and retrocessionaire behavior (including mortality, lapse, annuity election rates and retrocessional credit), as well as risk and profit charges. At adoption of SFAS No. 157, the Company updated assumptions to reflect those that the Company believes a hypothetical market participant would use to determine a current exit price for these contracts and recorded a charge to net income as described in Note 3. As certain assumptions used to estimate fair values for these contracts are largely unobservable, the Company classifies assets and liabilities associated with guaranteed minimum income benefits in Level 3 (GMIB assets and GMIB liabilities).

These GMIB assets and liabilities are estimated using a complex internal model run using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitant’s accounts at the time of annuitization. GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in other assets. Generally, market return, interest rate and volatility assumptions are based on market-observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The assumptions used to value these assets and liabilities as of June 30, 2008 are as follows:

·	The market return and discount rate assumptions are based on the market observable LIBOR swap curve.

The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at the time of annuitization (claim interest rate) based on contractual terms. That rate was 3.6% at June 30, 2008 and must be projected for future time periods. These projected rates vary by economic scenario and are determined by an interest rate model using current interest rate curves and the prices of instruments available in the market including various interest rate caps and zero-coupon bonds.

The market volatility assumptions for annuitants’ underlying mutual fund investments that are modeled based on the S&P 500, Russell 2000 and NASDAQ Composite are based on the market implied volatility for these indices for three to seven years grading to historical volatility levels thereafter. For the remaining 54% of underlying mutual fund investments modeled based on other indices (with insufficient market observable data), volatility is based on the average historical level for each index over the past 10 years. Using this approach, volatility ranges from 14% to 30% for equity funds, 3% to 8% for bond funds and 1% to 2% for money market funds.

·	The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.

·	The lapse rate assumption varies by contract from 2% to 17% and depends on the time since contract issue, the relative value of the guarantee and the differing experience by issuing company of the underlying variable annuity contracts.

The annuity election rate assumption varies by contract and depends on the annuitant’s age, the relative value of the guarantee, the number of previous opportunities a contractholder has had to elect the benefit and the differing experience by issuing company of the underlying variable annuity contracts. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second annual opportunity to elect the benefit, the assumed probability of election is up to 45%. For each subsequent annual opportunity to elect the benefit, the assumed probability of election is up to 25%. With respect to the second and subsequent election opportunities, actual data is just beginning to emerge for the Company as well as the industry and the estimates are based on this limited data.

·	The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be required by a hypothetical market participant.

The Company has considered adjustments for expenses, nonperformance risk (such as credit risk for retrocessionnaires and the Company), and model risk and believes that a hypothetical market participant would view these adjustments as offsetting. Therefore the Company determined that no adjustment for these risks was required as of June 30, 2008.

The approach for these assumptions, including market observable reference points, is consistent with that used to estimate the fair values of these contracts at January 1, 2008. The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting current observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other relevant and available industry data. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain situations, could be material to the Company’s financial condition.

Changes in Level 3 Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the second quarter and six months ended June 30, 2008. These tables exclude separate account assets which are discussed on page 19 as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in these tables may include changes in fair value that are attributable to both observable and unobservable inputs.

For the Three Months Ended June 30, 2008

(In millions)	Fixed Maturities & Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 4/1/08:	$	726		$	515		$	(965	)	$	(450	)
Gains (losses) included in income:
Results of GMIB		-			(58	)		107			49
Other		4			-			-			-
Total gains (losses) included in income		4			(58	)		107			49
Gains included in
other comprehensive income		6			-			-			-
Losses required to adjust future policy benefits for certain annuities (1)		(16	)		-			-			-
Purchases, issuances, settlements		17			(10	)		22			12
Transfers out of Level 3		(42	)		-			-			-
Balance at 6/30/08	$	695		$	447		$	(836	)