SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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		(I.R.S. Employer
of incorporation or organization)		Identification No.)

Two Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania 19192

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

Not Applicable

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 þ No o

Indicate by check mark 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). Yes þ No o

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 þ		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 16, 2009, 273,436,995 shares of the issuer’s common stock were outstanding.

 

 

CIGNA CORPORATION

INDEX

		Page
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 Total 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			45
Item 3. Quantitative and Qualitative Disclosures About Market Risk			84
Item 4. Controls and Procedures			85
PART II OTHER INFORMATION
Item 1. Legal Proceedings			86
Item 1. A. Risk Factors			87
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			88
Item 6. Exhibits			89
SIGNATURE			90
INDEX TO EXHIBITS			E-1
Exhibit 3.2
Exhibit 10.1
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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								Nine Months Ended
		September 30,								September 30,
(In millions, except per share amounts)		2009				2008				2009				2008
Revenues
Premiums and fees		$	3,985			$	4,128			$	12,049			$	12,197
Net investment income			263				272				752				802
Mail order pharmacy revenues			316				300				944				882
Other revenues			(61	)			175				73				431
Realized investment gains (losses):
Other-than-temporary impairments on debt securities, net			(16	)			(66	)			(42	)			(92	)
Other realized investment gains			30				43				2				64
Total realized investment gains (losses)			14				(23	)			(40	)			(28	)
Total revenues			4,517				4,852				13,778				14,284
Benefits and Expenses
Health Care medical claims expense			1,698				1,819				5,226				5,480
Other benefit expenses			754				1,049				2,551				2,877
Mail order pharmacy cost of goods sold			255				238				762				704
Guaranteed minimum income benefits (income) expense			(19	)			98				(215	)			353
Other operating expenses			1,342				1,415				4,064				4,150
Total benefits and expenses			4,030				4,619				12,388				13,564
Income from Continuing Operations before Income Taxes			487				233				1,390				720
Income taxes (benefits):
Current			68				65				138				274
Deferred			89				(3	)			279				(54	)
Total taxes			157				62				417				220
Income from Continuing Operations			330				171				973				500
Income from Discontinued Operations, Net of Taxes			—				1				1				3
Net Income			330				172				974				503
Less: Net Income Attributable to Noncontrolling Interest			1				1				2				2
Shareholders’ Net Income		$	329			$	171			$	972			$	501
Basic Earnings Per Share:
Shareholders’ income from continuing operations		$	1.20			$	0.62			$	3.55			$	1.79
Shareholders’ income from discontinued operations			—				—				—				0.01
Shareholders’ net income		$	1.20			$	0.62			$	3.55			$	1.80
Diluted Earnings Per Share:
Shareholders’ income from continuing operations		$	1.19			$	0.62			$	3.54			$	1.77
Shareholders’ income from discontinued operations			—				—				—				0.01
Shareholders’ net income		$	1.19			$	0.62			$	3.54			$	1.78
Dividends Declared Per Share		$	—			$	—			$	0.040			$	0.040
Amounts Attributable to CIGNA:
Shareholders’ income from continuing operations		$	329			$	170			$	971			$	498
Shareholders’ income from discontinued operations			—				1				1				3
Shareholders’ Net Income		$	329			$	171			$	972			$	501

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

CIGNA Corporation
Consolidated Balance Sheets

						Unaudited
						As of								As of
						September 30,								December 31,
(In millions, except per share amounts)						2009								2008
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $12,471; $11,492)						$	13,488							$	11,781
Equity securities, at fair value (cost, $131; $140)							104								112
Commercial mortgage loans							3,607								3,617
Policy loans							1,530								1,556
Real estate							124								53
Other long-term investments							592								632
Short-term investments							201								236
Total investments							19,646								17,987
Cash and cash equivalents							836								1,342
Accrued investment income							265								225
Premiums, accounts and notes receivable, net							1,481								1,407
Reinsurance recoverables							6,689								6,973
Deferred policy acquisition costs							886								789
Property and equipment							827								804
Deferred income taxes, net							1,017								1,617
Goodwill							2,876								2,878
Other assets, including other intangibles							1,166								1,520
Separate account assets							6,964								5,864
Total assets						$	42,653							$	41,406
Liabilities
Contractholder deposit funds						$	8,488							$	8,539
Future policy benefits							8,304								8,754
Unpaid claims and claim expenses							4,006								4,037
Health Care medical claims payable							932								924
Unearned premiums and fees							424								414
Total insurance and contractholder liabilities							22,154								22,668
Accounts payable, accrued expenses and other liabilities							5,805								6,869
Short-term debt							104								301
Long-term debt							2,435								2,090
Nonrecourse obligations							23								16
Separate account liabilities							6,964								5,864
Total liabilities							37,485								37,808
Contingencies — Note 17
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)							88								88
Additional paid-in capital							2,510								2,502
Net unrealized appreciation (depreciation), fixed maturities		$	402							$	(147	)
Net unrealized appreciation, equity securities			4								7
Net unrealized depreciation, derivatives			(27	)							(13	)
Net translation of foreign currencies			(17	)							(60	)
Postretirement benefits liability adjustment			(878	)							(861	)
Accumulated other comprehensive loss							(516	)							(1,074	)
Retained earnings							8,303								7,374
Less treasury stock, at cost							(5,228	)							(5,298	)
Total shareholders’ equity							5,157								3,592
Noncontrolling interest							11								6
Total equity							5,168								3,598
Total liabilities and equity						$	42,653							$	41,406
Shareholders’ Equity Per Share						$	18.86							$	13.25

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 Total Equity
(In millions, except per share amounts)

		Unaudited
		2009								2008
		Compre-								Compre-
		hensive				Total				hensive				Total
Three Months Ended September 30		Income				Equity				Income				Equity
Common Stock, September 30						$	88							$	88
Additional Paid-In Capital, July 1							2,506								2,493
Effects of stock issuance for employee benefit plans							4								5
Additional Paid-In Capital, September 30							2,510								2,498
Accumulated Other Comprehensive Loss, July 1							(837	)							(84	)
Net unrealized appreciation (depreciation), fixed maturities		$	302				302			$	(133	)			(133	)
Net unrealized appreciation (depreciation), equity securities			(3	)			(3	)			2				2
Net unrealized appreciation (depreciation) on securities			299								(131	)
Net unrealized appreciation (depreciation), derivatives			(6	)			(6	)			14				14
Net translation of foreign currencies			29				29				(56	)			(56	)
Postretirement benefits liability adjustment			(1	)			(1	)			3				3
Other comprehensive income (loss)			321								(170	)
Accumulated Other Comprehensive Loss, September 30							(516	)							(254	)
Retained Earnings, July 1							7,986								7,412
Shareholders’ net income			329				329				171				171
Effects of stock issuance for employee benefit plans							(12	)							(1	)
Retained Earnings, September 30							8,303								7,582
Treasury Stock, July 1							(5,254	)							(5,155	)
Repurchase of common stock							—								(125	)
Other, primarily issuance of treasury stock for employee benefit plans							26								8
Treasury Stock, September 30							(5,228	)							(5,272	)
Shareholders’ Comprehensive Income and Shareholders’ Equity			650				5,157				1				4,642
Noncontrolling interest, July 1							9								7
Net income attributable to noncontrolling interest			1				1				1				1
Accumulated other comprehensive income attributable to noncontrolling interest			1				1				—				—
Noncontrolling interest, September 30			2				11				1				8
Total Comprehensive Income and Total Equity		$	652			$	5,168			$	2			$	4,650

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 Total Equity
(In millions, except per share amounts)

		Unaudited
		2009								2008
		Compre-								Compre-
		hensive				Total				hensive				Total
Nine Months Ended September 30		Income				Equity				Income				Equity
Common Stock, September 30						$	88							$	88
Additional Paid-In Capital, January 1							2,502								2,474
Effects of stock issuance for employee benefit plans							8								24
Additional Paid-In Capital, September 30							2,510								2,498
Accumulated Other Comprehensive Income (Loss), January 1							(1,074	)							51
Implementation effect of updated guidance on other-than-temporary impairments							(18	)							—
Net unrealized appreciation (depreciation), fixed maturities		$	567				567			$	(247	)			(247	)
Net unrealized appreciation (depreciation), equity securities			(3	)			(3	)			2				2
Net unrealized appreciation (depreciation) on securities			564								(245	)
Net unrealized appreciation (depreciation), derivatives			(14	)			(14	)			3				3
Net translation of foreign currencies			43				43				(79	)			(79	)
Postretirement benefits liability adjustment			(17	)			(17	)			16				16
Other comprehensive income (loss)			576								(305	)
Accumulated Other Comprehensive Loss, September 30							(516	)							(254	)
Retained Earnings, January 1							7,374								7,113
Shareholders’ net income			972				972				501				501
Effects of stock issuance for employee benefit plans							(50	)							(21	)
Implementation effect of updated guidance on other-than-temporary impairments							18								—
Common dividends declared (per share: $0.04; $0.04)							(11	)							(11	)
Retained Earnings, September 30							8,303								7,582
Treasury Stock, January 1							(5,298	)							(4,978	)
Repurchase of common stock							—								(347	)
Other, primarily issuance of treasury stock for employee benefit plans							70								53
Treasury Stock, September 30							(5,228	)							(5,272	)
Shareholders’ Comprehensive Income and Shareholders’ Equity			1,548				5,157				196				4,642
Noncontrolling interest, January 1							6								6
Net income attributable to noncontrolling interest			2				2				2				2
Accumulated other comprehensive income attributable to noncontrolling interest			3				3				—				—
Noncontrolling interest, September 30			5				11				2				8
Total Comprehensive Income and Total Equity		$	1,553			$	5,168			$	198			$	4,650

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

CIGNA Corporation
Consolidated Statements of Cash Flows

		Unaudited
		Nine Months Ended September 30,
(In millions)		2009				2008
Cash Flows from Operating Activities
Net income		$	974			$	503
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations			(1	)			(3	)
Income attributable to noncontrolling interest			(2	)			(2	)
Insurance liabilities			(271	)			185
Reinsurance recoverables			(1	)			47
Deferred policy acquisition costs			(60	)			(74	)
Premiums, accounts and notes receivable			(72	)			16
Other assets			350				(425	)
Accounts payable, accrued expenses and other liabilities			(1,126	)			717
Current income taxes			(29	)			(5	)
Deferred income taxes			279				(54	)
Realized investment losses			40				28
Depreciation and amortization			207				181
Gains on sales of businesses (excluding discontinued operations)			(24	)			(28	)
Proceeds from sales of mortgage loans held for sale			1				—
Other, net			4				(36	)
Net cash provided by operating activities			269				1,050
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities			655				1,123
Equity securities			21				5
Commercial mortgage loans			23				48
Other (primarily short-term and other long-term investments)			485				279
Investment maturities and repayments:
Fixed maturities			791				660
Commercial mortgage loans			44				31
Investments purchased:
Fixed maturities			(2,257	)			(2,237	)
Equity securities			(8	)			(18	)
Commercial mortgage loans			(121	)			(359	)
Other (primarily short-term and other long-term investments)			(489	)			(344	)
Property and equipment purchases			(218	)			(179	)
Acquisition of Great-West Healthcare, net of cash acquired			—				(1,301	)
Other (primarily other acquisitions/dispositions)			—				(12	)
Net cash used in investing activities			(1,074	)			(2,304	)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds			1,011				989
Withdrawals and benefit payments from contractholder deposit funds			(946	)			(901	)
Change in cash overdraft position			82				(3	)
Net change in short-term debt			(199	)			312
Net proceeds on issuance of long-term debt			346				297
Repayment of long-term debt			(2	)			—
Repurchase of common stock			—				(340	)
Issuance of common stock			9				37
Common dividends paid			(11	)			(14	)
Net cash provided by financing activities			290				377
Effect of foreign currency rate changes on cash and cash equivalents			9				(15	)
Net decrease in cash and cash equivalents			(506	)			(892	)
Cash and cash equivalents, beginning of period			1,342				1,970
Cash and cash equivalents, end of period		$	836			$	1,078
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds		$	171			$	267
Interest paid		$	107			$	96

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 (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, 2008.

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.

In preparing these interim consolidated financial statements, the Company has evaluated events that occurred between the balance sheet date and November 5, 2009.

Certain reclassifications and restatements have been made to prior period amounts to conform to the current presentation. In addition, certain restatements have been made in connection with the adoption of new accounting pronouncements. See Note 2 for further information.

Discontinued operations for the nine months ended September 30, 2009 primarily represented a tax benefit associated with a past divestiture, resolved at the completion of the 2005 and 2006 IRS examinations.

Discontinued operations for the third quarter of 2008 included a gain of $1 million after-tax from the settlement of certain issues related to a past divestiture. Discontinued operations for the nine months ended September 30, 2008 included a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.

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

Note 2 — Recent Accounting Pronouncements

Accounting Standards Codification. The Financial Accounting Standards Board (FASB) has established the Accounting Standards Codification (Codification or ASC) as the single source of authoritative accounting guidance effective for reporting in the third quarter of 2009. Therefore, the Company will use the Codification section or description when referring to GAAP except for very recent guidance that has not yet been incorporated into the Codification.

Other-than-temporary impairments. On April 1, 2009, the Company adopted the FASB’s updated guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost (ASC 320). It requires assessing the Company’s intent to sell or whether it is more likely than not that the Company will be required to sell such fixed maturities before their fair values recover. If so, an impairment loss is recognized in net income for the excess of the amortized cost over fair value. The Company must also determine if it does not expect to recover the amortized cost of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell these fixed maturities). In this case, the credit portion of the impairment loss is recognized in net income and the non-credit portion of an impairment loss is recognized in a separate component of shareholders’ equity. A reclassification adjustment from retained earnings to accumulated other comprehensive income was required for previously impaired fixed maturities that have a non-credit loss as of the date of adoption, less related tax effects.

The cumulative effect of adoption increased the Company’s retained earnings with an offsetting decrease to accumulated other comprehensive income of $18 million, with no overall change to shareholders’ equity. See Note 9 for information on the Company’s other-than-temporary impairments including additional required disclosures.

Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted the FASB’s updated guidance on accounting for noncontrolling interests (ASC 810) through retroactive restatement of prior financial statements and reclassified $6 million of noncontrolling interest as of January 1, 2009 and 2008 from Accounts payable, accrued expenses and other liabilities to Noncontrolling interest in total equity. In addition, for the nine months ended September 30, 2008, net income of $2 million attributable to the noncontrolling interest has been reclassified to be included in net income, with a reduction to net income to determine net income attributable to the Company’s shareholders (“shareholders’ net income”).

Earnings per share. Effective January 1, 2009, the Company adopted the FASB’s updated earnings per share guidance (ASC 260) for determining participating securities which requires unvested restricted stock awards that contain rights to nonforfeitable dividends to be included in the denominator of both basic and diluted earnings per share (“EPS”) calculations. Prior period EPS data have been restated to reflect the adoption of this guidance. See Note 4 for the effects of this guidance on previously reported EPS amounts.

Business combinations. Effective January 1, 2009, the Company adopted the FASB’s guidance on accounting for business combinations (ASC 805) that requires fair value measurements for all future acquisitions, including contingent purchase price and certain contingent assets or liabilities of the entity to be acquired, requires acquisition related and restructuring costs to be expensed as incurred and requires changes in tax items after the acquisition date to be reported in income tax expense. There were no effects to the Company’s Consolidated Financial Statements at adoption.

Derivatives disclosures. Effective January 1, 2009, the Company expanded its disclosures on derivatives and hedging activities to comply with the FASB’s updated guidance (ASC 815) that requires the Company to disclose the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 10 for information on the Company’s derivative financial instruments including these additional required disclosures.

Fair value measurements. Effective January 1, 2008, the Company adopted the FASB’s fair value disclosure and measurement guidance (ASC 820) that 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). In addition, the FASB amended the fair value guidance in 2008 to provide additional guidance for determining the fair value of a financial asset when the market for that instrument is not active. See Note 8 for information on the Company’s fair value measurements.

The Company carries certain financial instruments at fair value in the financial statements including approximately $13.8 billion in invested assets at September 30, 2009. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) 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 this fair value guidance, there were no effects to the Company’s measurements of fair values for financial instruments other than for GMIB assets and liabilities discussed below. In addition, there were no effects to the Company’s measurements of financial assets of adopting the FASB’s 2008 amendment to this fair value guidance.

At adoption, the Company was required to change certain assumptions used to estimate the fair values of GMIB assets and liabilities. 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 exit price, rather than using historical market data and actual experience to establish the Company’s future expectations. Certain of these assumptions have limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates. On adoption, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance.

The Company’s results of operations related to this business are expected to continue to be volatile in future periods because several underlying assumptions will be based on current market-observable inputs which will likely change each period. See Note 8 for additional information.

During the first nine months of 2009, the Company adopted FASB guidance that clarifies how to determine fair value for various assets and liabilities with no material effects to the Company’s Consolidated Financial Statements.

In the third quarter of 2009, the FASB issued guidance on measuring the fair value of liabilities and for investments in certain entities to provide a practical alternative under certain conditions to determine the fair value of these investments using their net asset value or its equivalent. The Company expects no material effects on its Consolidated Financial Statements at adoption in the fourth quarter of 2009.

Transfers of financial assets. In 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,” which changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a “qualifying special purpose entity” when assessing transfers of financial instruments. The recognition and measurement provisions of this guidance must be applied to transfers that occur on or after January 1, 2010. On adoption, the Company does not expect a material effect to the results of operations or financial condition.

Variable interest entities. In 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” which amended guidance requiring periodic qualitative analyses to determine whether a variable interest entity must be consolidated by the Company. In addition, this guidance requires the Company to disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity. Any changes in consolidated entities resulting from these requirements must be applied through retrospective restatement of prior financial statements beginning in 2010. The Company is presently evaluating the impact of these new requirements.

Note 3 — Acquisitions and Dispositions

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

Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West Healthcare” or the “acquired business”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional 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 the first quarter of 2009, the Company completed its allocation of the total purchase price to the tangible and intangible net assets acquired based on management’s estimates of their fair values without material changes from December 31, 2008.

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

The following table presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2008. 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 that date or what such results will be for any future periods.

		(Unaudited)
		Nine Months Ended
		September 30,
(In millions, except per share amounts)		2008
Total revenues		$	14,652
Shareholders’ income from continuing operations		$	526
Shareholders’ net income		$	529
Earnings per share:
Shareholders’ income from continuing operations
Basic		$	1.89
Diluted		$	1.87
Shareholders’ net income
Basic		$	1.90
Diluted		$	1.88

Note 4 — Earnings Per Share

Basic and diluted earnings per share were computed as follows:

						Effect of
(In millions, except per share amounts)		Basic				Dilution				Diluted
Three Months Ended September 30,
2009
Shareholders’ income from continuing operations		$	329			$	—			$	329
Shares (in thousands):
Weighted average			274,398				—				274,398
Options			—				1,732				1,732
Total shares			274,398				1,732				276,130
EPS		$	1.20			$	(0.01	)		$	1.19
2008
Shareholders’ income from continuing operations		$	170			$	—			$	170
Shares (in thousands):
Weighted average			275,141				—				275,141
Options			—				1,665				1,665
Total shares			275,141				1,665				276,806
EPS		$	0.62			$	—			$	0.62

						Effect of
(In millions, except per share amounts)		Basic				Dilution				Diluted
Nine Months Ended September 30,
2009
Shareholders’ income from continuing operations		$	971			$	—			$	971
Shares (in thousands):
Weighted average			273,698				—				273,698
Options			—				993				993
Total shares			273,698				993				274,691
EPS		$	3.55			$	(0.01	)		$	3.54
2008
Shareholders’ income from continuing operations		$	498			$	—			$	498
Shares (in thousands):
Weighted average			278,912				—				278,912
Options			—				2,035				2,035
Total shares			278,912				2,035				280,947
EPS		$	1.79			$	(0.02	)		$	1.77

As described in Note 2, effective in 2009, the Company adopted the FASB’s new guidance for determining participating securities which requires the Company’s unvested restricted stock awards to be included in weighted average shares instead of being considered a common stock equivalent. Prior period share information has been restated as follows.

		Three Months Ended September 30, 2008
		Basic								Diluted
		As originally								As originally
		reported				As adjusted				reported				As adjusted
Shareholders’ income from continuing operations		$	0.62			$	0.62			$	0.62			$	0.62

		Nine Months Ended September 30, 2008
		Basic								Diluted
		As originally								As originally
		reported				As adjusted				reported				As adjusted
Shareholders’ income from continuing operations		$	1.80			$	1.79			$	1.78			$	1.77

The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect would have increased diluted earnings per share (antidilutive) as their exercise price was greater than the average share price of the Company’s common stock for the period.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2009				2008				2009				2008
Antidilutive options			8.7				4.9				10.0				4.5

The Company held 77,475,700 shares of common stock in Treasury as of September 30, 2009, and 78,693,702 shares as of September 30, 2008.

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:

		September 30,				December 31,
(In millions)		2009				2008
Incurred but not yet reported		$	814			$	782
Reported claims in process			101				114
Other medical expense payable			17				28
Medical claims payable		$	932			$	924

Activity in medical claims payable was as follows:

		For the period ended
		September 30,				December 31,
(In millions)		2009				2008
Balance at January 1,		$	924			$	975
Less: Reinsurance and other amounts recoverable			211				258
Balance at January 1, net			713				717
Acquired April 1, 2008 net			—				90
Incurred claims related to:
Current year			5,265				7,312
Prior years			(39	)			(60	)
Total incurred			5,226				7,252
Paid claims related to:
Current year			4,560				6,716
Prior years			643				630
Total paid			5,203				7,346
Ending Balance, net			736				713
Add: Reinsurance and other amounts recoverable			196				211
Ending Balance		$	932			$	924

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 11 for additional information on reinsurance. For the nine months ended September 30, 2009, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $39 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction in medical claims payable of $18 million, or 0.2% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $21 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business.

For the year ended December 31, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29 million, or 0.4% 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 of the medical claims payable of $31 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.

The favorable impacts in 2009 and 2008 relating to completion factors and medical cost trend variances are 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 provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was not material for the three months and nine months ended September 30, 2009 and 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 shareholders’ 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 shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ 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 shareholders’ 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 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.

The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the Company’s 2008 Form 10-K.

Note 6 — Cost Reduction

During 2009, the Company continued its previously announced comprehensive review to reduce the operating expenses of its ongoing businesses. As a result, the Company recognized severance related charges in other operating expenses as follows:

•

during the third quarter of 2009, a charge of $10 million pre-tax ($7 million after-tax), for severance resulting from reductions of approximately 230 positions in its workforce; and

•

during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax), for severance resulting from reductions of approximately 480 positions in its workforce.

Substantially all of these charges were recorded in the Health Care segment, and are expected to be paid in cash by June 30, 2010.

Cost reduction activity for 2009 was as follows:

(In millions)		Severance				Real estate				Total
Balance, January 1, 2009		$	44			$	11			$	55
Add: Second quarter 2009 charge			14				—				14
Add: Third quarter 2009 charge			10				—				10
Subtotal — cost reduction actions			68				11				79
Less: Payments			36				3				39
Balance, September 30, 2009		$	32			$	8			$	40

Note 7 — 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 guaranteed minimum death benefits (GMDB), also known as variable annuity death benefits (VADBe), 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. In periods of declining equity markets and in periods of flat equity markets following a decline, the Company’s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company’s liabilities for these guaranteed minimum death benefits decrease.

In order to substantially reduce the equity market exposures relating to guaranteed minimum death benefit contracts, the Company operates a dynamic hedge program (GMDB equity hedge program), using exchange-traded futures contracts. The hedge program is designed to substantially offset both positive and negative impacts of changes in equity markets on the GMDB liability. The hedge program involves detailed, daily monitoring of equity market movements and rebalancing the futures contracts within established parameters. While the hedge program is actively managed, it may not exactly offset changes in the GMDB liability due to, among other things, divergence between the performance of the underlying mutual funds and the hedge instruments, high levels of volatility in the equity markets, and differences between actual contractholder behavior and what is assumed. In addition, underlying mutual fund data is not reported and incorporated into the required hedge position on a real time basis, which also impacts the performance of the hedge program. Although this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it is designed and operated to substantially reduce equity market exposures resulting from this product. The results of these futures contracts are included in other revenue and amounts reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits and expenses, consistent with GAAP when a premium deficiency exists.

The GMDB reinsurance business is considered premium deficient because the expected present value of future claims and expenses exceeds the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company performs a reserve review on a quarterly basis using current market conditions and 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. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.

The Company had future policy benefit reserves for GMDB contracts of $1.4 billion as of September 30, 2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder’s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance refers to market rates to be earned over the life of the GMDB equity hedge program, and market volatility refers to market fluctuation. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility) used in estimating these liabilities, the result 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 following provides information about the Company’s reserving methodology and assumptions for GMDB as of September 30, 2009:

•

The reserve represents 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 reserve includes an estimate for future partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-20% depending on the net amount at risk for each policy and whether surrender charges apply.

•

The mean investment performance assumption is 5% considering the Company’s GMDB equity hedge program 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 based on a review of historical monthly returns for each key index (e.g. S&P 500) over a period of at least ten years. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The assumption is 16-30%, varying by equity fund type; 4-10%, varying by bond fund type; and 2% for money market funds. These volatility assumptions are used along with the mean investment performance assumption to project future return scenarios.

•

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 annual lapse rate assumption is 0-21%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

•

The reserve includes a provision for future policy maintenance and hedging expenses.

Although the year to date results include a first quarter charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves, no additional reserve strengthening has been required for GMDB since the first quarter of 2009, primarily due to the stabilization and recovery of equity markets. The components of the first quarter charge were:

•

adverse impacts of overall market declines of $50 million pre-tax ($32 million after-tax). This is comprised of (a) $39 million pre-tax ($25 million after-tax) primarily related to the provision for future partial surrenders, and (b) $11 million pre-tax ($7 million after-tax) related to declines in the values of contractholders’ non-equity investments such as bond funds, neither of which is included in the GMDB equity hedge program;

•

adverse volatility-related impacts of $11 million pre-tax ($7 million after-tax) due to turbulent equity market conditions, including higher than expected claims and the performance of the diverse mix of equity fund investments held by contractholders being different than expected; and

•

adverse interest rate impacts of $12 million pre-tax ($8 million after-tax). Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance.

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

		For the period ended
		September 30,				December 31,
(In millions)		2009				2008
Balance at January 1		$	1,609			$	848
Add: Unpaid Claims			34				21
Less: Reinsurance and other amounts recoverable			83				19
Balance at January 1, net			1,560				850
Add: Incurred benefits			(86	)			822
Less: Paid benefits			139				112
Ending balance, net			1,335				1,560
Less: Unpaid Claims			39				34
Add: Reinsurance and other amounts recoverable			56				83
Ending balance		$	1,352			$	1,609

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, and include the charges discussed above. As discussed below, losses or gains have been recorded in other revenues as a result of the GMDB equity hedge program to reduce equity market exposures.

As of September 30, 2009, the aggregate value of the underlying mutual fund investments was $17.1 billion. The death benefit coverage in force as of that date (representing the estimated amount of death claims that the Company would have to pay if all of the approximately 600,000 contractholders had submitted death claims as of that date) was $7.7 billion. As of December 31, 2008, the aggregate value of the underlying mutual fund investments was $16.3 billion. The death benefit coverage in force as of that date (representing the estimated amount of death claims that the Company would have to pay if all of the approximately 650,000 contractholders had submitted death claims as of that date) was $11.1 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.

As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity market and foreign currency risks associated with this business. The notional amount of futures contract positions held by the Company at September 30, 2009 was $1.2 billion. The Company recorded in other revenues pre-tax losses of $161 million for the three months ended September 30, 2009 and $232 million for the nine months ended September 30, 2009, and pre-tax gains of $70 million for the three months ended September 30, 2008 and $118 million for the nine months ended September 30, 2008.

The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits (GMIB). All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 8 for further information.

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 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 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.

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 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 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. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.

•

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 Carried at Fair Value

The following tables provide information as of September 30, 2009 and December 31, 2008 about the Company’s financial assets and liabilities carried at fair value. Similar 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.

September 30, 2009

		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
(In millions)		(Level 1)				(Level 2)				(Level 3)				Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency		$	44			$	577			$	1			$	622
State and local government			—				2,566				—				2,566
Foreign government			—				1,040				17				1,057
Corporate			—				8,041				489				8,530
Federal agency mortgage-backed			—				35				—				35
Other mortgage-backed			—				117				6				123
Other asset-backed			—				92				463				555
Total fixed maturities (1)			44				12,468				976				13,488
Equity securities			2				78				24				104
Subtotal			46				12,546				1,000				13,592
Short-term investments			—				201				—				201
GMIB assets (2)			—				—				614				614
Other derivative assets (3)			—				19				—				19
Total financial assets at fair value, excluding separate accounts		$	46			$	12,766			$	1,614			$	14,426
Financial liabilities at fair value:
GMIB liabilities		$	—			$	—			$	1,126			$	1,126
Other derivative liabilities			—				28				—				28
Total financial liabilities at fair value		$	—			$	28			$	1,126			$	1,154