UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

Commission file number 1-08323

CIGNA CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE

06-1059331

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

Two Liberty Place, 1601 Chestnut Street Philadelphia, Pennsylvania

19192

(Address of principal executive offices)

(Zip Code)

(215) 761-1000

Registrant’s telephone number, including area code

(215) 761-3596

Registrant’s facsimile number, including area code

Not Applicable

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

Indicate by check mark

Yes

No

whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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).

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

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

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

As of April 15, 2011, 270,569,454 shares of the issuer’s common stock were outstanding.


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Index

PART I

FINANCIAL INFORMATION

1

ITEM 1

Financial Statements

1

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

72

ITEM 4

Controls and Procedures

73

PART II

OTHER INFORMATION

74

ITEM 1

Legal Proceedings

74

ITEM 1A

Risk Factors

75

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

76

ITEM 6

Exhibits

77

Signature

78

Index to Exhibits

E1

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


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PART I   FINANCIAL INFORMATION

ITEM 1  Financial Statements

CIGNA Corporation

Consolidated Statements of Income

(In millions, except per share amounts)

Unaudited

Three Months Ended

March 31,

2011

2010

Revenues

Premiums and fees

$

4,733

$

4,543

Net investment income

279

266

Mail order pharmacy revenues

339

348

Other revenues

36

54

Realized investment gains (losses):

Other-than-temporary impairments on fixed maturities, net

-

(1)

Other realized investment gains (losses)

26

(5)

Total realized investment gains (losses)

26

(6)

TOTAL REVENUES

5,413

5,205

Benefits and Expenses

Health Care medical claims expense

2,077

2,209

Other benefit expenses

994

879

Mail order pharmacy cost of goods sold

276

285

GMIB fair value (gain)

(16)

(4)

Other operating expenses

1,482

1,414

TOTAL BENEFITS AND EXPENSES

4,813

4,783

Income before Income Taxes

600

422

Income taxes:

Current

22

87

Deferred

148

51

TOTAL TAXES

170

138

Net Income

430

284

Less: Net Income Attributable to Noncontrolling Interest

1

1

Shareholders’ Net Income

$

429

$

283

Shareholders’ Net Income Per Share:

Basic

$

1.59

$

1.03

Diluted

$

1.57

$

1.02

Dividends Declared Per Share

$

0.040

$

0.040

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

CIGNA CORPORATION – Form 10-Q – 1


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CIGNA Corporation

Consolidated Balance Sheets

(In millions, except per share amounts)

Unaudited

As of March 31, 2011

As of December 31, 2010

ASSETS

Investments:

Fixed maturities, at fair value (amortized cost, $13,838; $13,445)

$

15,033

$

14,709

Equity securities, at fair value (cost, $152; $144)

140

127

Commercial mortgage loans

3,402

3,486

Policy loans

1,583

1,581

Real estate

113

112

Other long-term investments

829

759

Short-term investments

149

174

Total investments

21,249

20,948

Cash and cash equivalents

1,656

1,605

Accrued investment income

276

235

Premiums, accounts and notes receivable, net

1,441

1,318

Reinsurance recoverables

6,386

6,495

Deferred policy acquisition costs

1,209

1,122

Property and equipment

912

912

Deferred income taxes, net

621

782

Goodwill

3,135

3,119

Other assets, including other intangibles

1,219

1,238

Separate account assets

8,413

7,908

TOTAL ASSETS

 

 

$

46,517

 

 

$

45,682

LIABILITIES

Contractholder deposit funds

$

8,471

$

8,509

Future policy benefits

8,050

8,147

Unpaid claims and claim expenses

4,083

4,017

Health Care medical claims payable

1,248

1,246

Unearned premiums and fees

452

416

Total insurance and contractholder liabilities

22,304

22,335

Accounts payable, accrued expenses and other liabilities

5,563

5,936

Short-term debt

330

552

Long-term debt

2,883

2,288

Separate account liabilities

8,413

7,908

TOTAL LIABILITIES

39,493

39,019

Contingencies — Note 16

Shareholders’ Equity

Common stock (par value per share, $0.25; shares issued, 351)

88

88

Additional paid-in capital

2,547

2,534

Net unrealized appreciation, fixed maturities

$

521

$

529

Net unrealized appreciation, equity securities

5

3

Net unrealized depreciation, derivatives

(29)

(24)

Net translation of foreign currencies

77

25

Postretirement benefits liability adjustment

(1,143)

(1,147)

Accumulated other comprehensive loss

(569)

(614)

Retained earnings

10,270

9,879

Less treasury stock, at cost

(5,312)

(5,242)

Total shareholders’ equity

7,024

6,645

Noncontrolling interest

-

18

Total equity

7,024

6,663

Total liabilities and equity

$

46,517

$

45,682

SHAREHOLDERS’ EQUITY PER SHARE

$

25.95

$

24.44

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

CIGNA CORPORATION – Form 10-Q – 2


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CIGNA Corporation

Consolidated Statements of Comprehensive Income and Changes in Total Equity

(In millions, except per share amounts)

Three Months Ended March 31,

Unaudited

2011

2010

Comprehensive Income

Total Equity

Comprehensive Income

Total Equity

Common Stock, January 1 and March 31,

 

 

$

88

 

 

$

88

Additional Paid-In Capital, January 1,

2,534

2,514

Effects of stock issuance for employee benefit plans

9

8

Effects of acquisition of noncontrolling interest

4

-

Additional Paid-In Capital, March 31,

2,547

2,522

Accumulated Other Comprehensive Loss, January 1,

(614)

(618)

Net unrealized appreciation (depreciation), fixed maturities

$

(8)

(8)

$

72

72

Net unrealized appreciation, equity securities

2

2

-

-

Net unrealized appreciation (depreciation) on securities

(6)

72

Net unrealized appreciation (depreciation), derivatives

(5)

(5)

4

4

Net translation of foreign currencies

52

52

4

4

Postretirement benefits liability adjustment

4

4

8

8

Other comprehensive income

45

88

Accumulated Other Comprehensive Loss, March 31,

 

 

 

(569)

 

 

 

(530)

Retained Earnings, January 1,

9,879

8,625

Shareholders’ net income

429

429

283

283

Effects of stock issuance for employee benefit plans

(27)

(57)

Common dividends declared (per share: $0.04; $0.04)

(11)

(11)

Retained Earnings, March 31,

 

 

 

10,270

 

 

 

8,840

Treasury Stock, January 1,

(5,242)

(5,192)

Repurchase of common stock

(163)

-

Other, primarily issuance of treasury stock for employee benefit plans

 

 

93

 

 

 

73

Treasury Stock, March 31,

 

 

 

(5,312)

 

 

 

(5,119)

Shareholders’ Comprehensive Income and Shareholders’ Equity

 

474

 

7,024

 

371

 

5,801

Noncontrolling interest, January 1,

 

 

 

18

 

 

 

12

Net income attributable to noncontrolling interest

1

1

1

1

Accumulated other comprehensive income attributable to noncontrolling interest

-

1

1

Acquisition of noncontrolling interest

 

 

(19)

 

 -

 

 -

Noncontrolling interest, March 31,

 

1

 

-

 

2

 

14

Total Comprehensive Income and Total Equity

$

475

$

7,024

$

373

$

5,815

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

CIGNA CORPORATION – Form 10-Q – 3


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CIGNA Corporation

Consolidated Statements of Cash Flows

(In millions)

Unaudited

Three Months Ended March 31,

2011

2010

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

430

$

284

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

83

61

Realized investment (gains) losses

(26)

6

Deferred income taxes

148

51

Gains on sale of businesses (excluding discontinued operations)

(5)

(6)

Net changes in assets and liabilities, net of non-operating effects:

Premiums, accounts and notes receivable

(129)

(148)

Reinsurance recoverables

(2)

23

Deferred policy acquisition costs

(67)

(60)

Other assets

39

41

Insurance liabilities

77

406

Accounts payable, accrued expenses and other liabilities

(366)

(299)

Current income taxes

(87)

79

Other, net

(44)

(44)

Net cash provided by operating activities

51

394

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from investments sold:

Fixed maturities

155

240

Commercial mortgage loans

28

1

Other (primarily short-term and other long-term investments)

221

443

Investment maturities and repayments:

Fixed maturities

319

172

Commercial mortgage loans

75

11

Investments purchased:

Fixed maturities

(790)

(752)

Equity securities

(8)

(4)

Commercial mortgage loans

(18)

(32)

Other (primarily short-term and other long-term investments)

(213)

(145)

Property and equipment purchases

(73)

(52)

Acquisitions, net of cash acquired

(12)

(5)

Net cash used in investing activities

(316)

(123)

CASH FLOWS FROM FINANCING ACTIVITIES

Deposits and interest credited to contractholder deposit funds

321

354

Withdrawals and benefit payments from contractholder deposit funds

(303)

(309)

Change in cash overdraft position

6

40

Net change in short-term debt

(222)

-

Issuance of long-term debt

591

-

Repayment of long-term debt

(2)

(2)

Repurchase of common stock

(152)

-

Issuance of common stock

66

24

Net cash provided by financing activities

305

107

Effect of foreign currency rate changes on cash and cash equivalents

11

(3)

Net increase in cash and cash equivalents

51

375

Cash and cash equivalents, January 1,

1,605

924

CASH AND CASH EQUIVALENTS, MARCH 31,

$

1,656

$

1,299

Supplemental Disclosure of Cash Information:

Income taxes paid, net of refunds

$

106

$

6

Interest paid

$

27

$

32

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

CIGNA CORPORATION – Form 10-Q – 4


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Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1  Basis of Presentation

CIGNA Corporation is a holding company and is not an insurance company. Its subsidiaries conduct various businesses, that are described in its Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”). As used in this document, “CIGNA” or “the Company” may refer to CIGNA Corporation itself, one or more of its subsidiaries, or CIGNA Corporation and its consolidated subsidiaries. The Consolidated Financial Statements include the accounts of CIGNA Corporation and its significant subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The 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 2010 Form 10-K.

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.

During the three months ended March 31, 2011, the Company acquired the noncontrolling interest in a majority-owned subsidiary that the Company continues to consolidate.

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

NOTE 2  Recent Accounting Pronouncements

Deferred acquisition costs

In October 2010, the Financial Accounting Standards Board (“FASB”) amended guidance (ASU 2010-26) for the accounting of costs related to the acquisition or renewal of insurance contracts to require costs such as certain sales compensation or telemarketing costs that are related to unsuccessful efforts and any indirect costs to be expensed as incurred. This new guidance must be implemented on January 1, 2012 or may be implemented earlier and any changes to the Company’s Consolidated Financial Statements may be recognized prospectively for acquisition costs incurred beginning in 2012 or through retrospective adjustment of comparative prior periods. The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its International segment and, to a lesser extent, the Health Care and corporate-owned life insurance businesses. Because the new requirements further restrict the types of costs that are deferrable, the Company expects more of its acquisition costs to be expensed when incurred under the new guidance. The Company continues to evaluate these new requirements to determine the timing, method and estimated effects of their implementation.

Troubled debt restructurings

In April 2011, the FASB amended guidance (ASU 2011-02) to clarify for lenders that a troubled debt restructuring occurs when a debt modification is a concession to the borrower and the borrower is experiencing financial difficulties. The amendments are effective July 1, 2011 and are to be applied retrospectively to loan restructurings occurring on or after January 1, 2011. The amendment also requires new disclosures to be provided in the third quarter 2011 addressing certain troubled debt restructurings. The Company is presently evaluating these new requirements to determine the potential effects of their implementation.

CIGNA CORPORATION – Form 10-Q – 5


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NOTE 3  Earnings Per Share (“EPS”)

Basic and diluted earnings per share were computed as follows:

(Dollars in millions, except per share amounts)

Three Months Ended March 31,

Basic

Effect of Dilution

Diluted

2011

Shareholders’ net income

$

429

$

429

Shares (in thousands):

Weighted average

270,377

270,377

Common stock equivalents

3,496

3,496

TOTAL SHARES

270,377

3,496

273,873

EPS

$

1.59

$

(0.02)

$

1.57

2010

Shareholders’ net income

$

283

$

283

Shares (in thousands):

Weighted average

275,688

275,688

Common stock equivalents

2,412

2,412

TOTAL SHARES

275,688

2,412

278,100

EPS

$

1.03

$

(0.01)

$

1.02

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.

(In millions)

Three Months Ended

March 31,

2011

2010

Antidilutive options

4.1

5.2

The Company held 80,240,471 shares of common stock in Treasury as of March 31, 2011, and 74,283,513 shares as of March 31, 2010.

NOTE 4  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 incentives and other amounts payable to health care professionals and facilities. Incurred but not yet reported comprises the majority of the reserve balance as follows:

(In millions)

March 31, 2011

December 31, 2010

Incurred but not yet reported

$

1,050

$

1,067

Reported claims in process

182

164

Other medical expense payable

16

15

MEDICAL CLAIMS PAYABLE

$

1,248

$

1,246

CIGNA CORPORATION – Form 10-Q – 6


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Activity in medical claims payable was as follows:

(In millions)

For the period ended

March 31, 2011

December 31, 2010

Balance at January 1,

$

1,246

$

921

Less: Reinsurance and other amounts recoverable

236

206

Balance at January 1, net

1,010

715

Incurred claims related to:

Current year

2,151

8,663

Prior years

(74)

(93)

Total incurred

2,077

8,570

Paid claims related to:

Current year

1,325

7,682

Prior years

736

593

Total paid

2,061

8,275

Ending Balance, net

1,026

1,010

Add: Reinsurance and other amounts recoverable

222

236

ENDING BALANCE

$

1,248

$

1,246

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, 2011, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $74 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2010. Actual completion factors resulted in a reduction in medical claims payable of $54 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2010 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $20 million, or 0.2% of the current year incurred claims as reported for the year ended December 31, 2010 for the insured book of business.

For the year ended December 31, 2010, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $93 million, or 1.3% of the current year incurred claims as reported for the year ended December 31, 2009. Actual completion factors resulted in a reduction of the medical claims payable of $51 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $42 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business.

The favorable impacts in 2011 and 2010 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was $22 million for the three months ended March 31, 2011 and not material for the three months ended March 31, 2010. The favorable effect of prior year development on net income in 2011 primarily reflects continued low utilization of medical services. 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:

CIGNA CORPORATION – Form 10-Q – 7


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

Second, changes in reserves for the Company’s retrospectively experience-rated business do not always impact shareholders’ net income. For 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.

The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2010 Form 10-K.

NOTE 5  Guaranteed Minimum Death Benefit Contracts

The Company had future policy benefit reserves for guaranteed minimum death benefit (“GMDB”) contracts of $1.1 billion as of March 31, 2011 and December 31, 2010. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company tests for premium deficiency by reviewing its reserve each quarter using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.

See Note 8 for further information on the Company’s recently expanded dynamic hedge programs that are used to reduce certain equity and interest rate exposures associated with this business.

Since December 31, 2010, the Company updated its long-term assumption for assumed mean investment performance (“growth interest rate”) of the underlying equity mutual funds to use the market-observable LIBOR swap curve for the portion of the liability that is covered by the Company’s newly implemented growth interest rate hedge program. The mean investment performance for the remaining liability has not changed since December 31, 2010.

During 2010, the Company performed its periodic review of assumptions and recorded a charge in the third quarter of $52 million pre-tax ($34 million after-tax) to strengthen GMDB reserves. During 2010, current short-term interest rates had declined from the level anticipated at December 31, 2009, leading the Company to increase reserves. Interest rate risk was not covered by the GMDB equity hedge program discussed above. The Company also updated the lapse assumption for policies that have already taken or may take a significant partial withdrawal, which had a lesser reserve impact.

CIGNA CORPORATION – Form 10-Q – 8


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

(In millions)

For the period ended

March 31, 2011

December 31, 2010

Balance at January 1

$

1,138

$

1,285

Add: Unpaid Claims

37

36

Less: Reinsurance and other amounts recoverable

51

53

Balance at January 1, net

1,124

1,268

Add: Incurred benefits

(20)

(20)

Less: Paid benefits

30

124

Ending balance, net

1,074

1,124

Less: Unpaid Claims

35

37

Add: Reinsurance and other amounts recoverable

47

51

ENDING BALANCE

$

1,086

$

1,138

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 2010 charge discussed above.

The aggregate value of the underlying mutual fund investments was $16.8 billion as of March 31, 2011 and $16.6 billion as of December 31, 2010. The death benefit coverage in force was $4.6 billion as of March 31, 2011 and $5.2 billion as of December 31, 2010. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 520,000 as of March 31, 2011 and 530,000 as of December 31, 2010).

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 6 for further information.

NOTE 6  Fair Value Measurements

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

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

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.

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

CIGNA CORPORATION – Form 10-Q – 9


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The Company performs ongoing analyses of prices used to value the Company’s invested assets to determine that they represent appropriate estimates of fair value. This process involves quantitative and qualitative analysis including reviews of pricing methodologies, judgments of valuation inputs, the significance of any unobservable inputs, pricing statistics and trends. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates.

Financial Assets and Financial Liabilities Carried at Fair Value

The following tables provide information as of March 31, 2011 and December 31, 2010 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.

March 31, 2011

(In millions)

Quoted Prices in Active Markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total

Financial assets at fair value:

Fixed maturities:

Federal government and agency

$

202

$

541

$

4

$

747

State and local government

-

2,417

-

2,417

Foreign government

-

1,142

15

1,157

Corporate

-

9,416

364

9,780

Federal agency mortgage-backed

-

10

-

10

Other mortgage-backed

-

79

2

81

Other asset-backed

-

332

509

841

Total fixed maturities (1)

202

13,937

894

15,033

Equity securities

9

97

34

140

Subtotal

211

14,034

928

15,173

Short-term investments

-

149

-

149

GMIB assets (2)

-

-

459

459

Other derivative assets (3)

-

19

-

19

TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS

$

211

$

14,202

$

1,387

$

15,800

Financial liabilities at fair value:

GMIB liabilities

$

-

$

-

$

850

$

850

Other derivative liabilities (3)

-

38

-

38

TOTAL FINANCIAL LIABILITIES AT FAIR VALUE

$

-

$

38

$

850

$

888

(1) Fixed maturities includes $385 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $68 million of appreciation for securities classified in Level 3.

(2) The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts.

(3) Other derivative assets includes $13 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $6 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflect foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 8 for additional information.

CIGNA CORPORATION – Form 10-Q – 10


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December 31, 2010

(In millions)

Quoted Prices in Active Markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable

Inputs

(Level 3)

Total

Financial assets at fair value:

Fixed maturities:

Federal government and agency

$

133

$

550

$

4

$

687

State and local government

-

2,467

-

2,467

Foreign government

-

1,137

17

1,154

Corporate

-

9,080

364

9,444

Federal agency mortgage-backed

-

10

-

10

Other mortgage-backed

-

85

3

88

Other asset-backed

-

348

511

859

Total fixed maturities (1)

133

13,677

899

14,709

Equity securities

6

87

34

127

Subtotal

139

13,764

933

14,836

Short-term investments

-

174

-

174

GMIB assets (2)

-

-

480

480

Other derivative assets (3)

-

19

-

19

TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS

$

139

$

13,957

$

1,413

$

15,509

Financial liabilities at fair value:

GMIB liabilities

$

-

$

-

$

903

$

903

Other derivative liabilities (3)

-

32

-

32

TOTAL FINANCIAL LIABILITIES AT FAIR VALUE

$

-

$

32

$

903

$

935

(1) Fixed maturities includes $443 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $74 million of appreciation for securities classified in Level 3.

(2) The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts.

(3) Other derivative assets include $16 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $3 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflect foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 8 for additional information.

Level 1 Financial Assets

Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets 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.

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

Inputs for instruments classified in Level 2 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 market observable or can be corroborated by market data for the term of the instrument. Such other 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.

CIGNA CORPORATION – Form 10-Q – 11


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Fixed maturities and equity securities. Approximately 93% 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-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, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.

Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued, consistent with local market practice, using a single unadjusted market-observable input derived by averaging multiple broker-dealer quotes.

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 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, 2011 or December 31, 2010. The nature and use of these other derivatives are described in Note 8.

Level 3 Financial Assets and Financial Liabilities

Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting 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.

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

Fixed maturities and equity securities. Approximately 6% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:

(In millions)

March 31, 2011

December 31, 2010

Other asset and mortgage-backed securities – valued using pricing models

$

511

$

514

Corporate and government bonds – valued using pricing models

314

312

Corporate bonds – valued at transaction price

69

73

Equity securities – valued at transaction price

34

34

TOTAL

$

928

$

933

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, spreads and liquidity of assets with similar characteristics. 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. Certain subordinated corporate bonds and private equity investments are valued at transaction price in the absence of market data indicating a change in the estimated fair values.

CIGNA CORPORATION – Form 10-Q – 12


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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 behavior (including mortality, lapse, and annuity election rates), and non-performance risk, as well as risk and profit charges. As certain assumptions used to estimate fair values for these contracts are largely unobservable (primarily related to future annuitant behavior), 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 with a complex internal model 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, 2011 were as follows:

The market return (“growth interest rate”) 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 2.90% at March 31, 2011 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 53% 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 30% 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 annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts, ranges from 1% to 12%, and depends on the time since contract issue and the relative value of the guarantee.

The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts and depends on the annuitant’s age, the relative value of the guarantee and whether a contractholder has had a previous opportunity to elect the benefit. 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 35%.

The nonperformance risk adjustment is incorporated by adding an additional spread to the discount rate in the calculation of both (1) the GMIB liability to reflect a hypothetical market participant’s view of the risk of the Company not fulfilling its GMIB obligations, and (2) the GMIB asset to reflect a hypothetical market participant’s view of the reinsurers’ credit risk, after considering collateral. The estimated market-implied spread is company-specific for each party involved to the extent that company-specific market data is available and is based on industry averages for similarly rated companies when company-specific data is not available. The spread is impacted by the credit default swap spreads of the specific parent companies, adjusted to reflect subsidiaries’ credit ratings relative to their parent company and any available collateral. The additional spread over LIBOR incorporated into the discount rate ranged from 5 to 115 basis points for the GMIB liability and from 10 to 80 basis points for the GMIB reinsurance asset for that portion of the interest rate curve most relevant to these policies.

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.

CIGNA CORPORATION – Form 10-Q – 13


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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 currently 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.

Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value

The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three months ended March 31, 2011 and 2010. 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 net changes in fair value that are attributable to both observable and unobservable inputs.

CIGNA CORPORATION – Form 10-Q – 14


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For the Three Months Ended March 31, 2011

(In millions)

Fixed Maturities & Equity Securities

GMIB Assets

GMIB Liabilities

GMIB Net

Balance at January 1, 2011

$

933

$

480

$

(903)

$

(423)

Gains (losses) included in shareholders’ net income:

GMIB fair value gain/(loss)

-

(21)

37

16

Other

5

-

-

-

Total gains (losses) included in shareholders’ net income

5

(21)

37

16

Gains included in other comprehensive income

2

-

-

-

Losses required to adjust future policy benefits for settlement annuities (1)

(6)

-

-

-

Purchases, sales and settlements:

Purchases

7

-

-

-

Settlements

(12)

-

16

16

Total purchases, sales and settlements

(5)

-

16

16

Transfers into/(out of) Level 3:

Transfers into Level 3

-

-

-

-

Transfers out of Level 3

(1)

-

-

-

Total transfers into/(out of) Level 3

(1)

-

-

-

Balance at March 31, 2011

$

928

$

459

$

(850)

$

(391)

TOTAL GAINS (LOSSES) INCLUDED IN INCOME ATTRIBUTABLE TO INSTRUMENTS HELD AT THE REPORTING DATE

$

5

$

(21)

$

37

$

16

(1) Amounts do not accrue to shareholders.

For the Three Months Ended March 31, 2010

(In millions)

Fixed Maturities & Equity Securities

GMIB Assets

GMIB Liabilities

GMIB Net

Balance at January 1, 2010

$

845

$

482

$

(903)

$

(421)

Gains (losses) included in shareholders’ net income:

GMIB fair value gain/(loss)

-

-

4

4

Other

4

-

-

-

Total gains (losses) included in shareholders’ net income

4

-

4

4

Gains included in other comprehensive income

12

-

-

-

Gains required to adjust future policy benefits for settlement annuities (1)

18

-

-

-

Purchases, sales and settlements:

Purchases

15

-

-

-

Settlements

(26)

(3)

13

10

Total purchases, sales and settlements

(11)

(3)

13

10

Transfers into/(out of) Level 3:

Transfers into Level 3

54

-

-

-

Transfers out of Level 3

(38)

-

-

-

Total transfers into/(out of) Level 3

16

-

-

-

Balance at March 31, 2010

$

884

$

479

$

(886)

$

(407)

TOTAL GAINS (LOSSES) INCLUDED IN INCOME ATTRIBUTABLE TO INSTRUMENTS HELD AT THE REPORTING DATE

$

4

$

-

$

4

$

4

(1) Amounts do not accrue to shareholders.

CIGNA CORPORATION – Form 10-Q – 15


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As noted in the tables 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

GMIB fair value (gain) loss for amounts related to GMIB assets and liabilities.

Reclassifications impacting Level 3 financial instruments are reported as transfers into 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.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. For the three months ended March 31, 2010, transfers into Level 3 from Level 2 primarily reflect an increase in the unobservable inputs used to value certain private corporate bonds, principally related to credit risk of the issuers.

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 FASB’s guidance for fair value measurements, the Company’s GMIB assets and liabilities are expected to be volatile in future periods because the underlying capital markets assumptions will be based largely on market-observable inputs at the close of each reporting period including interest rates and market-implied volatilities.

GMIB fair value gains of $16 million for the three months ended March 31, 2011, were primarily due to increases in interest rates and underlying account values during the period due to favorable equity market returns, partially offset by updates to the risk and profit charges that the Company anticipates a hypothetical market participant would require to assume this business.

Beginning in February 2011, the Company implemented a dynamic equity hedge program to reduce a portion of the equity market exposures related to GMIB contracts (“GMIB equity hedge program”) by entering into exchange-traded futures contracts. The Company also entered into a dynamic interest rate hedge program that reduces a portion of the interest rate exposure related to GMIB contracts (“GMIB growth interest rate hedge program”) using LIBOR swap contracts and exchange-traded treasury futures contracts. See Note 8 for further information.

GMIB fair value gains of $4 million for the three months ended March 31, 2010 were primarily a result of increases in underlying account values during the period due to favorable equity market returns, offset by declining interest rates.

CIGNA CORPORATION – Form 10-Q – 16


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Separate account assets

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company’s revenues and expenses. As of March 31, 2011 and December 31, 2010 separate account assets were as follows:

March 31, 2011

(In millions)

Quoted Prices in Active Markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total

Guaranteed separate accounts (See Note 16)

$

297

$

1,418

$

-

$

1,715

Non-guaranteed separate accounts (1)

2,138

4,001

559

6,698

TOTAL SEPARATE ACCOUNT ASSETS

$

2,435

$

5,419

$

559

$

8,413

(1) As of March 31, 2011, non-guaranteed separate accounts include $3.2 billion in assets supporting the Company’s pension plans, including $517 million classified in Level 3.

December 31, 2010

(In millions)

Quoted Prices in Active Markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total

Guaranteed separate accounts (See Note 16)

$

286

$

1,418

$

-

$

1,704

Non-guaranteed separate accounts (1)

1,947

3,663

594

6,204

TOTAL SEPARATE ACCOUNT ASSETS

$

2,233

$

5,081

$

594

$

7,908

(1) As of December 31, 2010, non-guaranteed separate accounts include $2.8 billion in assets supporting the Company’s pension plans, including $557 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 their exit price.

Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments. In addition, certain fixed income funds priced using their net asset values are classified in Level 3 due to restrictions on their withdrawal.

CIGNA CORPORATION – Form 10-Q – 17


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The following tables summarize the changes in separate account assets reported in Level 3 for the three months ended March 31, 2011 and 2010.

(In millions)

Three Months Ended

March 31,

2011

2010

Balance at January 1

$

594

$

550

Policyholder gains (1)

58

16

Purchases, sales and settlements:

Purchases

9

24

Sales

(40)

(18)

Settlements

(59)

(9)

Total purchases, sales and settlements

(90)

(3)

Transfers into/(out of) Level 3:

Transfers into Level 3

-

-

Transfers out of Level 3

(3)

(19)

Total transfers into/(out of) Level 3

(3)

(19)

BALANCE AT MARCH 31

$

559

$

544

(1) Included in this amount are gains of $40 million and $15 million attributable to instruments still held at March 31, 2011 and March 31, 2010 respectively.

Assets and Liabilities Measured at Fair Value under Certain Conditions

Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as investments in real estate entities and commercial mortgage loans when they become impaired. During the three months ended March 31, 2011, no commercial mortgage loans or real estate entities were written down to their fair values.

During 2010, impaired commercial mortgage loans with carrying values of $158 million were written down to their fair values of $134 million, resulting in pre-tax realized investment losses of $24 million. Also during 2010, impaired real estate entities carried at cost of $35 million were written down to their fair values of $21 million, resulting in pre-tax realized investment losses of $14 million.

These fair values were calculated by discounting the expected future cash flows at estimated market interest rates. Such market rates were derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the characteristics of the underlying collateral, including the type, quality and location of the assets. The fair value measurements were classified in Level 3 because these cash flow models incorporate significant unobservable inputs.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

Most financial instruments that are subject to fair value disclosure requirements are carried in the Company’s consolidated financial statements at amounts that approximate fair value. The following table provides the fair values and carrying values of the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at March 31, 2011 and December 31, 2010:

(In millions)

March 31, 2011

December 31, 2010

Fair Value

Carrying Value

Fair Value

Carrying Value

Commercial mortgage loans

$

3,434

$

3,402

$

3,470

$

3,486

Contractholder deposit funds, excluding universal life products

$

990

$

979

$

1,001

$

989

Long-term debt, including current maturities, excluding capital leases

$

3,290

$

3,087

$

2,926

$

2,709

The fair values presented in the table above have been estimated using market information when available. The following is a description of the valuation methodologies and inputs used by the Company to determine fair value.

CIGNA CORPORATION – Form 10-Q – 18


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Commercial mortgage loans. The Company estimates the fair value of commercial mortgage loans generally by discounting the contractual cash flows at estimated market interest rates that reflect the Company’s assessment of the credit quality of the loans. Market interest rates are derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the property type, quality rating and average life of the loan. The quality ratings reflect the relative risk of the loan, considering debt service coverage, the loan-to-value ratio and other factors. Fair values of impaired mortgage loans are based on the estimated fair value of the underlying collateral generally determined using an internal discounted cash flow model.

Contractholder deposit funds, excluding universal life products. Generally, these funds do not have stated maturities. Approximately 50% of these balances can be withdrawn by the customer at any time without prior notice or penalty. The fair value for these contracts is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of the individual life and annuity and retirement benefits businesses. The fair value for these contracts is determined using the fair value of these buyers’ assets supporting these reinsured contracts. The Company had a reinsurance recoverable equal to the carrying value of these reinsured contracts.

Long-term debt, including current maturities, excluding capital leases. The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company’s estimated current borrowing rate for debt of similar terms and remaining maturities.

Fair values of off-balance-sheet financial instruments were not material.

NOTE 7  Investments

Total Realized Investment Gains and Losses

The following total realized gains and losses on investments include other-than-temporary impairments on debt securities but exclude amounts required to adjust future policy benefits for the run-off settlement annuity business:

(In millions)

Three Months Ended

March 31,

2011

2010

Fixed maturities

$

21

$

15

Equity securities

3

4

Commercial mortgage loans

-

(11)

Other investments, including derivatives

2

(14)

Realized investment gains (losses), before income taxes

26

(6)

Less income taxes (benefits)

9

(3)

NET REALIZED INVESTMENT GAINS (LOSSES)

$

17

$

(3)

Included in pre-tax realized investment gains (losses) above were changes in valuation reserves, asset write-downs and other-than-temporary impairments on fixed maturities as follows:

(In millions)

Three Months Ended

March 31,

2011

2010

Credit-related (1)

$

-

$

25

Other

-

1

TOTAL (2)

$

-

$

26

(1) Credit related losses include changes in valuation reserves and asset write-downs related to commercial mortgage loans and investments in real estate entities.

(2) Other-than-temporary impairments on fixed maturities for the three months ended March 31, 2011 and March 31, 2010 were not significant.

CIGNA CORPORATION – Form 10-Q – 19


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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 other realized investment gains (losses) 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.

(In millions)

As of March 31, 2011

As of December 31, 2010

Included in fixed maturities:

Trading securities (amortized cost: $3; $3)

$

3

$

3

Hybrid securities (amortized cost: $54; $45)

63

52

TOTAL

$

66

$

55

Included in equity securities:

Hybrid securities (amortized cost: $113; $108)

$

94

$

86

Fixed maturities included $55 million at March 31, 2011, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities were primarily federal government securities.

The following information about fixed maturities excludes trading and hybrid securities. The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at March 31, 2011:

(In millions)

Amortized Cost

Fair Value

Due in one year or less

$

709

$

721

Due after one year through five years

4,714

5,000

Due after five years through ten years

4,966

5,370

Due after ten years

2,570

2,947

Other asset and mortgage-backed securities

822

929

TOTAL

$

13,781

$

14,967

Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without penalties. Also, in some cases the Company may extend maturity dates.

Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities with a fair value of $66 million at March 31, 2011 and $55 million at December 31, 2010) by type of issuer is shown below.

CIGNA CORPORATION – Form 10-Q – 20


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(In millions)

March 31, 2011

Amortized Cost

Unrealized Appreciation

Unrealized Depreciation

Fair Value

Federal government and agency

$

539

$

210

$

(2)

$

747

State and local government

2,264

165

(12)

2,417

Foreign government

1,104

58

(5)

1,157

Corporate

9,052

711

(46)

9,717

Federal agency mortgage-backed

9

1

-

10

Other mortgage-backed

72

10

(2)

80

Other asset-backed

741

109

(11)

839

TOTAL

$

13,781

$

1,264

$

(78)

$

14,967

(In millions)

December 31, 2010

Federal government and agency

$

459

$

229

$

(1)

$

687

State and local government

2,305

172

(10)

2,467

Foreign government

1,095

63

(4)

1,154

Corporate

8,697

744

(49)

9,392

Federal agency mortgage-backed

9

1

-

10

Other mortgage-backed

80

10

(3)

87

Other asset-backed

752

117

(12)

857

TOTAL

$

13,397

$

1,336

$

(79)

$

14,654

The above table includes investments with a fair value of $2.4 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of $421 million and gross unrealized depreciation of $36 million at March 31, 2011. Such unrealized amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other comprehensive income. At December 31, 2010, investments supporting this business had a fair value of $2.5 billion, gross unrealized appreciation of $476 million and gross unrealized depreciation of $33 million.

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

(In millions)

Three Months Ended

March 31,

2011

2010

Proceeds from sales

$

155

$

240

Gross gains on sales

$

14

$

15

Gross losses on sales

$

-

$

(1)

CIGNA CORPORATION – Form 10-Q – 21


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Review of declines in fair value. Management reviews fixed maturities with a decline in fair value from cost 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 intent to sell or the likelihood of a required sale prior to recovery.

Excluding trading and hybrid securities, as of March 31, 2011, fixed maturities with a decline in fair value from amortized cost (which were primarily investment grade corporate bonds) were as follows, including the length of time of such decline:

(In millions)

Fair Value

Amortized
Cost

Unrealized
Depreciation

Number
of Issues

Fixed maturities:

One year or less:

Investment grade

$

1,178

$

1,213

$

(35)

371

Below investment grade

$

105

$

107

$

(2)

71

More than one year:

Investment grade

$

296

$

333

$

(37)

66

Below investment grade

$

37

$

41

$

(4)

18

The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. There were no equity securities with a fair value significantly lower than cost as of March 31, 2011.

Commercial Mortgage Loans

Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are secured by high quality, primarily completed and substantially leased operating properties, generally carried at unpaid principal balances and issued at a fixed rate of interest.

Credit quality. The Company has one portfolio segment and one class of mortgage loans and applies a consistent and disciplined approach to evaluating and monitoring credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal rating system developed from the Company’s experience in real estate investing and mortgage lending. A quality rating, designed to evaluate the relative risk of the transaction, is assigned at each loan’s origination and is updated each year as part of the annual portfolio loan review. The Company monitors credit quality on an ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.

Quality ratings are based on internal evaluations of each loan’s specific characteristics considering a number of key inputs, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the amount of property cash flow available to meet annual interest and principal payments on debt. A debt service coverage ratio below 1.0 indicates that there is not enough cash flow to cover the loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property collateralizing the loan. Based on property valuations and cash flows estimated as part of the most recent annual review completed in July, 2010, and considering updates for loans where material changes were subsequently identified, at March 31, 2011 both the portfolio’s average loan-to-value ratio of 74% and debt service coverage ratio of 1.38 were unchanged from December 31, 2010.

CIGNA CORPORATION – Form 10-Q – 22


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The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios, as of March 31, 2011:

(Dollars in millions)

Loan-to-Value Ratios

Debt Service Coverage Ratio

Total

1.30x or

Greater

1.20x to

1.29x

1.10x to

1.19x

1.00x to

1.09x

Less than

1.00x

Below 50%

$

330

$

-

$

-

$

-

$

29

$

359

50% to 59%

382

54

56

-

-

492

60% to 69%

534

72

5

29

25

665

70% to 79%

218

78

33

55

66

450

80% to 89%

186

186

165

125

13

675

90% to 99%

15

54

181

185

119

554

100% or above

-

-

47

43

117

207

TOTAL

$

1,665

$

444

$

487

$

437

$

369

$

3,402

The Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. This review is performed by the Company’s investment professionals and includes an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimates the current year and future stabilized property income and fair value, and categorizes the investments as loans in good standing, potential problem loans or problem loans. Quality ratings are adjusted between annual reviews if new property information is received or events such as delinquency or a borrower request for restructure cause management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.

Potential problem mortgage loans are considered current (no payment more than 59 days past due), but exhibit certain characteristics that increase the likelihood of future default. The characteristics management considers include, but are not limited to, the deterioration of debt service coverage below 1.0, estimated loan-to-value ratios increasing to 100% or more, downgrade in quality rating and request from the borrower for restructuring. In addition, loans are considered potential problems if principal or interest payments are past due by more than 30 but less than 60 days. Problem mortgage loans are either in default by 60 days or more or have been restructured as to terms, which could include concessions on interest rate, principal payment or maturity date. The Company monitors each problem and potential problem mortgage loan on an ongoing basis, and updates the loan categorization and quality rating when warranted.

Problem and potential problem mortgage loans, net of valuation reserves, totaled $373 million at March 31, 2011 and $383 million at December 31, 2010, with no significant concentrations by property type or geographic region in either year.

Impaired commercial mortgage loans. A commercial mortgage loan is considered impaired when it is probable that the Company will not collect all amounts due (principal and interest) according to the terms of the original loan agreement. The Company assesses each loan individually for impairment, utilizing the information obtained from the quality review process discussed above. Impaired loans are carried at the lower of unpaid principal balance or the fair value of the underlying collateral. Certain commercial mortgage loans without valuation reserves are considered impaired because the Company will not collect all interest due according to the terms of the original agreements; however, the Company expects to recover their remaining carrying value primarily because it is less than the fair value of the underlying property.

CIGNA CORPORATION – Form 10-Q – 23


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The carrying value of the Company’s impaired commercial mortgage loans and related valuation reserves were as follows:

(In millions)

March 31, 2011

December 31, 2010

Gross

Reserves

Net

Gross

Reserves

Net

Impaired commercial mortgage loans with valuation reserves

$

36

$

(11)

$

25

$

47

$

(12)

$

35

Impaired commercial mortgage loans with no valuation reserves

60

-

60

60

-

60

TOTAL

$

96

$

(11)

$

85

$

107

$

(12)

$

95

During the three months ended March 31, 2010, the Company recorded an $11 million pre-tax ($7 million after-tax) increase in valuation reserves on impaired commercial mortgage loans primarily due to decreased valuations of certain office properties collateralizing the loans. The average recorded investment in impaired loans was $102 million at March 31, 2011 and $221 million at March 31, 2010. The Company recognizes interest income on problem mortgage loans only when payment is actually received because of the risk profile of the underlying investment. Interest income that would have been reflected in net income if interest on non-accrual commercial mortgage loans had been received in accordance with the original terms was not significant for the three months ended March 31, 2011or 2010. Interest income on impaired commercial mortgage loans was not significant for the three months ended March 31, 2011 or 2010.

The following table summarizes the changes in valuation reserves for commercial mortgage loans:

(In millions)

2011

2010

Reserve balance, January 1,

$

12

$

17

Increase in valuation reserves

-

11

Charge-offs upon sales and repayments, net of recoveries

(1)

-

RESERVE BALANCE, MARCH 31,

$

11

$

28

Short-term investments and cash equivalents. Short-term investments and cash equivalents includes corporate securities of $1.2 billion, federal government securities of $124 million and money market funds of $43 million as of March 31, 2011. The Company’s short-term investments and cash equivalents as of December 31, 2010 included corporate securities of $1.1 billion, federal government securities of $137 million and money market funds of $40 million.

NOTE 8  Derivative Financial Instruments

Derivative instruments associated with the Company’s run-off reinsurance segment

The Company has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees of minimum income benefits resulting from the level of variable annuity account values compared with a contractually guaranteed amount (“GMIB liabilities”). The Company has purchased retrocessional coverage for a portion of these contracts (“GMIB assets”). Because cash flows 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 GMIB liabilities and assets as derivatives at fair value.

During the first quarter of 2011, the Company expanded its dynamic hedge program that substantially reduces equity market exposures associated with its GMDB business to include a portion of equity market exposures associated with its GMIB business (approximately one-quarter). The Company also implemented a dynamic hedge program to reduce the growth interest rate exposures for approximately one-third of its GMDB and one-quarter of its GMIB businesses (“GMDB and GMIB growth interest rate hedge program”). These hedge programs are dynamic because the Company will regularly rebalance the hedging instruments within established parameters as equity and interest rate exposures of these businesses change.

The Company manages these hedge programs using exchange-traded equity, foreign currency and Treasury futures contracts, and interest rate swap contracts. These contracts are generally expected to rise in value as equity markets and interest rates decline, and decline in value as equity markets and interest rates rise.

CIGNA CORPORATION – Form 10-Q – 24


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These hedge programs do not qualify for GAAP hedge accounting. Although these hedge programs effectively reduce equity market and interest rate exposures, changes in the fair values of the swap and futures contracts may not exactly offset changes in the portions of the GMDB and GMIB liabilities covered by these hedges, in part because the market does not offer contracts that exactly match the targeted exposure profile. The results of the swaps and futures contracts are included in other revenues and amounts reflecting corresponding changes in liabilities for GMDB contracts are included in benefits and expenses. Related changes in liabilities for GMIB contracts are reported in GMIB fair value (gain) loss.

See Notes 5 and 6 for further details regarding these businesses.

Derivative instruments used in the Company’s investment risk management

Derivative financial instruments are also used by the Company as a part of its investment strategy to manage the characteristics 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). Derivatives are typically used under this strategy to minimize interest rate and foreign currency risks. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize this risk.

Accounting for derivative instruments

The Company applies 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).

Collateral and termination features

Certain of the Company’s over-the-counter derivative instruments contain provisions requiring either the Company or the counterparty to post collateral depending on the amount of the net liability position and predefined financial strength or credit rating thresholds. The collateral posting requirements vary by counterparty. The aggregate fair value of derivative instruments with such credit-risk-related contingent features where the Company was in a net liability position was $30 million at March 31, 2011 and $25 million at December 31, 2010 for which the Company was not required to post collateral with its counterparties. If the various contingent features underlying the agreements were triggered as of the balance sheet date, the Company would be required to post collateral equal to the total net liability. The Company is a party 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 Company were to decline below specified levels. As of March 31, 2011 and December 31, 2010, there was no net liability position under such derivative instruments.

The following tables present 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 March 31, 2011 and December 31, 2010, and for the periods ended March 31, 2011 and March 31, 2010. Derivatives in the Company’s separate accounts are excluded from the tables because associated gains and losses generally accrue directly to policyholders.

CIGNA CORPORATION – Form 10-Q – 25


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Instrument / Volume of Activity

Primary Risk

Purpose

Cash Flows

Accounting Policy

DERIVATIVES DESIGNATED AS ACCOUNTING HEDGES - CASH FLOW HEDGES

Interest rate swaps — $153 million of par value of related investments as of March 31, 2011 and December 31, 2010

Foreign currency swaps — $159 million of U.S. dollar equivalent par value of related investments as of March 31, 2011 and December 31, 2010

Combination swaps (interest rate and foreign currency) — $64 million of U.S. dollar equivalent par value of related investments as of March 31, 2011 and December 31, 2010

Interest rate and foreign currency

To hedge the interest and/or foreign currency cash flows of fixed maturities to match associated liabilities. Currency swaps are primarily euros, Australian dollars, Canadian dollars and British pounds for periods of up to 10 years.

The Company periodically exchanges cash flows between variable and fixed interest rates and/or between two currencies for both principal and interest. Net interest cash flows are reported 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 and amortized into net investment income or reported in other realized investment gains and losses as interest or principal payments are received.

Fair Value Effect on the Financial Statements (In millions)

Instrument

Other Long-Term Investments

Accounts Payable, Accrued Expenses and Other Liabilities

Gain (Loss) Recognized in Other Comprehensive Income (1)

As of March 31, 2011

As of December 31, 2010

As of March 31, 2011

As of December 31, 2010

Three Months Ended March 31,

2011

2010

Interest rate swaps

$

8

$

10

$

-

$

-

$

(2)

$

1

Foreign currency swaps

5

6

23

20

(4)

4

Interest rate and foreign currency swaps

-

-

15

12

(3)

-

TOTAL

$

13

$

16

$

38

$

32

$

(9)

$

5

(1) Other comprehensive income for foreign currency swaps excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.

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 paid the fair value of the contract at the expiration. Cash flows were reported in operating 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 interest expense over the period of expected cash flows.

Fair Value Effect on the Financial Statements

In the first quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in other comprehensive income, resulting in net cumulative losses of $26 million, to be amortized to interest expense over the period of expected hedged cash flows. In the second quarter of 2009, the Company issued debt and began amortizing this loss to interest expense.

For the three months ended March 31, 2011 and 2010, 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.

CIGNA CORPORATION – Form 10-Q – 26


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Instrument / Volume of Activity

Primary Risk

Purpose

Cash Flows

Accounting Policy

DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES

Written options (GMIB liability) — $1,065 million as of March 31, 2011 and $1,134 million as of December 31, 2010 of maximum potential undiscounted future payments as defined in Note 16

Purchased options (GMIB asset) — $586 million as of March 31, 2011 and $624 million as of December 31, 2010 of maximum potential undiscounted future receipts as defined in Note 16

Equity and interest rate

The Company has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. According to the contractual terms of written reinsurance contracts, 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 reduce a portion of the 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 contractholders 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 GMIB fair value (gain) loss.

Fair Value Effect on the Financial Statements (In millions)

Instrument

Other Assets, including other intangibles

Accounts Payable, Accrued Expenses and Other Liabilities

GMIB Fair Value (Gain) Loss

As of

March 31, 2011

As of

December 31, 2010

As of

March 31, 2011

As of

December 31, 2010

Three Months Ended March 31,

 

2011

 

2010

Written options (GMIB liability)

$

850

$

903

$

(37)

$

(4)

Purchased options (GMIB asset)

$

459

$

480

21

-

TOTAL

$

459

$

480

$

850

$

903

$

(16)

$

(4)

CIGNA CORPORATION – Form 10-Q – 27


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Instrument / Volume of Activity

Primary Risk

Purpose

Cash Flows

Accounting Policy

DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES

Futures — $839 million as of March 31, 2011 and $878 million as of December 31, 2010 of U.S. dollar equivalent market price of outstanding contracts

Equity and foreign currency

To reduce domestic and international equity market exposures resulting from changes in variable annuity account values based on underlying mutual funds for certain reinsurance contracts that guarantee minimum death benefits (GMDB) (excluding exposures due to partial surrenders) and a portion (approximately one-quarter) of these risks associated with certain reinsurance contracts that guarantee minimum income benefits (GMIB). Currency futures are 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 other assets and other liabilities.

 

Fair Value Effect on the Financial Statements (In millions)

Other Revenues

Three Months Ended March 31,

2011

2010

Futures for GMDB exposures

$

(44)

$

(45)

Futures for GMIB exposures

-

-

TOTAL FUTURES

$

(44)

$

(45)

Interest rate swaps — $240 million of swap notional value as of March 31, 2011

Interest rate

To reduce the exposure to changes in interest rates levels on the growth rate for certain contracts that guarantee minimum death benefits and minimum income benefits. The hedge program covers approximately one-third of the GMDB and approximately one-quarter of the GMIB growth interest exposures.

For interest rate swaps, the Company periodically exchanges cash flows between variable and fixed interest rates. Cash flows are included in operating activities.

For interest rate swaps, fair values are reported in other assets and other liabilities, with changes in fair value and interest income and interest expense reported in other revenues.

Interest rate futures — $45 million market price of outstanding contracts as of March 31, 2011

For interest rate futures, 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.

For interest rate futures, 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 other assets and other liabilities.

Fair Value Effect on the Financial Statements (In millions)

Other assets, including other intangibles

Other Revenues

As of

March 31, 2011

Three Months Ended

March 31, 2011

Interest rate swaps

$

4

$

4

Interest rate futures

1

Total swaps and futures

$

5

Derivatives for GMDB exposures

$

4

Derivatives for GMIB exposures

1

TOTAL SWAPS AND FUTURES

$

5

CIGNA CORPORATION – Form 10-Q – 28


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Instrument / Volume of Activity

Primary Risk

Purpose

Cash Flows

Accounting Policy

DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES

Interest rate swaps — $45 million of par value of related investments as of March 31, 2011 and December 31, 2010

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 and these cash flows are included in investing activities.

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

Fair Value Effect on the Financial Statements (In millions)

Other Long-Term Investments

Realized Investment Gains (Losses)

As of

March 31, 2011

As of

December 31, 2010

Three Months Ended March 31,

2011

2010

Interest rate swaps

$

3

$

3

$

-

$

-

NOTE 9  Variable Interest Entities

When the Company becomes involved with a variable interest entity and when the nature of the Company’s involvement with the entity changes, in order to determine if the Company is the primary beneficiary and must consolidate the entity, it evaluates:

the structure and purpose of the entity;

the risks and rewards created by and shared through the entity; and

the entity’s participants’ ability to direct the activities, receive its benefits and absorb its losses. Participants include the entity’s sponsors, equity holders, guarantors, creditors and servicers.

In the normal course of its investing activities, the Company makes passive investments in securities that are issued by variable interest entities for which the Company is not the sponsor or manager. These investments are predominantly asset-backed securities primarily collateralized by foreign bank obligations and mortgage-backed securities. The asset-backed securities largely represent fixed-rate debt securities issued by trusts which hold perpetual floating-rate subordinated notes issued by foreign banks. The mortgage-backed securities represent senior interests in pools of commercial or residential mortgages created and held by special-purpose entities to provide investors with diversified exposure to these assets. The Company owns senior securities issued by several entities and receives fixed-rate cash flows from the underlying assets in the pools. The Company is not the primary beneficiary and does not consolidate any of these entities because either:

it had no power to direct the activities that most significantly impact the entities’ economic performance; or

it had no right to receive benefits nor obligation to absorb losses that could be significant to these variable interest entities.

The Company has not provided, and does not intend to provide, financial support to these entities. The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required. The Company’s maximum potential exposure to loss related to these entities is limited to the carrying amount of its investment reported in fixed maturities and equity securities, and its aggregate ownership interest is insignificant relative to the total principal amount issued by these entities.

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 when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

CIGNA CORPORATION – Form 10-Q – 29


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Retirement benefits business

The Company had reinsurance recoverables of $1.6 billion as of March 31, 2011 and $1.7 billion as of December 31, 2010 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 whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities are held in a trust established for the benefit of the Company. As of March 31, 2011, the book value of the trust assets exceeded the recoverable.

Individual life and annuity reinsurance

The Company had reinsurance recoverables of $4.2 billion as of March 31, 2011 and $4.3 billion as of December 31, 2010 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. At March 31, 2011, the $3.8 billion reinsurance recoverable from The Lincoln National Life Insurance Company was secured by assets held in a trust established for the benefit of the Company, and was less than the market value of the trust assets. The trust was established to allow the Company to take statutory reserve credit in New York for business ceded to Lincoln National Life Insurance Company. Under Section 532 of the Dodd-Frank Act, which becomes effective July 21, 2011, the trust will no longer be required in order for the Company to take statutory reserve credit. The remaining recoverable from Lincoln Life & Annuity of New York of $393 million is currently unsecured, however, if this reinsurer does not maintain a specified minimum credit or claims paying rating, it is required to fully secure the outstanding balance. Similarly, in the event the trust were terminated because of the Dodd-Frank Act, failure of Lincoln National Life Insurance Company to maintain a specified minimum claims paying rating would require the outstanding balance to be fully secured. As of March 31, 2011 both companies had ratings sufficient to avoid triggering a contractual obligation.

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 $291 million as of March 31, 2011 are expected to be collected from more than 70 reinsurers.

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, 2011, the Company’s recoverables related to these segments were net of a reserve of $8 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 and also purchased retrocessional coverage to reduce the risk of loss on these contracts. In December 2010, the Company entered into reinsurance arrangements to transfer the remaining liabilities and administration of the workers’ compensation and personal accident businesses to a subsidiary of Enstar Group Limited. Under this arrangement, the new reinsurer also assumes the future risk of collection from prior reinsurers. See CIGNA’s 2010 Form 10-K for further details regarding this arrangement.

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 caption Other assets, including other intangibles and the liability related to GMIB is recorded in the caption Accounts payable, accrued expenses, and other liabilities on the Company’s Consolidated Balance Sheets (see Notes 6 and 16 for additional discussion of the GMIB assets and liabilities).

The reinsurance recoverables for GMDB, workers’ compensation, and personal accident total $259 million as of March 31, 2011. Of this amount, approximately 78% are secured by assets in trust or letters of credit.

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, 2011, the Company’s recoverables related to this segment were net of a reserve of $1 million.

The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on the ceding companies’ claim payments. For GMDB, claim payments vary because of changes in equity markets and interest rates, as well as claim mortality and contractholder behavior. 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, 2011, 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.

CIGNA CORPORATION – Form 10-Q – 30


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Effects of reinsurance

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

(In millions)

Three Months Ended

March 31,

2011

2010

Ceded premiums and fees

Individual life insurance and annuity business sold

$

47

$

46

Other

58

64

TOTAL

$

105

$

110

Reinsurance recoveries

Individual life insurance and annuity business sold

$

65

$

67

Other

47

44

TOTAL

$

112

$

111

NOTE 11  Pension and Other Postretirement Benefit Plans

The Company and certain of its subsidiaries provide pension, health care and life insurance defined benefits to eligible retired employees, spouses and other eligible dependents through various domestic and foreign plans. The effect of its foreign pension and other postretirement benefit plans is immaterial to the Company’s results of operations, liquidity and financial position. Effective July 1, 2009, the Company froze its primary domestic defined benefit pension plans.

For the three months ended March 31, 2011, the Company’s postretirement benefits liability decreased by $5 million pre-tax ($4 million after-tax) resulting in an increase in shareholders’ equity. This was primarily a result of net amortization of actuarial losses and prior service cost.

Pension and Other Postretirement Benefits

Components of net pension and net other postretirement benefit costs were as follows:

(In millions)

Pension Benefits

Other Postretirement Benefits

Three Months Ended

March 31,

Three Months Ended

March 31,

2011

2010

2011

2010

Service cost

$

1

$

-

$

-

$

-

Interest cost

57

59

5

5

Expected long-term return on plan assets

(65)

(63)

-

-

Amortization of:

Net (gain) loss from past experience

9

7

-

-

Prior service cost

-

-

(4)

(4)

NET PENSION COST

$

2

$

3

$

1

$

1

The Company funds its qualified pension plans at least at the minimum amount required by the Pension Protection Act of 2006. For the three months ended March 31, 2011, the Company contributed $141 million, of which $16 million was required and $125 million was voluntary. For the remainder of 2011, the Company expects to make additional contributions of $109 million.

CIGNA CORPORATION – Form 10-Q – 31


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NOTE 12  Debt

Short-term and long-term debt were as follows:

(In millions)

March 31, 2011

December 31, 2010

Short-term:

Commercial paper

$

100

$

100

Current maturities of long-term debt

230

452

TOTAL SHORT-TERM DEBT

$

330

$

552

Long-term:

Uncollateralized debt:

5.375% Notes due 2017

$

250

$

250

6.35% Notes due 2018

131

131

8.5% Notes due 2019

251

251

4.375% Notes due 2020

249

249

5.125% Notes due 2020

299

299

4.5% Notes due 2021

298

-

6.37% Notes due 2021