Form 10-Q

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

For the quarterly period ended March 31, 2009


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
(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 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 o 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 April 17, 2009, 272,776,207 shares of the issuer’s common stock were outstanding.

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CIGNA Corporation

Consolidated Statements of Income


	Unaudited
	Three Months Ended
	March 31,
(In millions, except per share amounts)	2009			2008
Revenues
Premiums and fees	$	4,051		$	3,851
Net investment income		229			265
Mail order pharmacy revenues		312			296
Other revenues		217			143
Realized investment gains (losses)		(36	)		14

Total revenues		4,773			4,569

Benefits and Expenses
Health Care medical claims expense		1,780			1,744
Other benefit expenses		1,108			928
Mail order pharmacy cost of goods sold		252			239
Guaranteed minimum income benefits (income) expense		(32	)		304
Other operating expenses		1,392			1,280

Total benefits and expenses		4,500			4,495

Income from Continuing Operations before Income Taxes		273			74

Income taxes (benefits):
Current		(85	)		77
Deferred		150			(59	)

Total taxes		65			18

Income from Continuing Operations		208			56
Income from Discontinued Operations, Net of Taxes		1			3

Net Income		209			59
Less: Net Income Attributable to Noncontrolling Interest		1			1

Shareholders’ Net Income	$	208		$	58


Basic Earnings Per Share:
Shareholders’ income from continuing operations	$	0.76		$	0.20
Shareholders’ income from discontinued operations		—			0.01

Shareholders’ net income	$	0.76		$	0.21

Diluted Earnings Per Share:
Shareholders’ income from continuing operations	$	0.76		$	0.19
Shareholders’ income from discontinued operations		—			0.01

Shareholders’ net income	$	0.76		$	0.20


Dividends Declared Per Share	$	0.04		$	0.04


Amounts Attributable to CIGNA:
Shareholders’ income from continuing operations	$	207		$	55
Shareholders’ income from discontinued operations		1			3

Shareholders’ Net Income	$	208		$	58

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
				March 31,						December 31,
(In millions, except per share amounts)				2009						2008
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $11,662; $11,492)				$	11,741					$	11,781
Equity securities, at fair value (cost, $139; $140)					89						112
Commercial mortgage loans					3,618						3,617
Policy loans					1,538						1,556
Real estate					59						53
Other long-term investments					621						632
Short-term investments					103						236

Total investments					17,769						17,987
Cash and cash equivalents					1,375						1,342
Accrued investment income					264						225
Premiums, accounts and notes receivable, net					1,530						1,407
Reinsurance recoverables					6,878						6,973
Deferred policy acquisition costs					790						789
Property and equipment					804						804
Deferred income taxes, net					1,446						1,617
Goodwill					2,876						2,878
Other assets, including other intangibles					1,426						1,520
Separate account assets					6,076						5,864

Total assets				$	41,234					$	41,406

Liabilities
Contractholder deposit funds				$	8,543					$	8,539
Future policy benefits					8,513						8,754
Unpaid claims and claim expenses					4,089						4,037
Health Care medical claims payable					981						924
Unearned premiums and fees					419						414

Total insurance and contractholder liabilities					22,545						22,668
Accounts payable, accrued expenses and other liabilities					6,291						6,869
Short-term debt					377						301
Long-term debt					2,086						2,090
Nonrecourse obligations					21						16
Separate account liabilities					6,076						5,864

Total liabilities					37,396						37,808

Contingencies — Note 16
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)					88						88
Additional paid-in capital					2,505						2,502
Net unrealized depreciation, fixed maturities	$	(94	)				$	(147	)
Net unrealized appreciation, equity securities		5						7
Net unrealized depreciation, derivatives		(2	)					(13	)
Net translation of foreign currencies		(88	)					(60	)
Postretirement benefits liability adjustment		(857	)					(861	)

Accumulated other comprehensive loss					(1,036	)					(1,074	)
Retained earnings					7,536						7,374
Less treasury stock, at cost					(5,262	)					(5,298	)

Total shareholders’ equity					3,831						3,592
Noncontrolling interest					7						6

Total equity					3,838						3,598

Total liabilities and equity				$	41,234					$	41,406

Shareholders’ Equity Per Share				$	14.04					$	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


	2009						2008
	Compre-						Compre-
(In millions, except per share amounts)	hensive			Total			hensive			Total
Three Months Ended March 31,	Income			Equity			Income			Equity
Common Stock, March 31				$	88					$	88

Additional Paid-In Capital, January 1					2,502						2,474
Effects of stock issuance for employee benefit plans					3						14

Additional Paid-In Capital, March 31					2,505						2,488

Accumulated other comprehensive income (loss), January 1					(1,074	)					51
Net unrealized appreciation (depreciation), fixed maturities	$	53			53		$	(3	)		(3	)
Net unrealized appreciation (depreciation), equity securities		(2	)		(2	)		1			1

Net unrealized appreciation (depreciation) on securities		51						(2	)
Net unrealized appreciation (depreciation), derivatives		11			11			(8	)		(8	)
Net translation of foreign currencies		(28	)		(28	)		(6	)		(6	)
Postretirement benefits liability adjustment		4			4			3			3

Other comprehensive income (loss)		38						(13	)

Accumulated Other Comprehensive Income (Loss), March 31					(1,036	)					38

Retained Earnings, January 1					7,374						7,113
Shareholders’ net income		208			208			58			58
Effects of stock issuance for employee benefit plans					(35	)					(18	)
Common dividends declared (per share: $0.04; $0.04)					(11	)					(11	)

Retained Earnings, March 31					7,536						7,142

Treasury Stock, January 1					(5,298	)					(4,978	)
Other, primarily issuance of treasury stock for employee benefit plans					36						36

Treasury Stock, March 31					(5,262	)					(4,942	)


Shareholders’ Comprehensive Income and Shareholders’ Equity		246			3,831			45			4,814

Noncontrolling interest, January 1					6						6
Net income attributable to noncontrolling interest		1			1			1			1

Noncontrolling interest, March 31		1			7			1			7

Total Comprehensive Income and Total Equity	$	247		$	3,838		$	46		$	4,821

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

CIGNA Corporation

Consolidated Statements of Cash Flows


	Unaudited
	Three Months Ended March 31,
(In millions)	2009			2008
Cash Flows from Operating Activities
Net income	$	209		$	59
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations		(1	)		(3	)
Income attributable to noncontrolling interest		(1	)		(1	)
Insurance liabilities		273			126
Reinsurance recoverables		(11	)		17
Deferred policy acquisition costs		(28	)		(43	)
Premiums, accounts and notes receivable		(124	)		(72	)
Other assets		78			(341	)
Accounts payable, accrued expenses and other liabilities		(464	)		596
Current income taxes		(90	)		64
Deferred income taxes		150			(59	)
Realized investment (gains) losses		36			(14	)
Depreciation and amortization		69			53
Gains on sales of businesses (excluding discontinued operations)		(8	)		(9	)
Other, net		(16	)		(21	)

Net cash provided by operating activities		72			352

Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		119			315
Commercial mortgage loans		—			12
Other (primarily short-term and other long-term investments)		267			115
Investment maturities and repayments:
Fixed maturities		199			149
Commercial mortgage loans		6			5
Investments purchased:
Fixed maturities		(543	)		(499	)
Equity securities		—			(13	)
Commercial mortgage loans		(8	)		(30	)
Other (primarily short-term and other long-term investments)		(146	)		(142	)
Property and equipment purchases		(60	)		(68	)
Other (primarily other acquisitions/dispositions)		—			(7	)

Net cash used in investing activities		(166	)		(163	)

Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		373			330
Withdrawals and benefit payments from contractholder deposit funds		(322	)		(280	)
Change in cash overdraft position		14			64
Net change in short-term debt		74			248
Net proceeds on issuance of long-term debt		—			298
Repayment of long-term debt		(2	)		—
Issuance of common stock		—			33
Common dividends paid		—			(3	)

Net cash provided by financing activities		137			690

Effect of foreign currency rate changes on cash and cash equivalents		(10	)		1

Net increase in cash and cash equivalents		33			880
Cash and cash equivalents, beginning of period		1,342			1,970

Cash and cash equivalents, end of period	$	1,375		$	2,850

Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	9		$	3
Interest paid	$	35		$	22

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.

Certain reclassifications and restatements have been made to prior period amounts to conform to the presentation of 2009 amounts. In addition, certain restatements have been made in connection with the adoption of new accounting pronouncements. See Note 2 for further information.

Discontinued operations. Discontinued operations for the three months ended March 31, 2009 primarily represented a tax benefit associated with a past divestiture related to the completion of the 2005 and 2006 IRS examinations.

Discontinued operations for the three months ended March 31, 2008 represented $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

Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” through retroactive restatement of prior financial statements and reclassified its $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 three months ended March 31, 2008, net income of $1 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 Financial Accounting Standards Board Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP 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 earnings per share data have been restated to reflect the adoption of this FSP. For the three months ended March 31, 2008, diluted EPS related to shareholders’ net income was reduced by $.01 compared with the previously reported amount. Other EPS amounts for the three months ended March 31, 2008 were unchanged.

Business combinations. Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007, referred to as SFAS No. 141R), “Business Combinations”. This standard 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 adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This standard expands required disclosures to include the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 9 for information on the Company’s derivative financial instruments including these additional required disclosures.

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). In addition, the Financial Accounting Standards Board (FASB) amended SFAS No. 157 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 7 for information on the Company’s fair value measurements.

The Company carries certain financial instruments at fair value in the financial statements including approximately $11.8 billion in invested assets at March 31, 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 SFAS No. 157, 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 2008 amendment to SFAS No. 157.

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. 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. 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 underlying assumptions will be based on current market-observable inputs which will likely change each period. See Note 7 for additional information.

In the first quarter of 2009 the Company adopted the provisions of SFAS No. 157 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 impairment). The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

In addition, the FASB recently amended SFAS No. 157 to provide additional guidance in determining fair value when the volume and level of activity for an asset or liability have significantly decreased and in identifying transactions that are not orderly. The Company does not expect material changes to their fair value measurements when this new guidance is adopted as required in the second quarter of 2009.

Other-than-temporary impairments. In 2009, the FASB issued FASB FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” to improve the accounting and reporting for other-than-temporary impairments (impairment), particularly for debt securities that are expected to recover a portion of their decline in fair value over their holding period. Under these new requirements, an impairment has occurred if the fair value of a debt security is less than its amortized cost and:

•

the Company intends to sell or will more likely than not be required to sell the debt security before recovery of its amortized cost; or

•

the Company does not expect to recover some or all of the debt security’s amortized cost (even if it does not intend to sell).

In the first situation, an impairment is recognized in shareholders’ net income equal to the entire difference between the debt security’s fair value and amortized cost. In the second situation, this new guidance requires that an impairment be recognized in shareholders’ net income for the expected credit loss (the excess of the debt security’s amortized cost over the present value of the cash flows expected to be collected). In addition, any non-credit loss (the present value of the cash flows expected to be collected less fair value) is reported in a separate component of accumulated other comprehensive income within shareholders’ equity. At adoption, a reclassification adjustment from retained earnings to accumulated other comprehensive income is required for impaired debt securities that meet the second situation. This reclassification adjustment is measured as any non-credit losses less related tax effects as of the adoption date. Finally, new and expanded quarterly disclosures about impaired securities and their credit and non-credit losses are required.

The Company will adopt this new impairment guidance as required on April 1, 2009. Although the Company continues to evaluate these new requirements and emerging implementation guidance, the cumulative effect of adoption for impaired securities held on April 1, 2009 is currently not expected to have a material impact on retained earnings or accumulated other comprehensive income, with no net change to total shareholders’ equity.

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.

As part of the reinsurance and administrative service arrangements, the Company is responsible to pay claims for the group medical and long-term disability business of Great-West Healthcare and collect related amounts due from their third party reinsurers. Any such amounts not collected will represent additional assumed liabilities of the Company and decrease shareholders’ net income if and when these amounts are determined uncollectible. At March 31, 2009, there were no receivables recorded for paid claims due from third party reinsurers for this business and unpaid claims related to this business were estimated at $26 million.

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, 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.


	(Unaudited)
	Three Months
	Ended March 31,
(In millions, except per share amounts)	2008
Total revenues	$	4,937
Shareholders’ income from continuing operations	$	76
Shareholders’ net income	$	79
Earnings per share:
Shareholders’ income from continuing operations
Basic	$	0.27
Diluted	$	0.27
Shareholders’ net income
Basic	$	0.28
Diluted	$	0.28

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 March 31,
2009
Shareholders’ income from continuing operations	$	207	$	—		$	207

Shares (in thousands):
Weighted average		272,591		—			272,591
Options				277			277

Total shares		272,591		277			272,868

EPS	$	0.76	$	—		$	0.76

2008
Shareholders’ income from continuing operations	$	55	$	—		$	55

Shares (in thousands):
Weighted average		281,566		—			281,566
Options				2,590			2,590

Total shares		281,566		2,590			284,156

EPS	$	0.20	$	(0.01	)	$	0.19

As described in Note 2, effective in 2009, the Company adopted FSP EITF 03-06-1, 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. There was no change to previously reported earnings per share from shareholders’ income from continuing operations.

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
	March 31,
(In millions)	2009		2008
Antidilutive options		11.3		3.7

The Company held 78,169,190 shares of common stock in Treasury as of March 31, 2009, and 70,130,685 shares as of March 31, 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:


	March 31,		December 31,
(In millions)	2009		2008
Incurred but not yet reported	$	846	$	782
Reported claims in process		105		114
Other medical expense payable		30		28

Medical claims payable	$	981	$	924

Activity in medical claims payable was as follows:


	For the period ended
	March 31,			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		1,820			7,312
Prior years		(40	)		(60	)

Total incurred		1,780			7,252
Paid claims related to:
Current year		1,155			6,716
Prior years		551			630

Total paid		1,706			7,346
Ending Balance, net		787			713
Add: Reinsurance and other amounts recoverable		194			211

Ending Balance	$	981		$	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 10 for additional information on reinsurance. For the three months ended March 31, 2009, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $40 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 $17 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 $23 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 impact in 2009 and 2008 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 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 ended March 31, 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 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 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 — 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. The performance of the underlying mutual funds compared to the hedge instruments is further impacted by a time lag, since the data is not reported and incorporated into the required hedge position on a real time basis. 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 the 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 Company had future policy benefit reserves for GMDB contracts of $1.8 billion as of March 31, 2009, and $1.6 billion as of December 31, 2008. The increase in reserves during the first quarter of 2009 is primarily due to declines in the equity market driving down the value of the underlying mutual fund investments.

In the first quarter of 2009, the Company reported a loss related to GMDB of $75 million pre-tax ($49 million after-tax), which included a charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves following an analysis of experience. The components of the charge included the following:

•

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.

Management estimates reserves for GMDB exposures based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over the long-term period. The Company monitors actual experience to update these reserve estimates as necessary.

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.

The determination of liabilities for GMDB 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, future partial surrenders, 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 following provides information about the Company’s reserving methodology and assumptions for GMDB as of March 31, 2009:

•		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 future partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-24% 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 lapse rate assumption is 0-15%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

Activity in future policy benefit reserves for these GMDB contracts was as follows:


	For the period ended
	March 31,		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		211		822
Less: Paid benefits		42		112

Ending balance, net		1,729		1,560
Less: Unpaid Claims		55		34
Add: Reinsurance and other amounts recoverable		97		83

Ending balance	$	1,771	$	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 March 31, 2009, the aggregate value of the underlying mutual fund investments was $14.4 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 630,000 contractholders had died on that date) was $11.9 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 amount that the Company would have to pay if all of the approximately 650,000 contractholders had died on 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 March 31, 2009 was $1.2 billion. The Company recorded in Other revenues pre-tax gains of $117 million for the three months ended March 31, 2009, and $42 million for the three months ended March 31, 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 7 for further information.

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 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 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. 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 Measured at Fair Value on a Recurring Basis

The following tables provide information as of March 31, 2009 and December 31, 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.


March 31, 2009
(In millions)	Level 1		Level 2		Level 3		Total
Financial assets at fair value:
Fixed maturities (1)	$	39	$	10,811	$	891	$	11,741
Equity securities		4		66		19		89

Subtotal		43		10,877		910		11,830
Short-term investments		—		103		—		103
GMIB assets (2)		—		—		908		908
Other derivative assets (3)		—		44		—		44

Total financial assets at fair value, excluding separate accounts	$	43	$	11,024	$	1,818	$	12,885

Financial liabilities at fair value:
GMIB liabilities	$	—	$	—	$	1,641	$	1,641
Other derivative liabilities		—		9		—		9

Total financial liabilities at fair value	$	—	$	9	$	1,641	$	1,650


(1)		As of March 31, 2009, fixed maturities includes $223 million of net appreciation required to adjust future policy benefits for run-off settlement annuity business including $34 million of appreciation for securities classified in Level 3.

(2)		The 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 $15 million for the future cost of reinsurance.

(3)		Other derivative assets includes $39 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $5 million of interest rate swaps not designated as accounting hedges.


December 31, 2008
(In millions)	Level 1		Level 2		Level 3		Total
Financial assets at fair value:
Fixed maturities (1)	$	38	$	10,874	$	869	$	11,781
Equity securities		8		84		20		112

Subtotal		46		10,958		889		11,893
Short-term investments		—		236		—		236
GMIB assets (2)		—		—		953		953
Other derivative assets (3)		—		45		—		45

Total financial assets at fair value, excluding separate accounts	$	46	$	11,239	$	1,842	$	13,127

Financial liabilities at fair value:
GMIB liabilities	$	—	$	—	$	1,757	$	1,757
Other derivative liabilities		—		36		—		36

Total financial liabilities at fair value	$	—	$	36	$	1,757	$	1,793


(1)		As of December 31, 2008, fixed maturities includes $514 million of net appreciation required to adjust future policy benefits for run-off settlement annuity business including $111 million of appreciation for securities classified in Level 3.

(2)		The 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 $17 million for the future cost of reinsurance.

(3)		Other derivative assets include $40 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $5 million of interest rate swaps not designated as accounting hedges.

Level 1 Financial Assets

Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. 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.

Level 2 Financial Assets and Financial Liabilities

Fixed maturities and equity securities. Approximately 92% 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, liquidity, 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 interest rate and foreign currency 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 March 31, 2009 or December 31, 2008. The nature and use of these other derivatives are described in Note 9.

Level 3 Financial Assets and Financial Liabilities

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 8% as of March 31, 2009 and 7% as of December 31, 2008 of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:


	March 31,		December 31,
(In millions)	2009		2008
Mortgage and asset-backed securities	$	441	$	518
Primarily private corporate bonds		370		270
Subordinated loans and private equity investments		99		101

Total	$	910	$	889

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, liquidity 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. Subordinated loans and private equity investments are valued at transaction price in the absence of market data indicating a change in the estimated fair values.

Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and interest rates but are without significant life insurance risk and are settled in lump sum payments, the Company reports these liabilities and assets as derivatives at fair value. The Company estimates the fair value of the assets and liabilities for GMIB 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 in 2008, 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 shareholders’ net income as described in Note 2. As certain assumptions used to estimate fair values for these contracts are largely unobservable, the Company classifies GMIB assets and liabilities in Level 3. 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.

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 annuitants’ accounts at the time of annuitization. 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 significant assumptions used to value the GMIB assets and liabilities as of March 31, 2009 were 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 2.28% at March 31, 2009 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. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim interest rate.

•

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 56% 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 16% to 43% for equity funds, 4% to 11% 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 23% 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, whether a contractholder has had a previous opportunity 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 and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. 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.

In addition, the company has considered other assumptions related to model, expense and non-performance risk in calculating the GMIB liability.

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 factors that impact the net liability. 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.

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, including other intangibles. As of March 31, 2009, Standard & Poor’s (S&P) has given a financial strength rating of AA to one reinsurer and a financial strength rating of A- to the parent company that guarantees the receivable from the other reinsurer.

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 three months ended March 31, 2009 and 2008. These tables exclude separate account assets 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 March 31, 2009	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 1/1/09	$	889		$	953		$	(1,757	)	$	(804	)

Gains (losses) included in income:
Results of GMIB		—			(38	)		70			32
Other		(4	)		—			—			—

Total gains (losses) included in income		(4	)		(38	)		70			32

Losses included in other comprehensive income		(19	)		—			—			—
Losses required to adjust future policy benefits for settlement annuities (1)		(76	)		—			—			—
Purchases, issuances, settlements		(3	)		(7	)		46			39
Transfers into Level 3		123			—			—			—

Balance at 3/31/09	$	910		$	908		$	(1,641	)	$	(733	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	(4	)	$	(38	)	$	70		$	32


(1)		Amounts do not accrue to shareholders and are not reflected in the Company’s revenues.


For the Three Months Ended March 31, 2008	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 1/1/2008	$	732		$	173		$	(313	)	$	(140	)

Gains (losses) included in income:
Effect of adoption of SFAS No. 157		—			244			(446	)		(202	)
Results of GMIB, excluding adoption effect		—			125			(227	)		(102	)
Other		(5	)		—			—			—

Total gains (losses) included in income		(5	)		369			(673	)		(304	)

Losses included in other comprehensive income		(9	)		—			—			—
Losses required to adjust future policy benefits for settlement annuities (1)		(18	)		—			—			—
Purchases, issuances, settlements		(6	)		(27	)		21			(6	)
Transfers into Level 3		32			—			—			—

Balance at 3/31/2008	$	726		$	515		$	(965	)	$	(450	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	—		$	369		$	(673	)	$	(304	)


(1)		Amounts do not accrue to shareholders and are not reflected in the Company’s revenues.

As noted in the table above, total gains and losses included in shareholders’ net income are reflected in the following captions in the Consolidated Statements of Income:

•

Realized investment gains (losses) and Net investment income for amounts related to fixed maturities and equity securities; and

•

Guaranteed minimum income benefits (income) expense for amounts related to GMIB assets and liabilities.

Reclassifications impacting Level 3 financial instruments are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore gains and losses in income only reflect activity for the period the instrument was classified in Level 3. Typically, investments that transfer out of Level 3 are classified in Level 2 as market data on the securities becomes more readily available.

The Company provided reinsurance for other insurance companies that offer a guaranteed minimum income benefit, and then retroceded a portion of the risk to other insurance companies. These arrangements with third party insurers are the instruments still held at the reporting date for GMIB assets and liabilities in the table above. Because these reinsurance arrangements remain in effect at the reporting date, the Company has reflected the total gain or loss for the period as the total gain or loss included in income attributable to instruments still held at the reporting date. However, the Company reduces the GMIB assets and liabilities resulting from these reinsurance arrangements when annuitants lapse, die, elect their benefit, or reach the age after which the right to elect their benefit expires.

Under SFAS No. 157, the Company’s GMIB assets and liabilities are expected to be volatile in future periods because the underlying assumptions will be based largely on market-observable inputs at the close of each reporting period including interest rates and market-implied volatilities.

The net gain driven by a decrease in the net GMIB liability of $32 million for the three months ended March 31, 2009 was primarily due to increases in interest rates since December 31, 2008 of $78 million, partially offset by:

•

the impact of declines in underlying account values in the period, driven by declines in equity markets and bond fund returns, resulting in increased exposures: $19 million;

•

updates to the risk and profit charge estimate: $2 million;

•

updates to the lapse assumption: $13 million; and

•

other amounts including experience varying from assumptions: $12 million.

Excluding the one-time implementation effect of adopting SFAS No. 157, the net loss driven by an increase in the net GMIB liability of $102 million for the three months ended March 31, 2008 was primarily due to:

•

decreases in interest rates since December 31, 2007: $47 million;

•

the impact of declines in underlying account values in the period, driven by declines in equity markets and bond fund returns, resulting in increased exposures: $37 million;

•

updates to the risk and profit charge estimate: $11 million; and

•

other amounts including experience varying from assumptions: $7 million.

Separate account assets

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are not included in the Company’s revenues and expenses. As of March 31, 2009 and December 31, 2008 separate account assets were as follows:


March 31, 2009
(In millions)	Level 1		Level 2		Level 3		Total
Guaranteed separate accounts (See Note 16)	$	197	$	1,508	$	—	$	1,705
Non-guaranteed separate accounts (1)		1,220		2,554		597		4,371

Total separate account assets	$	1,417	$	4,062	$	597	$	6,076


(1)		Non-guaranteed separate accounts include $1.8 billion in assets supporting the Company’s pension plan, including $573 million classified in Level 3.


December 31, 2008
(In millions)	Level 1		Level 2		Level 3		Total
Guaranteed separate accounts (See Note 16)	$	233	$	1,557	$	—	$	1,790
Non-guaranteed separate accounts (1)		1,093		2,506		475		4,074

Total separate account assets	$	1,326	$	4,063	$	475	$	5,864


(1)		Non-guaranteed separate accounts include $1.5 billion in assets supporting the Company’s pension plan, including $435 million classified in Level 3.

Separate account assets in Level 1 include exchange-listed equity securities. Level 2 assets primarily include:

•

equity securities and corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and

•

actively-traded institutional and retail mutual fund investments and separate accounts priced using the daily net asset value which is the exit price.

Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued at transaction price in the absence of market data indicating a change in the estimated fair value. Values may be adjusted when evidence is available to support such adjustments. Evidence may include market data as well as changes in the financial results and condition of the investment.

The following table summarizes the changes in separate account assets reported in Level 3 for the three months ended March 31, 2009 and 2008.


	Three Months Ended
	March 31,
(In millions)	2009			2008
Balance at 1/1	$	475		$	403
Policyholder gains (losses) (1)		(46	)		17
Purchases, issuances, settlements		8			(7	)
Transfers in (out) of Level 3		160			(2	)

Balance at 3/31	$	597		$	411


(1)		Includes losses of $46 million and $1 million attributable to instruments still held at March 31, 2009 and March 31, 2008 respectively.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Certain financial assets and liabilities are measured at fair value on a non-recurring basis, such as commercial mortgage loans held for sale. As of March 31, 2009 and December 31, 2008, the amounts required to adjust these assets and liabilities to their fair values were not significant.

Note 8 — Investments

Realized Investment Gains and Losses

The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for run-off settlement annuity business:


	Three Months Ended
	March 31,
(In millions)	2009			2008
Fixed maturities	$	(16	)	$	(26	)
Equity securities		(17	)		—
Commercial mortgage loans		(1	)		—
Other investments, including derivatives		(2	)		40

Realized investment gains (losses), before income taxes		(36	)		14
Less income taxes (benefits)		(12	)		5

Net realized investment gains (losses)	$	(24	)	$	9

Included in pre-tax realized investment gains (losses) above were asset write-downs and changes in valuation reserves as follows:


	Three Months Ended
	March 31,
(In millions)	2009		2008
Credit related	$	11	$	4
Other (1)		10		12

Total	$	21	$	16


(1)		Other primarily represents the impact of rising market yields on investments where the Company cannot demonstrate the intent and ability to hold until recovery.

Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equity securities on the Company’s Consolidated Balance Sheets. These securities are carried at fair value with changes in fair value reported in realized investment gains and interest and dividends reported in net investment income. The Company’s hybrid investments include preferred stock or debt securities with call or conversion features. The Company elected fair value accounting for certain hybrid securities to simplify accounting and mitigate volatility in results of operations and financial condition.


	As of		As of
	March 31,		December 31,
(In millions)	2009		2008
Included in fixed maturities:
Trading securities (amortized cost: $11; $13)	$	11	$	13
Hybrid securities (amortized cost: $11; $10)		12		10

Total	$	23	$	23


Included in equity securities:
Hybrid securities (amortized cost: $123; $123)	$	66	$	84

Sales information for available-for-sale fixed maturities and equity securities were as follows:


	Three Months Ended
	March 31,
(In millions)	2009			2008
Proceeds from sales	$	119		$	315
Gross gains on sales	$	3		$	2
Gross losses on sales	$	(3	)	$	(12	)

Review of declines in fair value. Management reviews fixed maturities and equity securities for impairment based on criteria that include:

•		length of time and severity of decline;

•		financial health and specific near term prospects of the issuer;

•		changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and

•		the Company’s ability and intent to hold until recovery.

Excluding trading and hybrid securities, as of March 31, 2009 fixed maturities with a decline in fair value from cost (which were primarily investment grade corporate bonds) were as follows, including the length of time of such decline:


	Fair		Amortized		Unrealized			Number
(Dollars In millions)	Value		Cost		Depreciation			of Issues
Fixed maturities:
One year or less:
Investment grade	$	2,628	$	2,892	$	(264	)		521
Below investment grade	$	377	$	427	$	(50	)		135
More than one year:
Investment grade	$	1,238	$	1,547	$	(309	)		280
Below investment grade	$	86	$	112	$	(26	)		19

The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Approximately $365 million of the unrealized depreciation is due to securities with a decline in value of greater than 20%. Approximately 80% of these securities had been in that position for less than six months. The remaining $284 million of the unrealized depreciation is due to securities with declines in value of less than 20%. There were no equity securities with a fair value significantly lower than cost as of March 31, 2009.

Note 9 — Derivative Financial Instruments

The Company’s investment strategy is to manage the characteristics and risks of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contractholder liabilities (such as paying claims, investment returns and withdrawals).As part of this investment strategy, the Company typically uses derivatives to minimize interest rate, foreign currency and equity price risks of chosen investment assets to conform to the characteristics and risks of the related insurance and contractholder liabilities. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize credit risk. In addition, the Company has written or sold contracts to guarantee minimum income benefits (GMIB) and to enhance investment returns. See Note 6 for a discussion of derivatives associated with GMDB contracts and Note 7 for a discussion of derivatives arising from GMIB contracts.

The Company uses hedge accounting when derivatives are designated, qualify and are highly effective as hedges. Effectiveness is formally assessed and documented at inception and each period throughout the life of a hedge using various quantitative methods appropriate for each hedge, including regression analysis and dollar offset. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income.

The Company accounts for derivative instruments as follows:

•		Derivatives are reported on the balance sheet at fair value with changes in fair values reported in shareholders’ net income or accumulated other comprehensive income.

•		Changes in the fair value of derivatives that hedge market risk related to future cash flows — and that qualify for hedge accounting — are reported in a separate caption in accumulated other comprehensive income. These hedges are referred to as cash flow hedges.

•		A change in the fair value of a derivative instrument may not always equal the change in the fair value of the hedged item; this difference is referred to as hedge ineffectiveness. Where hedge accounting is used, the Company reflects hedge ineffectiveness in shareholders’ net income (generally as part of realized investment gains and losses).

•		Features of certain investments and obligations, called embedded derivatives, are accounted for as derivatives. As permitted under SFAS No. 133, derivative accounting has not been applied to these features of such investments or obligations existing before January 1, 1999.

Certain subsidiaries of the Company are parties to over-the-counter (OTC) derivative instruments that contain bilateral provisions requiring the parties to such instruments to post collateral depending on net liability thresholds and the party’s financial strength or credit rating. The collateral posting requirements vary by counterparty. The aggregate fair value of derivative instruments with such credit-risk-related contingent features where a subsidiary of the Company was in a net liability position as of March 31, 2009 was $9 million for which the Company was not required to post collateral. If the contingent features underlying the agreements were triggered as of March 31, 2009, the Company would be required to post collateral of $7 million with its counterparties. Such subsidiaries are parties to certain other derivative instruments that contain termination provisions for which the counterparties could demand immediate payment of the total net liability position if the financial strength rating of the subsidiary were to decline below specified levels. As of March 31, 2009, the net liability position under such derivative instruments was less than $1 million.

The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments including the Company’s purpose for entering into specific derivative transactions, and their locations in and effect on the financial statements as of and for the three months ended March 31, 2009. Derivatives in the Company’s separate accounts are not included because associated gains and losses generally accrue directly to policyholders.



Instrument / Volume of
Activity	Primary Risk	Purpose		Cash Flows		Accounting Policy

Derivatives Designated as Accounting Hedges — Cash Flow Hedges

Interest rate swaps — $155 million of par value of related investments Foreign currency swaps — $180 million of U.S. dollar equivalent par value of related investments Interest rate and foreign currency swaps — $60 million of U.S. dollar equivalent par value of related investments	Interest rate and foreign currency	To hedge the interest or foreign currency cash flows of fixed maturities and commercial mortgage loans to match associated liabilities. Currency swaps are primarily Canadian dollars, euros, Australian dollars, and British pounds for periods of up to 12 years.		The Company periodically exchanges cash flows between variable and fixed interest rates or between two currencies for both principal and interest. Net interest cash flows are reported in net investment income and included in operating activities.		Using cash flow hedge accounting, fair values are reported in other long-term investments or other liabilities and accumulated other comprehensive income.

	Fair Value Effect on the Financial Statements (in millions)

		As of March 31				Three Months Ended March 31

		Other Long-Term		Accounts Payable, Accrued		Gain (Loss) Recognized in Other
	Instrument	Investments		Expenses and Other Liabilities		Comprehensive Income

	Interest rate swaps	$	12	$	—	$	(1	)
	Foreign currency swaps		15		6		2
	Interest rate and foreign currency swaps		12		3		2

	Total	$	39	$	9	$	3

Purchased options — $308 million of cash surrender value of related life insurance policies

Interest rate

To hedge the possibility of early policyholder cash surrender when the amortized cost of underlying invested assets is greater than their fair values.

The Company pays a fee and may receive or pay cash, based on the difference between the amortized cost and fair values of underlying invested assets at the time of policyholder surrender. These cash flows will be reported in financing activities.

Using cash flow hedge accounting, fair values are reported in other assets or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to benefits expense over the life of the underlying invested assets.

Fair Value Effect on the Financial Statements

Fair values reported in other assets and other comprehensive income were less than $1 million.

Treasury lock

Interest rate

To hedge the variability of and fix at inception date, the benchmark Treasury rate component of future interest payments on debt to be issued.

The Company will receive (pay) the fair value of the contract at the earliest of expiration or debt issuance. Cash flows are reported in operating activities.

Using cash flow hedge accounting, fair values are reported in short-term investments or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to interest expense over the life of the debt issued.

Fair Value Effect on the Financial Statements

All treasury locks matured and the Company recognized a gain of $14 million in other comprehensive income for the three months ended March 31, 2009, resulting in net cumulative losses of $26 million, to be amortized to interest expense over the life of the debt, commencing at issuance. Reclassifications from accumulated other comprehensive income to interest expense for issued debt were less than $1 million for the three months ended March 31, 2009.

The amount of gains (losses) reclassified from accumulated other comprehensive income into income was not significant. No gains (losses) were recognized due to ineffectiveness and no amounts were excluded from the assessment of hedge ineffectiveness.

Instrument / Volume of

Activity

Primary Risk

Purpose

Cash Flows

Accounting Policy

Derivatives Not Designated As Accounting Hedges

Futures — $1,215 million of U.S. dollar equivalent market price of outstanding contracts

Equity and foreign currency

To reduce domestic and international equity market exposures for certain reinsurance contracts that guarantee death benefits resulting from changes in variable annuity account values based on underlying mutual funds. Currency futures are primarily euros, Japanese yen and British pounds.

The Company receives (pays) cash daily in the amount of the change in fair value of the futures contracts. Cash flows are included in operating activities.

Fair value changes are reported in other revenues. Amounts not yet settled from the previous day’s fair value change (daily variation margin) are reported in premiums, accounts and notes receivable, net or accounts payable, accrued expenses and other liabilities.

Fair Value Effect on the Financial Statements (in millions)

Three Months Ended March 31

Other Revenues

Futures

117

Interest rate swaps — $73 million of par value of related investments

Interest rate

To hedge the interest cash flows of fixed maturities to match associated liabilities.

The Company periodically exchanges cash flows between variable and fixed interest rates for both principal and interest. Net interest cash flows are reported in realized investment gains (losses) and included in operating activities.

Fair values are reported in other long-term investments or other liabilities, with changes in fair value reported in realized investment gains and losses.

Fair Value Effect on the Financial Statements (in millions)

As of March 31

Three Months Ended March 31

Other Long-Term Investments

Realized Investment Gains (Losses)

Interest rate swaps

—

Written options (GMIB liability) — $1,804 million of maximum potential undiscounted future payments as defined in Note 16

Purchased options (GMIB asset) — $992 million of maximum potential undiscounted future receipts as defined in Note 16

Equity and interest rate

The Company has written certain reinsurance contracts to guarantee minimum income benefits resulting from the level of variable annuity account values compared with a contractually guaranteed amount. The actual payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments. The Company purchased reinsurance contracts to hedge the market risks assumed. These contracts are accounted for as written and purchased options.

The Company periodically receives (pays) fees based on either contractholders’ account values or deposits increased at a contractual rate. The Company will also pay (receive) cash depending on changes in account values and interest rates when account holders first elect to receive minimum income payments. These cash flows are reported in operating activities.

Fair values are reported in other liabilities (GMIB liability) and other assets (GMIB asset). Changes in fair value are reported in guaranteed minimum income benefits (income) expense.

Fair Value Effect on the Financial Statements (in millions)

As of March 31

Three Months Ended March 31

Accounts Payable, Accrued

Guaranteed Minimum Income

Instrument

Other Assets

Expenses and Other Liabilities

Benefits (Income) Expense

Written options (GMIB liability)

—

1,641

(70

)

Purchased options (GMIB asset)

908

—

Total

908

1,641

(32

)

Note 10 — Reinsurance

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

Retirement benefits business. The Company had a reinsurance recoverable of $1.8 billion as of March 31, 2009, and $1.9 billion as of December 31, 2008 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable, which is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed maturities and mortgage loans equal to or greater than 100% of the reinsured liabilities held in a trust established for the benefit of the Company. As of March 31, 2009, the trust was adequately funded and S&P had assigned this reinsurer a rating of AA-.

Individual life and annuity reinsurance. The Company had reinsurance recoverables totaling $4.5 billion as of March 31, 2009 and December 31, 2008 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. Effective December 31, 2007, a substantial portion of the reinsurance recoverables are secured by investments held in a trust established for the benefit of the Company. At March 31, 2009, the trust assets secured approximately 90% of the reinsurance recoverables and S&P had assigned both of these reinsurers a rating of AA-.

Other Ceded and Assumed Reinsurance

Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Health Care, Disability and Life, and International segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $302 million as of March 31, 2009 are expected to be collected from more than 90 reinsurers which have been assigned the following financial strength ratings from S&P:


						Percent of Reinsurance
	Reinsurance		Percent			Recoverable Protected
Ongoing operations	Recoverable		of Total			by Collateral

AA- (Single reinsurer)	$	41		14	%		0	%
AA- or higher (All other reinsurers)		43		14	%		0	%
A (Single reinsurer)		31		10	%		0	%
A+ to A- (All other reinsurers)		96		32	%		4	%
Unrated (Single reinsurer)		35		12	%		91	%
Below A- or unrated (All other reinsurers)		56		18	%		25	%

Total	$	302		100	%		16	%

The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of March 31, 2009, the Company’s recoverables related to these segments were net of a reserve of $12 million.

Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Company’s Run-off Reinsurance operations assumed risks related to GMDB contracts, GMIB contracts, workers’ compensation, and personal accident business. The Company’s Run-off Reinsurance operations also purchased retrocessional coverage to reduce the risk of loss on these contracts.

Liabilities related to GMDB, workers’ compensation and personal accident are included in future policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under GAAP, the asset related to GMIB is recorded in the Other assets, including other intangibles caption and the liability related to GMIB is recorded in the Accounts payable, accrued expenses, and other liabilities caption on the Company’s Consolidated Balance Sheets (see Notes 7 and 16 for additional discussion of the GMIB assets and liabilities).

The reinsurance recoverables for GMDB, workers’ compensation, and personal accident of $178 million as of March 31, 2009 are expected to be collected from more than 100 retrocessionaires which have been assigned the following financial strength ratings from S&P:


						Percent of Reinsurance
	Reinsurance		Percent			Recoverable Protected
Run-off Reinsurance segment	Recoverable		of Total			by Collateral

AA- or higher (All reinsurers)	$	38		21	%		9	%
A (Single reinsurer)		64		36	%		61	%
A- (Single reinsurer)		33		19	%		0	%
A+ to A- (All other reinsurers)		21		12	%		1	%
Below A- or unrated (All reinsurers)		22		12	%		23	%

	$	178		100	%		26	%

The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on ceding companies’ claim payments. For GMDB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and policyholder behavior. For workers’ compensation and personal accident, the payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from retrocessionaires, may not be known with certainty for some time.

Summary. The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of March 31, 2009, based on current information. However, it is possible that future developments could have a material adverse effect on the Company’s consolidated results of operations and, in certain situations, such as if actual experience differs from the assumptions used in estimating reserves for GMDB, could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

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


	Three Months Ended
	March 31,
(In millions)	2009		2008
Ceded premiums and fees
Individual life insurance and annuity business sold	$	51	$	58
Other		60		59

Total	$	111	$	117

Reinsurance recoveries
Individual life insurance and annuity business sold	$	68	$	89
Other		58		53

Total	$	126	$	142

Note 11 — Pension and Other Postretirement Benefit Plans

The Company’s postretirement benefit liability adjustment decreased by $7 million pre-tax ($4 million after-tax) for the three months ended March 31, 2009, and $6 million pre-tax ($3 million after-tax) for the three months ended March 31, 2008, resulting in increases to shareholders’ equity. The decrease in the liability for each period was primarily due to net amortization of actuarial losses.

Pension benefits. Components of net pension cost were as follows:


	Three Months Ended
	March 31,
(In millions)	2009			2008
Service cost	$	21		$	18
Interest cost		61			61
Expected long-term return on plan assets		(60	)		(59	)
Amortization of:
Net loss from past experience		17			14
Prior service cost		(3	)		(2	)

Net pension cost	$	36		$	32

The Company funds its qualified pension plans at least at the minimum amount required by the Pension Protection Act of 2006, which requires companies to fully fund defined benefit pension plans over a seven-year period beginning in 2008. The Company made $300 million in domestic pension plan contributions in the first quarter of 2009, and expects to make additional contributions of $110 million for the remainder of 2009.

Other postretirement benefits. Components of net other postretirement benefit cost were as follows:


	Three Months Ended
	March 31,
(In millions)	2009			2008
Service cost	$	—		$	1
Interest cost		6			6
Expected long-term return on plan assets		—			—
Amortization of:
Net gain from past experience		(2	)		(2	)
Prior service cost		(5	)		(4	)

Net other postretirement benefit cost	$	(1	)	$	1

Note 12 — Debt


	March 31,		December 31,
(In millions)	2009		2008
Short-term:
Commercial paper	$	373	$	299
Current maturities of long-term debt		4		2

Total short-term debt	$	377	$	301

Long-term:
Uncollateralized debt:
7% Notes due 2011	$	222	$	222
6.375% Notes due 2011		226		226
5.375% Notes due 2017		250		250
6.35% Note due 2018		300		300
6.37% Note due 2021		78		78
7.65% Notes due 2023		100		100
8.3% Notes due 2023		17		17
7.875% Debentures due 2027		300		300
8.3% Step Down Notes due 2033		83		83
6.15% Notes due 2036		500		500
Other		10		14

Total long-term debt	$	2,086	$	2,090

Under a universal shelf registration statement filed with the Securities and Exchange Commission (SEC), the Company issued $300 million of 6.35% Notes on March 4, 2008 (with an effective interest rate of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning September 15, 2008. These Notes will mature on March 15, 2018.

The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal to the greater of:

•		100% of the principal amount of the Notes to be redeemed; or

•		the present value of the remaining principal and interest payments on the Notes being redeemed discounted at the applicable Treasury Rate plus 40 basis points.

On March 14, 2008, the Company entered into a new commercial paper program (“the Program”). Under the Program, the Company is authorized to sell from time to time short-term unsecured commercial paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. The Company uses the credit facility entered into in June 2007, as back-up liquidity to support the outstanding commercial paper. If at any time funds are not available on favorable terms under the Program, the Company may use its credit agreement for funding. In October 2008, the Company added an additional dealer to its Program. As of March 31, 2009, the Company had $373 million in commercial paper outstanding at a weighted average interest rate of 2.70%.

Note 13 — Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) excludes amounts required to adjust future policy benefits for run-off settlement annuity business. Changes in accumulated other comprehensive income (loss) were as follows:


				Tax
				(Expense)			After-
(In millions)	Pre-Tax			Benefit			Tax
Three Months Ended March 31,
2009
Net unrealized appreciation, securities:
Net unrealized appreciation on securities arising during the period	$	43		$	(13	)	$	30
Plus: reclassification adjustment for losses included in shareholders’ net income		33			(12	)		21

Net unrealized appreciation, securities	$	76		$	(25	)	$	51

Net unrealized appreciation, derivatives	$	17		$	(6	)	$	11

Net translation of foreign currencies	$	(44	)	$	16		$	(28	)

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	7		$	(3	)	$	4

2008
Net unrealized depreciation, securities:
Net unrealized depreciation on securities arising during the year	$	(30	)	$	11		$	(19	)
Plus: reclassification adjustment for losses included in shareholders’ net income		26			(9	)		17

Net unrealized depreciation, securities	$	(4	)	$	2		$	(2	)

Net unrealized depreciation, derivatives	$	(12	)	$	4		$	(8	)

Net translation of foreign currencies	$	(8	)	$	2		$	(6	)

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	6		$	(3	)	$	3

Note 14 — Income Taxes

During the first quarter of 2009, the IRS completed its examination of the Company’s 2005 and 2006 consolidated federal income tax returns, resulting in an increase to shareholders’ net income of $21 million ($20 million in continuing operations and $1 million in discontinued operations). This increase reflects a reduction in net unrecognized tax benefits of $8 million ($17 million reported in income tax expense, partially offset by a $9 million pre-tax charge) and a reduction of interest and penalties of $13 million (reported in income tax expense).

Gross unrecognized tax benefits declined by $39 million during the first quarter of 2009, primarily due to the completion of the 2005 and 2006 IRS examinations. However, as noted above, the effect on shareholders’ net income was only $8 million related to the completion of the IRS examinations. There were other non-audit related changes in net unrecognized tax benefits, resulting in a net increase to shareholders’ net income due to the reduction of unrecognized tax benefits of $6 million in the first quarter of 2009.

Over the next 12 months, the Company has determined it reasonably possible that the level of unrecognized tax benefits could increase or decrease significantly, subject to developments in certain matters in dispute with the IRS. It is also considered reasonably possible there could be a significant change in the level of valuation allowances recorded against deferred tax benefits of the reinsurance operations and certain unrealized investment losses within the next 12 months. The Company, however, is currently unable to reasonably estimate the potential impact of such changes.

During the first quarter of 2009, final resolution was reached for one of the two disputed issues associated with the IRS examination of the 2003 and 2004 consolidated federal income tax returns. The second of these disputed matters remains unresolved and will be proceeding to litigation. Due to the nature of the litigation process, the timing of the resolution of this matter is uncertain. In addition, two unresolved issues remain from the IRS examination of the 2005 and 2006 consolidated federal income tax returns, which have now moved to the administrative appeals level. One of these unresolved issues is the same matter which remains in dispute from the prior IRS examination.

The Company has historically accrued U.S. income taxes on the undistributed earnings of foreign subsidiaries because the Company has not considered such earnings to be permanently invested overseas. Management is currently assessing whether undistributed earnings of certain foreign operations may meet the “permanently invested overseas” criteria and, if so, the Company’s consolidated effective tax rate may decrease in future reporting periods.

Note 15 — Segment Information

The Company’s operating segments generally reflect groups of related products, except for the International segment which is generally based on geography. In accordance with GAAP, operating segments that do not require separate disclosure have been combined into Other Operations. The Company measures the financial results of its segments using “segment earnings (loss),” which subsequent to the implementation of SFAS No. 160, is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses.

Summarized segment financial information was as follows:


	Three Months Ended
	March 31,
(In millions)	2009			2008
Premiums and fees, Mail order pharmacy revenues and Other revenues
Health Care	$	3,289		$	3,064
Disability and Life		701			661
International		439			475
Run-off Reinsurance		121			57
Other Operations		44			46
Corporate		(14	)		(13	)

Total	$	4,580		$	4,290

Shareholders’ income (loss) from continuing operations
Health Care	$	155		$	114
Disability and Life		63			68
International		42			52
Run-off Reinsurance		(26	)		(189	)
Other Operations		19			22
Corporate		(22	)		(21	)

Segment Earnings		231			46
Realized investment gains (losses), net of taxes		(24	)		9

Shareholders’ income from continuing operations	$	207		$	55

Note 16 — Contingencies and Other Matters

The Company, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business.

Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business

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

The Company guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. This percentage varies depending on the asset class within a sponsoring employer’s portfolio (for example, a bond fund would require a lower percentage than a riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers do not maintain the required levels of separate account assets, the Company or an affiliate of the buyer has the right to redirect the management of the related assets to provide for benefit payments. As of March 31, 2009, employers maintained assets that exceeded the benefit obligations. Benefit obligations under these arrangements were $1.8 billion as of March 31, 2009. Approximately 77% of these guarantees are reinsured by an affiliate of the buyer of the retirement benefits business. The remaining guarantees are provided by the Company with minimal reinsurance from third parties. There were no additional liabilities required for these guarantees as of March 31, 2009. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the SFAS No. 157 fair value hierarchy. See Note 7 for further information on the fair value hierarchy.

Other Financial Guarantees

Guaranteed minimum income benefit contracts. The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income benefits under certain variable annuity contracts issued by other insurance companies. A contractholder can elect the guaranteed minimum income benefit (GMIB) within 30 days of any eligible policy anniversary after a specified contractual waiting period. The Company’s exposure arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the policy’s current account value. At the time of annuitization, the Company pays the excess (if any) of the guaranteed benefit over the benefit based on the current account value in a lump sum to the direct writing insurance company.

In periods of declining equity markets or declining interest rates, the Company’s GMIB liabilities increase. Conversely, in periods of rising equity markets and rising interest rates, the Company’s liabilities for these benefits decrease.

The Company estimates the fair value of the GMIB assets and liabilities using assumptions for market returns and interest rates, volatility of the underlying equity and bond mutual fund investments, mortality, lapse, annuity election rates, non-performance risk, and risk and profit charges. Assumptions were updated effective January 1, 2008 to reflect the requirements of SFAS No. 157. See Note 7 for additional information on how fair values for these liabilities and related receivables for retrocessional coverage are determined.

The Company is required to disclose the maximum potential undiscounted future payments for guarantees related to minimum income benefits. Under these guarantees, the future payment amounts are dependent on equity and bond fund market and interest rate levels prior to and at the date of annuitization election, which must occur within 30 days of a policy anniversary, after the appropriate waiting period. Therefore, the future payments are not fixed and determinable under the terms of the contract. Accordingly, the Company has estimated the maximum potential undiscounted future payments using hypothetical adverse assumptions, defined as follows:

•		No annuitants surrendered their accounts;

•		All annuitants lived to elect their benefit;

•		All annuitants elected to receive their benefit on the next available date (2009 through 2014); and

•		All underlying mutual fund investment values remained at the March 31, 2009 value of $1.1 billion with no future returns.

The maximum potential undiscounted payments that the Company would make under those assumptions would aggregate $1.8 billion before reinsurance recoveries. The Company expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The Company has retrocessional coverage in place from two external reinsurers which covers 55% of the exposures on these contracts. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

Certain Other Guarantees. The Company had indemnification obligations to lenders of up to $203 million as of March 31, 2009 related to borrowings by certain real estate joint ventures which the Company either records as an investment or consolidates. These borrowings, which are nonrecourse to the Company, are secured by the joint ventures’ real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in 2009 through 2017. The Company’s indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of March 31, 2009.

As of March 31, 2009, the Company guaranteed that it would compensate the lessors for a shortfall of up to $44 million in the market value of certain leased equipment at the end of the lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had additional liabilities for these guarantees of $5 million as of March 31, 2009.

The Company had indemnification obligations as of March 31, 2009 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, the filing of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations, since not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities required for these indemnification obligations as of March 31, 2009.

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

Regulatory and Industry Developments

Employee benefits regulation. The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the Federal Departments of Labor and Justice, as well as the courts. Regulation and judicial decisions have resulted in changes to industry and the Company’s business practices and will continue to do so in the future. In addition, the Company’s subsidiaries are routinely involved with various claims, lawsuits and regulatory and IRS audits and investigations that could result in financial liability, changes in business practices, or both. Health care regulation in its various forms could have an adverse effect on the Company’s health care operations if it inhibits the Company’s ability to respond to market demands or results in increased medical or administrative costs without improving the quality of care or services.

Other possible regulatory and legislative changes or judicial decisions that could have an adverse effect on the Company’s employee benefits businesses include:

	•		additional mandated benefits or services that increase costs;

	•		legislation that would grant plan participants broader rights to sue their health plans;

	•		changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for the Company’s health care products and services; and pension legislation, which could increase pension cost;

	•		changes in Employee Retirement Income Security Act (ERISA) regulations resulting in increased administrative burdens and costs;

	•		additional restrictions on the use of prescription drug formularies and rulings from pending purported class action litigation, which could result in adjustments to or the elimination of the average wholesale price or “AWP” of pharmaceutical products as a benchmark in establishing certain rates, charges, discounts, guarantees and fees for various prescription drugs;

	•		additional privacy legislation and regulations that interfere with the proper use of medical information for research, coordination of medical care and disease and disability management;

	•		additional variations among state laws mandating the time periods and administrative processes for payment of health care provider claims;

	•		legislation that would exempt independent physicians from antitrust laws; and

	•		changes in federal tax laws, such as amendments that could affect the taxation of employer provided benefits.

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

Concentration of risk. For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated 26% of the segment’s revenues for the three months ended March 31, 2009. South Korea generated 32% of the segment’s earnings for the three months ended March 31, 2009. Due to the concentration of business in South Korea, the International segment is exposed to potential losses resulting from economic and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, which could have a significant impact on the segment’s results and the Company’s consolidated financial results.

Litigation and Other Legal Matters

The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits, investigations and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs. Litigation of income tax matters is accounted for under the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes. Further information can be found in Note 14. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to the Company’s consolidated results of operations, liquidity or financial condition.

Managed care litigation. On April 7, 2000, several pending actions were consolidated in the United States District Court for the Southern District of Florida in a multi-district litigation proceeding captioned In re Managed Care Litigation challenging, in general terms, the mechanisms used by managed care companies in connection with the delivery of or payment for health care services. The consolidated cases include Shane v. Humana, Inc., et al., Mangieri v. CIGNA Corporation, Kaiser and Corrigan v. CIGNA Corporation, et al. and Amer. Dental Ass’n v. CIGNA Corp. et al.

In 2004, the court approved a settlement agreement between the physician class and CIGNA. However, a dispute over disallowed claims under the settlement submitted by a representative of certain class member physicians is in arbitration. Separately, in 2005, the court approved a settlement between CIGNA and a class of non-physician health care providers. Only the American Dental Association case remains unresolved. On March 2, 2009, the Court dismissed five of the six counts of the complaint with prejudice. On March 20, 2009, the Court declined to exercise supplemental jurisdiction over the remaining state law claim and dismissed the case. Plaintiffs filed a notice of appeal on April 17, 2009. CIGNA denies the allegations and will continue to vigorously defend itself.

CIGNA has received insurance recoveries related to this litigation. In 2008, the Court ruled that the Company is not entitled to insurance recoveries from one of the two insurers from which the Company is pursuing further recoveries. CIGNA has appealed that decision.

Broker compensation. Beginning in 2004, the Company, other insurance companies and certain insurance brokers received subpoenas and inquiries from various regulators, including the New York and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorney’s Office for the Southern District of California and the U.S. Department of Labor relating to their investigations of insurance broker compensation. CIGNA is cooperating with the inquiries and investigations.

On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life Insurance Company of North America, were named as defendants in a multi-district litigation proceeding, In re Insurance Brokerage Antitrust Litigation, consolidated in the United States District Court for the District of New Jersey. The complaint alleges that brokers and insurers conspired to hide commissions, increasing the cost of employee benefit plans, and seeks treble damages and injunctive relief. Numerous insurance brokers and other insurance companies are named as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in favor of the defendants. Plaintiffs have filed an appeal. CIGNA denies the allegations and will continue to vigorously defend itself.

Amara cash balance pension plan litigation. On December 18, 2001, Janice Amara filed a class action lawsuit, now captioned Janice C. Amara, Gisela R. Broderick, Annette S. Glanz, individually and on behalf of all others similarly situated v. CIGNA Corporation and CIGNA Pension Plan, in the United States District Court for the District of Connecticut against CIGNA Corporation and the CIGNA Pension Plan on behalf of herself and other similarly situated participants in the CIGNA Pension Plan affected by the 1998 conversion to a cash balance formula. The plaintiffs allege various ERISA violations including, among other things, that the Plan’s cash balance formula discriminates against older employees; the conversion resulted in a wear away period (during which the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are not adequately disclosed in the Plan.

In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension Plan on the age discrimination and wear away claims. However, the court found in favor of the plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from the existing cash balance formula for the majority of the class, requiring class members to receive their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment and post-judgment interest. The court has stayed implementation of the decision until the parties’ appeals have been exhausted. Both parties have appealed the court’s decisions. In the second quarter of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax), which principally reflects the Company’s current best estimate of the liabilities related to the court order. The Company will continue to vigorously defend itself in this case.

Ingenix. On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of UnitedHealthcare, used to calculate payments for services provided by out-of-network providers. The Company received four subpoenas from the New York Attorney General’s office in connection with this investigation and responded appropriately. On February 17, 2009, the Company entered into an Assurance of Discontinuance resolving the investigation. In connection with the industry-wide resolution, the Company will contribute $10 million to the establishment of a new non-profit company that will compile and provide the data currently provided by Ingenix. In addition, on March 28, 2008, the Company received a voluntary request for production of documents from the Connecticut Attorney General’s office seeking certain out-of-network claim payment information. The Company is responding appropriately. Since January 2009, the Company has received and is responding to inquiries regarding the use of Ingenix data from the Texas Attorney General and the Departments of Insurance in Illinois, Florida, Vermont and Georgia.

The Company is also a defendant in putative class actions brought on behalf of members (Franco et al. v. Connecticut General Life Insurance Co. et al. and Chazen et al. v. Connecticut General Life Insurance Co. et al.), and three putative class actions brought on behalf of providers (AMA et al. v. Connecticut General Life Insurance Co. et al., Shiring et al. v. CIGNA Corp. et al. and Pain Management and Surgery Center of Southern Indiana et al. v. CIGNA Corp. et al.), asserting that due to the use of Ingenix data, the Company improperly underpaid claims, an industry-wide issue. The Franco putative class action, filed on March 22, 2004 in federal district court in New Jersey, asserts claims under ERISA and the RICO statute on behalf of members of CIGNA plans. Plaintiff seeks to recover alleged underpayments in relation to out-of-network claims for the period from 1998 to present. In 2008, the court denied the Company’s motion to dismiss for lack of standing while indicating that the named plaintiff’s unique situation might undermine her adequacy as a class representative. The parties are conducting significant discovery, and we expect the class certification hearing to occur in the third quarter of 2009. On August 15, 2008, a second putative member class action was filed in federal district court in New Jersey on behalf of a different class representative, David Chazen. The Chazen complaint asserts claims under ERISA and New Jersey state law for the time period 2002 to present. On February 9, 2009, the AMA putative provider class action was filed in federal district court in New Jersey. The complaint asserts claims under ERISA, the RICO statute and the Sherman Antitrust Act for the time period 2005 to the present. On April 17, 2009, a second putative provider class action, Shiring, was filed in federal district court in New Jersey, asserting claims on behalf of non-physician providers for the time period 2005 to present. On April 14, 2009, a third putative provider class action, Pain Management and Surgery Center of Southern Indiana, was filed in federal district court in Indiana, asserting claims under ERISA, the RICO statute and the Sherman Antitrust Act. The alleged damages period is 1999 to the present for the ERISA claims and 2005 to the present for the RICO and Antitrust claims. The Company denies the allegations asserted in the investigations and litigation and will vigorously defend itself in these matters.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INDEX


Introduction			34
Consolidated Results of Operations			36
Critical Accounting Estimates			38
Segment Reporting
Health Care			39
Disability and Life			44
International			45
Run-off Reinsurance			47
Other Operations			49
Corporate			50
Discontinued Operations			50
Industry Developments and Other Matters			51
Liquidity and Capital Resources			52
Investment Assets			56
Market Risk			58
Cautionary Statement			59

INTRODUCTION

In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (the Company) make certain forward-looking statements relating to the Company’s financial condition and results of operations, as well as to trends and assumptions that may affect the Company. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2009”). Actual results may differ from the Company’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis (MD&A), including in the Cautionary Statement beginning on page 59. The forward-looking statements contained in this filing represent management’s current estimate as of the date of this filing. Management does not assume any obligation to update these estimates.

The following discussion addresses the financial condition of the Company as of March 31, 2009, compared with December 31, 2008, and its results of operations for the three months ended March 31, 2009 compared with the same period last year. This discussion should be read in conjunction with Management’s Discussion and Analysis included in the Company’s 2008 Form 10-K, to which the reader is directed for additional information.

Certain reclassifications and restatements have been made to prior period amounts to conform to the presentation of 2009 amounts. In addition, certain amounts have been restated as a result of the adoption of new accounting pronouncements. See Note 2 to the Consolidated Financial Statements for additional information.

Overview

The Company constitutes one of the largest investor-owned health service organizations in the United States. Its subsidiaries are major providers of health care and related benefits, the majority of which are offered through the workplace. In addition, the Company has an international operation that offers life, accident and supplemental health insurance products as well as international health care products and services to businesses and individuals in selected markets. The Company also has certain inactive businesses, including a Run-off Reinsurance segment.

Ongoing Operations

The Company generates revenues, shareholders’ net income and cash flow from ongoing operations by:

•		maintaining and growing its customer base;

•		charging prices that reflect emerging experience;

•		investing available cash at attractive rates of return for appropriate durations; and

•		effectively managing other operating expenses.

The Company’s ability to increase revenue, shareholders’ net income and operating cash flow is directly related to its ability to execute on its strategic initiatives, the success of which is measured by certain key factors as discussed below.

Key factors affecting the Company’s results from ongoing operations include:

•		the ability to profitably price products and services at competitive levels;

•		the volume of customers served and the mix of products and services purchased by those customers;

•		the ability to cross sell its various health and related benefit products;

•		the relationship between other operating expenses and revenue; and

•		the effectiveness of the Company’s capital deployment initiatives.

Run-off Operations

Effectively managing the various exposures of its run-off operations is important to the Company’s ongoing profitability, operating cash flows and available capital. The results are influenced by a range of economic factors, especially movements in equity markets and interest rates. Results are also influenced by behavioral factors, including future partial surrender election rates for guaranteed minimum death benefits (GMDB) contracts and annuity election rates for guaranteed minimum income benefits (GMIB) contracts, as well as the collection of amounts recoverable from retrocessionaires. In order to manage these risks, the Company operates a GMDB equity hedge program to substantially reduce the impact of equity market movements. The Company actively monitors the performance of the hedge program, and evaluates the cost/benefit of hedging other risks. The Company also actively studies policyholder behavior experience and adjusts future expectations based on the results of the studies, as warranted. We also perform regular audits of the ceding companies to ensure treaty compliance that premiums received and claims paid are properly reflective of the underlying risks and to maximize the probability of subsequent collection of claims from retrocessionaires. Finally, the Company monitors the credit standing of the retrocessionaires.

Summary

The Company’s overall results are influenced by a range of economic and other factors, especially:

•		cost trends and inflation for medical and related services;

•		utilization patterns of medical and other services;

•		employment levels;

•		the tort liability system;

•		developments in the political environment both domestically and internationally;

•		interest rates, equity market returns, foreign currency fluctuations and credit market volatility, including the availability and cost of credit in the future; and

•		federal and state regulation.

The Company regularly monitors the trends impacting operating results from the above mentioned key factors and economic and other factors affecting its operations. The Company develops strategic and tactical plans designed to improve performance and maximize its competitive position in the markets it serves. The Company’s ability to achieve its financial objectives is dependent upon its ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.

The Company seeks to improve the performance of and profitably grow its ongoing businesses and manage the risks associated with the run-off reinsurance operations.

Acquisition of Great-West Healthcare

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 was approximately $1.5 billion and 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.

See Note 3 to the Consolidated Financial Statements for additional information.

CONSOLIDATED RESULTS OF OPERATIONS

FINANCIAL SUMMARY


	Three Months Ended
	March 31,
(In millions)	2009			2008
Premiums and fees	$	4,051		$	3,851
Net investment income		229			265
Mail order pharmacy revenues		312			296
Other revenues		217			143
Realized investment gains (losses)		(36	)		14

Total revenues		4,773			4,569
Benefits and expenses		4,500			4,495

Income from continuing operations before taxes		273			74
Income taxes		65			18

Income from continuing operations		208			56
Shareholders’ income from discontinued operations, net of taxes		1			3

Net income		209			59
Less: Net income attributable to noncontrolling interests		1			1


	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		4

Notes to the Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3. Quantitative and Qualitative Disclosures About Market Risk		61

Item 4. Controls and Procedures		62

PART II OTHER INFORMATION

Item 1. Legal Proceedings		63

Item 1A. Risk Factors		64

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65

Item 6. Exhibits		66

SIGNATURE		67

EXHIBIT INDEX		E-1

Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents