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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).&#160;&#160;<br /><br />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&#8217;s Form 10-K for the year ended December 31, 2008.<br /><br />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.<br /><br />In preparing these interim consolidated financial statements, the Company has evaluated events that occurred between the balance sheet date and July 30, 2009. <br /><br />Certain reclassifications and restatements have been made to prior period amounts to conform to the presentation of 2009 amounts. In addition, certain restatements have been made in connection with the adoption of new accounting pronouncements. See Note 2 for further information. <br /><br />Discontinued operations. Discontinued operations for the six months ended June 30, 2009 primarily represented a tax benefit associated with a past divestiture related to the completion of the 2005 and 2006 IRS examinations.<br /><br />Discontinued operations for the second quarter of 2008 included a loss of $1 million after-tax related to the sale of the Brazilian Life Insurance Company. Discontinued operations for the six months ended June 30, 2008 also includes a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.<br /><br />Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;</p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>Note 2 &#8212; Recent Accounting Pronouncements <br /><br />Other-than-temporary impairments. 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In this case, the credit portion of the impairment loss is recognized in net income and the non-credit portion of an impairment loss is recognized in a separate component of shareholders&#8217; equity. A reclassification adjustment from retained earnings to accumulated other comprehensive income is required for previously impaired fixed maturities that have a non-credit loss as of the date of adoption, less related tax effects. <br /><br />The cumulative effect of adoption increased the Company&#8217;s retained earnings with an offsetting decrease to accumulated other comprehensive income of $18 million, with no overall change to shareholders&#8217; equity. See Note 9 for information on the Company&#8217;s other-than-temporary impairments including additional required disclosures.<br />&#160;<br />Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51," through retroactive restatement of prior financial statements and reclassified its $6 million of noncontrolling interest as of January 1, 2009 and 2008 from Accounts payable, accrued expenses and other liabilities to Noncontrolling interest in total equity. In addition, for the six months ended June 30, 2008, net income of $1 million attributable to the noncontrolling interest has been reclassified to be included in net income, with a reduction to net income to determine net income attributable to the Company&#8217;s shareholders (&#8220;shareholders&#8217; net income&#8221;). <br /><br />Earnings per share. Effective January 1, 2009, the Company adopted FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." This FSP requires unvested restricted stock awards that contain rights to nonforfeitable dividends to be included in the denominator of both basic and diluted earnings per share (&#8220;EPS&#8221;) calculations. Prior period EPS data have been restated to reflect the adoption of this FSP. See Note 4 for the effects of this FSP on previously reported EPS amounts.<br /><br />Business combinations. Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007, referred to as SFAS No. 141R), "Business Combinations&#8221;. This standard requires fair value measurements for all future acquisitions, including contingent purchase price and certain contingent assets or liabilities of the entity to be acquired; requires acquisition related and restructuring costs to be expensed as incurred and requires changes in tax items after the acquisition date to be reported in income tax expense. There were no effects to the Company&#8217;s Consolidated Financial Statements at adoption. <br /><br />Derivatives disclosures. Effective January 1, 2009, the Company adopted SFAS No. 161, &#8220;Disclosures about Derivative Instruments and Hedging Activities.&#8221; This standard expands required disclosures to include the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 10 for information on the Company&#8217;s derivative financial instruments including these additional required disclosures. <br /><br />Fair value measurements.&#160;&#160;Effective January 1, 2008, the Company adopted SFAS No. 157, &#8220;Fair Value Measurements.&#8221;&#160;&#160;This standard expands disclosures about fair value measurements and clarifies how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability (exit price).&#160;In addition, the FASB amended SFAS No. 157 in 2008 to provide additional guidance for determining the fair value of a financial asset when the market for that instrument is not active.&#160;See Note 8 for information on the Company&#8217;s fair value measurements. <br /><br />The Company carries certain financial instruments at fair value in the financial statements including approximately $12.7 billion in invested assets at June 30, 2009.&#160;&#160;The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in the fair values of these assets accrue directly to policyholders and are not included in the Company&#8217;s revenues and expenses.&#160;&#160;At the adoption of SFAS No. 157, there were no effects to the Company&#8217;s measurements of fair values for financial instruments other than for GMIB assets and liabilities discussed below. In addition, there were no effects to the Company&#8217;s measurements of financial assets of adopting the 2008 amendment to SFAS No. 157.<br />&#160;<br />At adoption, the Company was required to change certain assumptions used to estimate the fair values of GMIB assets and liabilities. Because there is no market for these contracts, the assumptions used to estimate their fair values at adoption were determined using a hypothetical market participant&#8217;s view of exit price, rather than using historical market data and actual experience to establish the Company&#8217;s future expectations.&#160;&#160;For many of these assumptions, there is limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates. On adoption, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance.<br /><br />The Company&#8217;s results of operations related to this business are expected to continue to be volatile in future periods because underlying assumptions will be based on current market-observable inputs which will likely change each period.&#160; See Note 8 for additional information.<br /><br />In the first quarter of 2009, the Company adopted the provisions of SFAS No. 157 for non-financial assets and liabilities (such as intangible assets, property and equipment and goodwill) that are required to be measured at fair value on a periodic basis (such as at impairment).&#160;&#160;The effect on the Company&#8217;s periodic fair value measurements for non-financial assets and liabilities was not material.<br /><br />In addition, the Company adopted recent amendments to SFAS No. 157 that provide additional guidance in determining fair value when the volume and level of activity for an asset or liability have significantly decreased and in identifying transactions that are not orderly. There were no effects to the Company&#8217;s Consolidated Financial Statements at adoption. <br /><br />Variable interest entities. In 2009, the FASB issued SFAS No. 167, &#8220;Amendments to FASB Interpretation No. 46(R),&#8221; which amended existing guidance to require periodic qualitative analyses to determine whether a variable interest entity must be consolidated by the Company. In addition, this standard requires the Company to disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity. Any changes in consolidated entities resulting from these requirements must be applied through retrospective restatement of prior financial statements beginning in 2010. The Company is presently evaluating the impact of these new requirements.<br /><br />Transfers of financial assets. In 2009, the FASB issued SFAS No. 166, &#8220;Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,&#8221; to provide greater transparency about transfers of financial assets. This guidance changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor&#8217;s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a &#8220;qualifying special purpose entity&#8221; when assessing transfers of financial instruments. The recognition and measurement provisions of this guidance must be applied to transfers that occur on or after January 1, 2010. 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For the six months ended June 30, 2009, actual experience differed from the Company&#8217;s key assumptions resulting in favorable incurred claims related to prior years&#8217; medical claims payable of $35 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction in medical claims payable of $15 million, or 0.2% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $20 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business.<br /><br />For the year ended December 31, 2008, actual experience differed from the Company's key assumptions, resulting in favorable incurred claims related to prior years&#8217; medical claims payable of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2007.&#160;Actual completion factors resulted in a reduction of the medical claims payable of $29 million, or 0.4% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.&#160;Actual medical cost trend resulted in a reduction of the medical claims payable of $31 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.<br /><br />The favorable impact in 2009 and 2008 relating to completion factors and medical cost trend variances is primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years.&#160;This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.<br /><br />The corresponding impact of prior year development on shareholders&#8217; net income was not material for the three months and six months ended June 30, 2009 and 2008. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company's shareholders&#8217; net income recognized for the following reasons:<br /><br />First, due to the nature of the Company's retrospectively experience-rated business, only adjustments to medical claims payable on accounts in deficit affect shareholders&#8217; net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders&#8217; 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&#8217;s shareholders&#8217; net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.<br /><br />Second, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice, which require that the liabilities be adequate under moderately adverse conditions.&#160;As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase deemed appropriate to address moderately adverse conditions for the current year incurred claims, the Company does not consider that offset amount as having any impact on shareholders&#8217; net income.<br /><br />The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the Company&#8217;s 2008 Form 10-K.</p></font></div></body></html> <html><head><meta content="text/html; charset=utf-8" /></head><body><div><font size="2"><p>Note 6 &#8212; Cost Reduction<br /><br />During the second quarter of 2009, the Company continued its previously announced comprehensive review of its ongoing businesses. 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In periods of declining equity markets and in periods of flat equity markets following a decline, the Company&#8217;s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company&#8217;s liabilities for these guaranteed minimum death benefits decrease.<br /><br />In order to substantially reduce the equity market exposures relating to guaranteed minimum death benefit contracts, the Company operates a dynamic hedge program (GMDB equity hedge program), using exchange-traded futures contracts. The hedge program is designed to substantially offset both positive and negative impacts of changes in equity markets on the GMDB liability. The hedge program involves detailed, daily monitoring of equity market movements and rebalancing the futures contracts within established parameters. While the hedge program is actively managed, it may not exactly offset changes in the GMDB liability due to, among other things, divergence between the performance of the underlying mutual funds and the hedge instruments, high levels of volatility in the equity markets, and differences between actual contractholder behavior and what is assumed. The performance of the underlying mutual funds compared to the hedge instruments is further impacted by a time lag, since the data is not reported and incorporated into the required hedge position on a real time basis. Although this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it is designed and operated to substantially reduce equity market exposures resulting from this product. The results of the futures contracts are included in other revenue and amounts reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits and expenses, consistent with GAAP when a premium deficiency exists.<br /><br />The GMDB reinsurance business is considered premium deficient because the expected present value of future claims and expenses exceeds the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company performs a reserve review on a quarterly basis using current market conditions and assumptions. Under premium deficiency accounting if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products. <br /><br />The Company had future policy benefit reserves for GMDB contracts of $1.5 billion as of June 30, 2009, and $1.6 billion as of December 31, 2008.&#160;&#160; The determination of liabilities for GMDB requires the Company to make critical accounting estimates.&#160;&#160;The Company estimates its liabilities for GMDB exposures using a complex internal model, run using many scenarios, and based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder&#8217;s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance refers to market rates to be earned over the life of the GMDB equity hedge program, and market volatility refers to market fluctuation. These assumptions are based on the Company&#8217;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.&#160;&#160;If actual experience differs from the assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility) used in estimating these liabilities, the result could have a material adverse effect on the Company&#8217;s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company&#8217;s financial condition.<br /><br />The following provides information about the Company&#8217;s reserving methodology and assumptions for GMDB as of June 30, 2009:<br /><br />The reserve represents estimates of the present value of net amounts expected to be paid, less the present value of net future premiums.&#160;&#160;Included in net amounts expected to be paid is the excess of the guaranteed death benefits over the values of the contractholders&#8217; accounts (based on underlying equity and bond mutual fund investments).<br />The reserve includes an estimate for future partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-27% depending on the net amount at risk for each policy and whether surrender charges apply.<br />The mean investment performance assumption is 5% considering the Company&#8217;s GMDB equity hedge program using futures contracts.&#160;&#160;This is reduced by fund fees ranging from 1-3% across all funds.&#160;&#160;The results of futures contracts are reflected in the liability calculation as a component of investment returns.<br />The volatility assumption is based on a review of historical monthly returns for each key index (e.g. S&amp;P 500) over a period of at least ten years. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The assumption is 16-30%, varying by equity fund type; 4-10%, varying by bond fund type; and 2% for money market funds. These volatility assumptions are used along with the mean investment performance assumption to project future return scenarios.<br />The discount rate is 5.75%.<br />The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.<br />The lapse rate assumption is 0-21%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.<br />The reserve includes a provision for future policy maintenance and hedging expenses.<br /><br />Although the year to date results include a first quarter charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves following an analysis of experience, no additional reserve strengthening was required for GMDB during the second quarter of 2009, primarily due to the stabilization and recovery of equity markets. The components of the first quarter charge were:<br /><br />adverse impacts of overall market declines of $50 million pre-tax ($32 million after-tax). This is comprised of (a) $39 million pre-tax ($25 million after-tax) primarily related to the provision for future partial surrenders, and (b) $11 million pre-tax ($7 million after-tax) related to declines in the values of contractholders&#8217; non-equity investments such as bond funds, neither of which is included in the GMDB equity hedge program;<br />adverse volatility-related impacts of $11 million pre-tax ($7 million after-tax) due to turbulent equity market conditions, including higher than expected claims and the performance of the diverse mix of equity fund investments held by contractholders being different than expected; and<br />adverse interest rate impacts of $12 million pre-tax ($8 million after-tax). 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As of December 31, 2008, the aggregate value of the underlying mutual fund investments was $16.3 billion. The death benefit coverage in force as of that date (representing the amount that the Company would have to pay if all of the approximately 650,000 contractholders had died on that date) was $11.1 billion.&#160;&#160;The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.<br /><br />As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity market and foreign currency risks associated with this business. The notional amount of futures contract positions held by the Company at June 30, 2009 was $1.3 billion.&#160;&#160;The Company recorded in other revenues pre-tax losses of $188 million for the three months ended June 30, 2009 and $71 million for the six months ended June 30, 2009, and pre-tax gains of $6 million for the three months ended June 30, 2008 and $48 million for the six months ended June 30, 2008.<br /><br />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. 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An asset&#8217;s or a liability&#8217;s classification is based on the lowest level input that is significant to its measurement.&#160;&#160;For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).&#160;&#160;&#160;The levels of the fair value hierarchy are as follows:<br /><br />Level 1&#160;&#8211; Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.&#160;&#160;Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.<br />Level 2 &#8211;&#160;&#160;Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument.&#160;&#160;Such inputs include market interest rates and volatilities, spreads and yield curves. 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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&#8217;s financial statements in its evaluation. 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The Company considered the following in determining the view of a hypothetical market participant:<br /><br />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<br />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.<br /><br />These GMIB assets and liabilities are estimated using a complex internal model run using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business.&#160;&#160;&#160;Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants&#8217; accounts at the time of annuitization. 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width="355" align="left" height="18"><font size="2">Net realized investment losses</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px solid #000000;background-color: #FFFFFF;" width="19" align="right" height="18"><font size="2">$</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px solid #000000;background-color: #FFFFFF;" width="75" align="right" height="18"><font size="2"> (9)</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px solid #000000;background-color: #FFFFFF;" width="19" align="right" height="18"><font size="2">$</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px solid #000000;background-color: #FFFFFF;" width="75" align="right" height="18"><font size="2"> (12)</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px solid #000000;background-color: #FFFFFF;" width="19" align="right" height="18"><font size="2">$</font></td><td style="border-top: 1px solid #000000;border-bottom: 2px 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