Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2009


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

for the transition period from _____ to _____.

Commission file number 1-08323

CIGNA Corporation

(Exact name of registrant as specified in its charter)


Delaware		06-1059331

(State or other jurisdiction 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)

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

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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


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

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

As of July 17, 2009, 272,704,706 shares of the issuer’s common stock were outstanding.

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CIGNA Corporation

Consolidated Statements of Income


	Unaudited						Unaudited
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In millions, except per share amounts)	2009			2008			2009			2008
Revenues
Premiums and fees	$	4,013		$	4,218		$	8,064		$	8,069
Net investment income		260			265			489			530
Mail order pharmacy revenues		316			286			628			582
Other revenues		(83	)		113			134			256
Realized investment gains (losses):
Other than temporary impairments on debt securities, net		(9	)		(9	)		(26	)		(26	)
Other realized investment gains (losses)		(9	)		(10	)		(28	)		21

Total realized investment losses		(18	)		(19	)		(54	)		(5	)

Total revenues		4,488			4,863			9,261			9,432

Benefits and Expenses
Health Care medical claims expense		1,748			1,917			3,528			3,661
Other benefit expenses		689			900			1,797			1,828
Mail order pharmacy cost of goods sold		255			227			507			466
Guaranteed minimum income benefits (income) expense		(164	)		(49	)		(196	)		255
Other operating expenses		1,330			1,455			2,722			2,735

Total benefits and expenses		3,858			4,450			8,358			8,945

Income from Continuing Operations before Income Taxes		630			413			903			487

Income taxes (benefits):
Current		155			132			70			209
Deferred		40			8			190			(51	)

Total taxes		195			140			260			158

Income from Continuing Operations		435			273			643			329
Income (Loss) from Discontinued Operations, Net of Taxes		—			(1	)		1			2

Net Income		435			272			644			331
Less: Net Income Attributable to Noncontrolling Interest		—			—			1			1

Shareholders’ Net Income	$	435		$	272		$	643		$	330

Basic Earnings Per Share:
Shareholders’ income from continuing operations	$	1.59		$	0.97		$	2.35		$	1.17
Shareholders’ income from discontinued operations		—			—			—			0.01

Shareholders’ net income	$	1.59		$	0.97		$	2.35		$	1.18

Diluted Earnings Per Share:
Shareholders’ income from continuing operations	$	1.58		$	0.97		$	2.34		$	1.16
Shareholders’ income (loss) from discontinued operations		—			(0.01	)		—			0.01

Shareholders’ net income	$	1.58		$	0.96		$	2.34		$	1.17

Dividends Declared Per Share	$	—		$	—		$	0.040		$	0.040

Amounts Attributable to CIGNA:
Shareholders’ income from continuing operations	$	435		$	273		$	642		$	328
Shareholders’ income (loss) from discontinued operations		—			(1	)		1			2

Shareholders’ Net Income	$	435		$	272		$	643		$	330

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

CIGNA Corporation

Consolidated Balance Sheets


				Unaudited
				As of						As of
				June 30,						December 31,
(In millions, except per share amounts)				2009						2008
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $12,166; $11,492)				$	12,495					$	11,781
Equity securities, at fair value (cost, $124; $140)					93						112
Commercial mortgage loans					3,578						3,617
Policy loans					1,570						1,556
Real estate					122						53
Other long-term investments					595						632
Short-term investments					105						236

Total investments					18,558						17,987
Cash and cash equivalents					1,022						1,342
Accrued investment income					229						225
Premiums, accounts and notes receivable, net					1,500						1,407
Reinsurance recoverables					6,782						6,973
Deferred policy acquisition costs					835						789
Property and equipment					805						804
Deferred income taxes, net					1,285						1,617
Goodwill					2,876						2,878
Other assets, including other intangibles					1,220						1,520
Separate account assets					6,537						5,864

Total assets				$	41,649					$	41,406

Liabilities
Contractholder deposit funds				$	8,555					$	8,539
Future policy benefits					8,267						8,754
Unpaid claims and claim expenses					4,042						4,037
Health Care medical claims payable					947						924
Unearned premiums and fees					406						414

Total insurance and contractholder liabilities					22,217						22,668
Accounts payable, accrued expenses and other liabilities					5,831						6,869
Short-term debt					106						301
Long-term debt					2,435						2,090
Nonrecourse obligations					25						16
Separate account liabilities					6,537						5,864

Total liabilities					37,151						37,808

Contingencies — Note 17
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)					88						88
Additional paid-in capital					2,506						2,502
Net unrealized appreciation (depreciation), fixed maturities	$	100					$	(147	)
Net unrealized appreciation, equity securities		7						7
Net unrealized depreciation, derivatives		(21	)					(13	)
Net translation of foreign currencies		(46	)					(60	)
Postretirement benefits liability adjustment		(877	)					(861	)

Accumulated other comprehensive loss					(837	)					(1,074	)
Retained earnings					7,986						7,374
Less treasury stock, at cost					(5,254	)					(5,298	)

Total shareholders’ equity					4,489						3,592
Noncontrolling interest					9						6

Total equity					4,498						3,598

Total liabilities and equity				$	41,649					$	41,406

Shareholders’ Equity Per Share				$	16.46					$	13.25

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

CIGNA Corporation

Consolidated Statements of Comprehensive Income and Changes in Total Equity


	Unaudited
	2009						2008
	Compre-						Compre-
(In millions, except per share amounts)	hensive			Total			hensive			Total
Three Months Ended June 30	Income			Equity			Income			Equity
Common Stock, June 30				$	88					$	88

Additional Paid-In Capital, April 1					2,505						2,488
Effects of stock issuance for employee benefit plans					1						5

Additional Paid-In Capital, June 30					2,506						2,493

Accumulated Other Comprehensive Income (Loss), April 1					(1,036	)					38
Implementation effect of FASB FSP No. 115-2					(18	)					—
Net unrealized appreciation (depreciation), fixed maturities	$	212			212		$	(111	)		(111	)
Net unrealized appreciation (depreciation), equity securities		2			2			(1	)		(1	)

Net unrealized appreciation (depreciation) on securities		214						(112	)
Net unrealized depreciation, derivatives		(19	)		(19	)		(3	)		(3	)
Net translation of foreign currencies		42			42			(17	)		(17	)
Postretirement benefits liability adjustment		(20	)		(20	)		10			10

Other comprehensive income (loss)		217						(122	)

Accumulated Other Comprehensive Loss, June 30					(837	)					(84	)

Retained Earnings, April 1					7,536						7,142
Shareholders’ net income		435			435			272			272
Effects of stock issuance for employee benefit plans					(3	)					(2	)
Implementation effect of FASB FSP No. 115-2					18						—

Retained Earnings, June 30					7,986						7,412

Treasury Stock, April 1					(5,262	)					(4,942	)
Repurchase of common stock					—						(222	)
Other, primarily issuance of treasury stock for employee benefit plans					8						9

Treasury Stock, June 30					(5,254	)					(5,155	)

Shareholders’ Comprehensive Income and Shareholders’ Equity		652			4,489			150			4,754

Noncontrolling interest, April 1					7						7
Accumulated other comprehensive income attributable to noncontrolling interest		2			2			—			—

Noncontrolling interest, June 30		2			9			—			7

Total Comprehensive Income and Total Equity	$	654		$	4,498		$	150		$	4,761

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

CIGNA Corporation

Consolidated Statements of Comprehensive Income and Changes in Total Equity


	Unaudited
	2009						2008
	Compre-						Compre-
(In millions, except per share amounts)	hensive			Total			hensive			Total
Six Months Ended June 30	Income			Equity			Income			Equity
Common Stock, June 30				$	88					$	88

Additional Paid-In Capital, January 1					2,502						2,474
Effects of stock issuance for employee benefit plans					4						19

Additional Paid-In Capital, June 30					2,506						2,493

Accumulated Other Comprehensive Income (Loss), January 1					(1,074	)					51
Implementation effect of FASB FSP No. 115-2					(18	)					—
Net unrealized appreciation (depreciation), fixed maturities	$	265			265		$	(115	)		(115	)
Net unrealized appreciation, equity securities		—			—			1			1

Net unrealized appreciation (depreciation) on securities		265						(114	)
Net unrealized depreciation, derivatives		(8	)		(8	)		(11	)		(11	)
Net translation of foreign currencies		14			14			(23	)		(23	)
Postretirement benefits liability adjustment		(16	)		(16	)		13			13

Other comprehensive income (loss)		255						(135	)

Accumulated Other Comprehensive Loss, June 30					(837	)					(84	)

Retained Earnings, January 1					7,374						7,113
Shareholders’ net income		643			643			330			330
Effects of stock issuance for employee benefit plans					(38	)					(20	)
Implementation effect of FASB FSP No. 115-2					18						—
Common dividends declared (per share: $0.04; $0.04)					(11	)					(11	)

Retained Earnings, June 30					7,986						7,412

Treasury Stock, January 1					(5,298	)					(4,978	)
Repurchase of common stock					—						(222	)
Other, primarily issuance of treasury stock for employee benefit plans					44						45

Treasury Stock, June 30					(5,254	)					(5,155	)

Shareholders’ Comprehensive Income and Shareholders’ Equity		898			4,489			195			4,754

Noncontrolling interest, January 1					6						6
Net income attributable to noncontrolling interest		1			1			1			1
Accumulated other comprehensive income attributable to noncontrolling interest		2			2			—			—

Noncontrolling interest, June 30		3			9			1			7

Total Comprehensive Income and Total Equity	$	901		$	4,498		$	196		$	4,761

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

CIGNA Corporation

Consolidated Statements of Cash Flows


	Unaudited
	Six Months Ended June 30,
(In millions)	2009			2008
Cash Flows from Operating Activities
Net income	$	644		$	331
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations		(1	)		(2	)
Income attributable to noncontrolling interest		(1	)		(1	)
Insurance liabilities		(72	)		62
Reinsurance recoverables		10			58
Deferred policy acquisition costs		(38	)		(54	)
Premiums, accounts and notes receivable		(90	)		28
Other assets		292			(284	)
Accounts payable, accrued expenses and other liabilities		(1,076	)		363
Current income taxes		41			(4	)
Deferred income taxes		190			(51	)
Realized investment losses		54			5
Depreciation and amortization		145			117
Gains on sales of businesses (excluding discontinued operations)		(16	)		(19	)
Proceeds from sales of mortgage loans held for sale		1			—
Other, net		29			10

Net cash provided by operating activities		112			559

Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		397			695
Equity securities		13			1
Commercial mortgage loans		18			12
Other (primarily short-term and other long-term investments)		432			145
Investment maturities and repayments:
Fixed maturities		640			351
Commercial mortgage loans		12			10
Investments purchased:
Fixed maturities		(1,612	)		(1,676	)
Equity securities		—			(17	)
Commercial mortgage loans		(51	)		(202	)
Other (primarily short-term and other long-term investments)		(361	)		(229	)
Property and equipment purchases		(136	)		(128	)
Acquisition of Great-West Healthcare, net of cash acquired		—			(1,301	)
Other (primarily other acquisitions/dispositions)		—			(8	)

Net cash used in investing activities		(648	)		(2,347	)

Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		706			673
Withdrawals and benefit payments from contractholder deposit funds		(618	)		(569	)
Change in cash overdraft position		(13	)		(8	)
Net change in short-term debt		(197	)		425
Net proceeds on issuance of long-term debt		346			298
Repayment of long-term debt		(2	)		—
Repurchase of common stock		—			(217	)
Issuance of common stock		—			35
Common dividends paid		(11	)		(14	)

Net cash provided by financing activities		211			623

Effect of foreign currency rate changes on cash and cash equivalents		5			—

Net decrease in cash and cash equivalents		(320	)		(1,165	)
Cash and cash equivalents, beginning of period		1,342			1,970

Cash and cash equivalents, end of period	$	1,022		$	805

Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	33		$	205
Interest paid	$	75		$	59

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

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

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

The interim consolidated financial statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Form 10-K for the year ended December 31, 2008.

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

In preparing these interim consolidated financial statements, the Company has evaluated events that occurred between the balance sheet date and July 30, 2009.

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

Discontinued operations. Discontinued operations for the 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.

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.

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

Note 2 — Recent Accounting Pronouncements

Other-than-temporary impairments. On April 1, 2009, the Company adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. This FSP provides new guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost. It requires assessing the Company’s intent to sell or whether it is more likely than not that the Company will be required to sell such fixed maturities before their fair values recover. If so, an impairment loss is recognized in net income for the excess of the amortized cost over fair value. The Company must also determine if it does not expect to recover the amortized cost of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell). In this case, the credit portion of the impairment loss is recognized in net income and the non-credit portion of an impairment loss is recognized in a separate component of shareholders’ equity. A reclassification adjustment from retained earnings to accumulated other comprehensive income is required for previously impaired fixed maturities that have a non-credit loss as of the date of adoption, less related tax effects.

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

Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted 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’s shareholders (“shareholders’ net income”).

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 (“EPS”) 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.

Business combinations. Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007, referred to as SFAS No. 141R), “Business Combinations”. This standard requires fair value measurements for all future acquisitions, including contingent purchase price and certain contingent assets or liabilities of the entity to be acquired; requires acquisition related and restructuring costs to be expensed as incurred and requires changes in tax items after the acquisition date to be reported in income tax expense. There were no effects to the Company’s Consolidated Financial Statements at adoption.

Derivatives disclosures. Effective January 1, 2009, the Company adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This standard expands required disclosures to include the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 10 for information on the Company’s derivative financial instruments including these additional required disclosures.

Fair value measurements. Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” This standard expands disclosures about fair value measurements and clarifies how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability (exit price). In addition, the FASB amended SFAS No. 157 in 2008 to provide additional guidance for determining the fair value of a financial asset when the market for that instrument is not active. See Note 8 for information on the Company’s fair value measurements.

The Company carries certain financial instruments at fair value in the financial statements including approximately $12.7 billion in invested assets at June 30, 2009. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in the fair values of these assets accrue directly to policyholders and are not included in the Company’s revenues and expenses. At the adoption of SFAS No. 157, there were no effects to the Company’s measurements of fair values for financial instruments other than for GMIB assets and liabilities discussed below. In addition, there were no effects to the Company’s measurements of financial assets of adopting the 2008 amendment to SFAS No. 157.

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

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

In the first quarter of 2009, the Company adopted the provisions of SFAS No. 157 for non-financial assets and liabilities (such as intangible assets, property and equipment and goodwill) that are required to be measured at fair value on a periodic basis (such as at impairment). The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

In addition, the 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’s Consolidated Financial Statements at adoption.

Variable interest entities. In 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” 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.

Transfers of financial assets. In 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,” 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’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a “qualifying special purpose entity” when assessing transfers of financial instruments. The recognition and measurement provisions of this guidance must be applied to transfers that occur on or after January 1, 2010. The Company is presently evaluating the impact of these new requirements.

Note 3 — Acquisitions and Dispositions

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

Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West Healthcare” or the “acquired business”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional employer groups. Great-West Healthcare’s offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed through a combination of cash and the issuance of both short and long-term debt.

In the first quarter of 2009, the Company completed its allocation of the total purchase price to the tangible and intangible net assets acquired based on management’s estimates of their fair values without material changes from December 31, 2008.

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

The following table presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2008. The pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of that date or what such results will be for any future periods.


	(Unaudited)
	Six Months Ended
	June 30,
(In millions, except per share amounts)	2008
Total revenues	$	9,800
Shareholders’ income from continuing operations	$	349
Shareholders’ net income	$	351
Earnings per share:
Shareholders’ income from continuing operations
Basic	$	1.24
Diluted	$	1.23
Shareholders’ net income
Basic	$	1.25
Diluted	$	1.24

Note 4 — Earnings Per Share

Basic and diluted earnings per share were computed as follows:


(In millions, except per share amounts)			Effect of
Three Months Ended June 30,	Basic		Dilution			Diluted
2009
Shareholders’ income from continuing operations	$	435	$	—		$	435

Shares (in thousands):
Weighted average		274,086		—			274,086
Options		—		969			969

Total shares		274,086		969			275,055

EPS	$	1.59	$	(0.01	)	$	1.58

2008
Shareholders’ income from continuing operations	$	273	$	—		$	273

Shares (in thousands):
Weighted average		280,070		—			280,070
Options		—		1,850			1,850

Total shares		280,070		1,850			281,920

EPS	$	0.97	$	—		$	0.97


(In millions, except per share amounts)			Effect of
Six Months Ended June 30,	Basic		Dilution			Diluted
2009
Shareholders’ income from continuing operations	$	642	$	—		$	642

Shares (in thousands):
Weighted average		273,342		—			273,342
Options		—		623			623

Total shares		273,342		623			273,965

EPS	$	2.35	$	(0.01	)	$	2.34

2008
Shareholders’ income from continuing operations	$	328	$	—		$	328

Shares (in thousands):
Weighted average		280,818		—			280,818
Options		—		2,220			2,220

Total shares		280,818		2,220			283,038

EPS	$	1.17	$	(0.01	)	$	1.16

As described in Note 2, effective in 2009, the Company adopted FSP EITF 03-06-1, which requires the Company’s unvested restricted stock awards to be included in weighted average shares instead of being considered a common stock equivalent. Prior period share information has been restated as follows.


	Three Months Ended June 30, 2008
	Basic				Diluted
	As originally				As originally
	reported		As adjusted		reported		As adjusted
Shareholders’ income from continuing operations	$	0.98	$	0.97	$	0.98	$	0.97


	Six Months Ended June 30, 2008
	Basic				Diluted
	As originally				As originally
	reported		As adjusted		reported		As adjusted
Shareholders’ income from continuing operations	$	1.18	$	1.17	$	1.17	$	1.16

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

Three Months Ended

Six Months Ended

June 30,

(In millions)

2009

2008

2009

2008

Antidilutive options

9.9

4.9

10.6

4.3

The Company held 78,223,221 shares of common stock in Treasury as of June 30, 2009, and 75,590,075 shares as of June 30, 2008.

Note 5 — Health Care Medical Claims Payable

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


	June 30,		December 31,
(In millions)	2009		2008
Incurred but not yet reported	$	808	$	782
Reported claims in process		116		114
Other medical expense payable		23		28

Medical claims payable	$	947	$	924

Activity in medical claims payable was as follows:


	For the period ended
	June 30,			December 31,
(In millions)	2009			2008
Balance at January 1,	$	924		$	975
Less: Reinsurance and other amounts recoverable		211			258

Balance at January 1, net		713			717
Acquired April 1, 2008 net		—			90
Incurred claims related to:
Current year		3,563			7,312
Prior years		(35	)		(60	)

Total incurred		3,528			7,252
Paid claims related to:
Current year		2,867			6,716
Prior years		625			630

Total paid		3,492			7,346
Ending Balance, net		749			713
Add: Reinsurance and other amounts recoverable		198			211

Ending Balance	$	947		$	924

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist. See Note 11 for additional information on reinsurance. For the six months ended June 30, 2009, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ 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.

For the year ended December 31, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29 million, or 0.4% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $31 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.

The favorable impact in 2009 and 2008 relating to completion 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. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was not material for the three months and 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’ net income recognized for the following reasons:

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

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

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

Note 6 — Cost Reduction

During the second quarter of 2009, the Company continued its previously announced comprehensive review of its ongoing businesses. As a result, in the second quarter of 2009 the Company recognized in other operating expenses a total charge of $14 million pre-tax ($9 million after-tax), for severance resulting from reductions of 465 positions in its workforce. The Company expects to pay substantially all of this charge in cash during 2009. The Health Care segment reported substantially all of this charge.

The following table presents the activity related to the cost reduction initiatives begun in the fourth quarter of 2008:


(In millions)	Severance			Real estate			Total
Balance, January 1, 2009	$	44		$	11		$	55
Less: Payments on 2008 charges		(21	)		(2	)		(23	)

Subtotal — 2008 cost reduction actions		23			9			32
Add: Second quarter 2009 charge		14			—			14

Balance, June 30, 2009	$	37		$	9		$	46

Note 7 — Guaranteed Minimum Death Benefit Contracts

The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured guaranteed minimum death benefits (GMDB), also known as variable annuity death benefits (VADBe), under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds combined with a death benefit. The Company has equity and other market exposures as a result of this product. In periods of declining equity markets and in periods of flat equity markets following a decline, the Company’s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company’s liabilities for these guaranteed minimum death benefits decrease.

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

The GMDB reinsurance business is considered premium deficient because the expected present value of future claims and expenses exceeds the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company performs a reserve review on a quarterly basis using current market conditions and assumptions. Under premium deficiency accounting if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.

The Company had future policy benefit reserves for GMDB contracts of $1.5 billion as of June 30, 2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model, run using many scenarios, and based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder’s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance refers to market rates to be earned over the life of the GMDB equity hedge program, and market volatility refers to market fluctuation. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility) used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

The following provides information about the Company’s reserving methodology and assumptions for GMDB as of June 30, 2009:

•

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

•

The reserve includes an estimate for future partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-27% depending on the net amount at risk for each policy and whether surrender charges apply.

•

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

•

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

•

The discount rate is 5.75%.

•

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

•

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

•

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

Although the year to date results include a first quarter charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves 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:

•

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

•

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

•

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

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


	For the period ended
	June 30,		December 31,
(In millions)	2009		2008
Balance at January 1	$	1,609	$	848
Add: Unpaid Claims		34		21
Less: Reinsurance and other amounts recoverable		83		19

Balance at January 1, net		1,560		850
Add: Incurred benefits		50		822
Less: Paid benefits		100		112

Ending balance, net		1,510		1,560
Less: Unpaid Claims		42		34
Add: Reinsurance and other amounts recoverable		74		83

Ending balance	$	1,542	$	1,609

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

As of June 30, 2009, the aggregate value of the underlying mutual fund investments was $15.8 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 615,000 contractholders had died on that date) was $9.6 billion. As of December 31, 2008, the aggregate value of the underlying mutual fund investments was $16.3 billion. The death benefit coverage in force as of that date (representing the amount that the Company would have to pay if all of the approximately 650,000 contractholders had died on that date) was $11.1 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.

As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity market and foreign currency risks associated with this business. The notional amount of futures contract positions held by the Company at June 30, 2009 was $1.3 billion. 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.

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

Note 8 — Fair Value Measurements

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

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

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

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

•

Level 1 — Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.

•

Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.

•

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

Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis

The following tables provide information as of June 30, 2009 and December 31, 2008 about the Company’s financial assets and liabilities measured at fair value on a recurring basis. 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.


			Significant
	Quoted Prices in		Other		Significant
	Active Markets for		Observable		Unobservable
June 30, 2009	Identical Assets		Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	45	$	546	$	1	$	592
State and local government		—		2,478		—		2,478
Foreign government		—		960		13		973
Corporate		—		7,357		486		7,843
Federal agency mortgage-backed		—		35		—		35
Other mortgage-backed		—		116		7		123
Other asset-backed		—		52		399		451

Total fixed maturities⁽¹⁾		45		11,544		906		12,495
Equity securities		7		69		17		93

Subtotal		52		11,613		923		12,588
Short-term investments		—		105		—		105
GMIB assets⁽²⁾		—		—		685		685
Other derivative assets⁽³⁾		—		21		—		21

Total financial assets at fair value, excluding separate accounts	$	52	$	11,739	$	1,608	$	13,399

Financial liabilities at fair value:
GMIB liabilities	$	—	$	—	$	1,224	$	1,224
Other derivative liabilities		—		19		—		19

Total financial liabilities at fair value	$	—	$	19	$	1,224	$	1,243


(1)		Fixed maturities includes $174 million of net appreciation required to adjust future policy benefits for run-off settlement annuity business including $4 million of appreciation for securities classified in Level 3.

(2)		The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $14 million for the future cost of reinsurance.

(3)		Other derivative assets includes $17 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $4 million of interest rate swaps not designated as accounting hedges.


			Significant
	Quoted Prices in		Other		Significant
	Active Markets for		Observable		Unobservable
December 31, 2008	Identical Assets		Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	38	$	724	$	—	$	762
State and local government		—		2,486		—		2,486
Foreign government		—		923		21		944
Corporate		—		6,526		330		6,856
Federal agency mortgage-backed		—		37		—		37
Other mortgage-backed		—		121		4		125
Other asset-backed		—		57		514		571

Total fixed maturities⁽¹⁾		38		10,874		869		11,781
Equity securities		8		84		20		112

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

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

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

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


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

(2)		The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $17 million for the future cost of reinsurance.

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

Level 1 Financial Assets

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

Level 2 Financial Assets and Financial Liabilities

Fixed maturities and equity securities. Approximately 92% of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Because many fixed maturities and preferred stocks do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset.

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

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

Other derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as interest rate and foreign currency swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties, and determined that no adjustment for credit risk was required as of June 30, 2009 or December 31, 2008. The nature and use of these other derivatives are described in Note 10.

Level 3 Financial Assets and Financial Liabilities

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

Fixed maturities and equity securities. Approximately 7% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:


	June 30,		December 31,
(In millions)	2009		2008
Mortgage and asset-backed securities	$	406	$	518
Primarily private corporate bonds		411		270
Subordinated loans and private equity investments		106		101


Total	$	923	$	889

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

Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and interest rates but are without significant life insurance risk and are settled in lump sum payments, the Company reports these liabilities and assets as derivatives at fair value. The Company estimates the fair value of the assets and liabilities for GMIB contracts using assumptions regarding capital markets (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments), future annuitant and retrocessionaire behavior (including mortality, lapse, annuity election rates and retrocessional credit), as well as risk and profit charges. At adoption of SFAS No. 157 in 2008, the Company updated assumptions to reflect those that the Company believes a hypothetical market participant would use to determine a current exit price for these contracts, and recorded a charge to shareholders’ net income as described in Note 2. As certain assumptions used to estimate fair values for these contracts are largely unobservable, the Company classifies GMIB assets and liabilities in Level 3. The Company considered the following in determining the view of a hypothetical market participant:

•

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

•

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

These GMIB assets and liabilities are estimated using a complex internal model run using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants’ accounts at the time of annuitization. Generally, market return, interest rate and volatility assumptions are based on market observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The significant assumptions used to value the GMIB assets and liabilities as of June 30, 2009 were as follows:

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

•		The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at the time of annuitization (claim interest rate) based on contractual terms. That rate was 3.19% at June 30, 2009 and must be projected for future time periods. These projected rates vary by economic scenario and are determined by an interest rate model using current interest rate curves and the prices of instruments available in the market including various interest rate caps and zero-coupon bonds. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim interest rate.

•		The market volatility assumptions for annuitants’ underlying mutual fund investments that are modeled based on the S&P 500, Russell 2000 and NASDAQ Composite are based on the market-implied volatility for these indices for three to seven years grading to historical volatility levels thereafter. For the remaining 57% 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 35% for equity funds, 4% to 11% for bond funds and 1% to 2% for money market funds.

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

•		The lapse rate assumption varies by contract from 2% to 23% and depends on the time since contract issue, the relative value of the guarantee and the differing experience by issuing company of the underlying variable annuity contracts.

•		The annuity election rate assumption varies by contract and depends on the annuitant’s age, the relative value of the guarantee, whether a contractholder has had a previous opportunity to elect the benefit and the differing experience by issuing company of the underlying variable annuity contracts. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. With respect to the second and subsequent election opportunities, actual data is just beginning to emerge for the Company as well as the industry and the estimates are based on this limited data.

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

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

The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting current observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that impact the net liability. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain situations, could be material to the Company’s financial condition.

GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles. As of June 30, 2009, Standard & Poor’s (S&P) has given a financial strength rating of AA to one reinsurer and a financial strength rating of A- to the parent company that guarantees the receivable from the other reinsurer.

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

The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three months and six months ended June 30, 2009 and 2008. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in these tables may include changes in fair value that are attributable to both observable and unobservable inputs.

For the Three Months Ended June 30, 2009


	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 4/1/09	$	910		$	908		$	(1,641	)	$	(733	)

Gains (losses) included in shareholders’ net income:
Results of GMIB		—			(198	)		362			164
Other		(6	)		—			—			—

Total gains (losses) included in shareholders’ net income		(6	)		(198	)		362			164

Gains included in other comprehensive income		29			—			—			—
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾		(31	)		—			—			—
Purchases, issuances, settlements		(7	)		(25	)		55			30
Transfers into Level 3		28			—			—			—

Balance at 6/30/09	$	923		$	685		$	(1,224	)	$	(539	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	(6	)	$	(198	)	$	362		$	164


(1)		Amounts do not accrue to shareholders.

For the Three Months Ended June 30, 2008


	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 4/1/08	$	726		$	515		$	(965	)	$	(450	)

Gains (losses) included in shareholders’ net income:
Results of GMIB, excluding adoption effect		—			(58	)		107			49
Other		4			—			—			—

Total gains (losses) included in shareholders’ net income		4			(58	)		107			49

Gains included in other comprehensive income		6			—			—			—
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾		(16	)		—			—			—
Purchases, issuances, settlements		17			(10	)		22			12
Transfers out of Level 3		(42	)		—			—			—

Balance at 6/30/08	$	695		$	447		$	(836	)	$	(389	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	3		$	(58	)	$	107		$	49


(1)		Amounts do not accrue to shareholders.


For the Six Months Ended June 30, 2009	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 1/1/09	$	889		$	953		$	(1,757	)	$	(804	)

Gains (losses) included in shareholders’ net income:
Results of GMIB		—			(236	)		432			196
Other		(10	)		—			—			—

Total gains (losses) included in shareholders’ net income		(10	)		(236	)		432			196

Gains included in other comprehensive income		10			—			—			—
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾		(107	)		—			—			—
Purchases, issuances, settlements		(10	)		(32	)		101			69
Transfers into Level 3		151			—			—			—

Balance at 6/30/09	$	923		$	685		$	(1,224	)	$	(539	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	(10	)	$	(236	)	$	432		$	196


(1)		Amounts do not accrue to shareholders.


For the Six Months Ended June 30, 2008	Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 1/1/08	$	732		$	173		$	(313	)	$	(140	)

Gains (losses) included in shareholders’ net income:
Effect of adoption of SFAS No. 157		—			244			(446	)		(202	)
Results of GMIB, excluding adoption effect		—			67			(120	)		(53	)
Other		(1	)		—			—			—

Total gains (losses) included in shareholders’ net income		(1	)		311			(566	)		(255	)

Losses included in other comprehensive income		(3	)		—			—			—
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾		(34	)		—			—			—
Purchases, issuances, settlements		11			(37	)		43			6
Transfers out of Level 3		(10	)		—			—			—

Balance at 6/30/08	$	695		$	447		$	(836	)	$	(389	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	3		$	311		$	(566	)	$	(255	)


(1)		Amounts do not accrue to shareholders.

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:

•

Other than temporary impairments on debt securities, net; other realized investment gains (losses) and net investment income for amounts related to fixed maturities and equity securities; and

•

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

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

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

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

The net gain for GMIB was $164 million for the three months ended June 30, 2009 and $196 million for the six months ended June 30, 2009, and was primarily due to the following factors:

•

increases in interest rates ($129 million for the three months and $206 million for the six months ended June 30, 2009);

•

increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures ($51 million for the three months and $32 million for the six months ended June 30, 2009); and

•

updates to the risk and profit charge estimates ($20 million for the three months and $18 million for the six months ended June 30, 2009).

These favorable effects were partially offset by:

•

increases to the annuitization assumption, reflecting higher utilization experience ($21 million for the three months and six months ended June 30, 2009);

•

updates to the lapse assumption (none for the three months and $14 million for the six months ended June 30, 2009); and

•

other amounts (including experience varying from assumptions, model and in-force updates) ($15 million for the three months and $25 million for the six months ended June 30, 2009).

For the second quarter of 2008, gains on the GMIB liabilities and offsetting losses on the GMIB assets were primarily the result of increases in interest rates. For the six months ended June 30, 2008, excluding the implementation impact of SFAS No. 157, losses on the GMIB liabilities and offsetting gains on the GMIB assets were primarily the result of declines in equity markets.

Separate account assets

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are not included in the Company’s revenues and expenses. As of June 30, 2009 and December 31, 2008 separate account assets were as follows:


June 30, 2009	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	231	$	1,532	$	—	$	1,763
Non-guaranteed separate accounts (1)		1,409		2,740		625		4,774

Total separate account assets	$	1,640	$	4,272	$	625	$	6,537


(1)		Non-guaranteed separate accounts include $2.1 billion in assets supporting the Company’s pension plans, including $590 million classified in Level 3.


December 31, 2008	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	233	$	1,557	$	—	$	1,790
Non-guaranteed separate accounts (1)		1,093		2,506		475		4,074

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


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

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

•

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

•

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

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

The following tables summarize the changes in separate account assets reported in Level 3 for the three months and six months ended June 30, 2009 and 2008.


	Three Months Ended
	June 30,
(In millions)	2009			2008
Balance at 4/1	$	597		$	411
Policyholder gains (losses) (1)		(21	)		3
Purchases, issuances, settlements		49			16
Transfers out of Level 3		—			(13	)

Balance at 6/30	$	625		$	417


(1)		Includes losses of $21 million and gains of $3 million attributable to instruments still held at June 30, 2009 and June 30, 2008 respectively.


	Six Months Ended
	June 30,
(In millions)	2009			2008
Balance at 1/1	$	475		$	403
Policyholder gains (losses) (1)		(67	)		20
Purchases, issuances, settlements		57			9
Transfers in (out) of Level 3		160			(15	)

Balance at 6/30	$	625		$	417


(1)		Includes losses of $67 million and gains of $6 million attributable to instruments still held at June 30, 2009 and June 30, 2008 respectively.

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

Certain financial assets and liabilities are measured at fair value on a non-recurring basis, such as commercial mortgage loans held for sale and investments in real estate entities that are impaired. In the second quarter of 2009, impaired real estate entities carried at cost of $41 million were written down to their fair values of $8 million, resulting in realized investment losses of $33 million. These fair value measurements were based on discounted cash flow analyses using significant unobservable inputs, and were classified in Level 3. As of December 31, 2008, the amounts required to adjust these assets and liabilities to their fair values were not significant.

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 consolidated financial statements at amounts that approximate fair value. The following table shows 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 June 30, 2009 and December 31, 2008:


	June 30, 2009				December 31, 2008
			Carrying				Carrying
(In millions)	Fair Value		Value		Fair Value		Value
Commercial mortgage loans	$	3,308	$	3,578	$	3,401	$	3,617
Contractholder deposit funds, excluding universal life products	$	921	$	938	$	889	$	915
Long-term debt, excluding capital leases	$	2,150	$	2,427	$	1,684	$	2,077

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.

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 using an internal discounted cash flow model.

Contractholder deposit funds, excluding universal life products. Generally, the Company’s contractholder deposit funds do not have stated maturities. Approximately 45% 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, 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 9 — 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 run-off settlement annuity business:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In millions)	2009			2008			2009			2008
Fixed maturities	$	5		$	(15	)	$	(11	)	$	(41	)
Equity securities		11			1			(6	)		1
Commercial mortgage loans		1			(2	)		—			(2	)
Other investments, including derivatives		(35	)		(3	)		(37	)		37

Realized investment losses, before income taxes		(18	)		(19	)		(54	)		(5	)
Less income tax benefits		(9	)		(7	)		(21	)		(2	)

Net realized investment losses	$	(9	)	$	(12	)	$	(33	)	$	(3	)

Included in pre-tax realized investment losses above were other than temporary impairments on debt securities, asset write-downs and changes in valuation reserves as follows:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
(in millions)	2009			2008		2009		2008
Credit related (1)	$	43		$	—	$	54	$	4
Other (2)		(1	)		11		9		24

Total	$	42		$	11	$	63	$	28


(1)		Credit-related losses include other-than-temporary declines in value of fixed maturities, equity securities and real estate entities. The amount related to credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income was not significant.

(2)		Prior to adoption of FSP No. 115-2 on April 1, 2009, other primarily represented the impact of rising market yields on investments where the Company could not demonstrate the intent and ability to hold until recovery.

Fixed Maturities and Equity Securities

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


	As of June 30,		As of December 31,
(In millions)	2009		2008
Included in fixed maturities:
Trading securities (amortized cost: $9; $13)	$	9	$	13
Hybrid securities (amortized cost: $20; $10)		21		10

Total	$	30	$	23


Included in equity securities:
Hybrid securities (amortized cost: $109; $123)	$	69	$	84

Fixed maturities and equity securities included $218 million at June 30, 2009, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities and equity securities were primarily corporate 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 June 30, 2009:


	Amortized		Fair
(in millions)	Cost		Value
Due in one year or less	$	667	$	671
Due after one year through five years		3,621		3,736
Due after five years through ten years		4,740		4,793
Due after ten years		2,481		2,657
Mortgage and other asset-backed securities		628		608

Total	$	12,137	$	12,465

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.

Mortgage-backed assets consist principally of commercial mortgage-backed securities and collateralized mortgage obligations of which $38 million were residential mortgages and home equity lines of credit, all of which were originated utilizing standard underwriting practices and are not considered sub-prime loans.

Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities) by type of issuer is shown below.


	June 30, 2009
			Unrealized		Unrealized
	Amortized		Appre-		Depre-			Fair
(in millions)	Cost		ciation		ciation			Value
Federal government and agency	$	392	$	201	$	(1	)	$	592
State and local government		2,351		145		(18	)		2,478
Foreign government		945		37		(9	)		973
Corporate		7,821		302		(309	)		7,814
Federal agency mortgage-backed		34		1		—			35
Other mortgage-backed		138		3		(19	)		122
Other asset-backed		456		22		(27	)		451

Total	$	12,137	$	711	$	(383	)	$	12,465

The above table includes investments with a fair value of $2.1 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of $296 million and gross unrealized depreciation of $122 million at June 30, 2009. 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.

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In millions)	2009		2008			2009			2008
Proceeds from sales	$	291	$	381		$	410		$	696
Gross gains on sales	$	12	$	3		$	15		$	5
Gross losses on sales	$	—	$	(11	)	$	(3	)	$	(23	)

Review of declines in fair value. Management reviews fixed maturities and equity securities 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

•

prior to April 1, 2009, the Company’s ability and intent to hold until recovery; beginning April 1, 2009, the Company’s intent to sell or the likelihood of a requirement to sell fixed maturities prior to their recovery.

Excluding trading and hybrid securities, as of June 30, 2009, 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:


	Fair		Amortized		Unrealized			Number
(In millions)	Value		Cost		Depreciation			of Issues
Fixed maturities:
One year or less:
Investment grade	$	1,889	$	1,996	$	(107	)		359
Below investment grade	$	237	$	255	$	(18	)		107
More than one year:
Investment grade	$	1,886	$	2,118	$	(232	)		324
Below investment grade	$	153	$	179	$	(26	)		33

The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Approximately $119 million of the unrealized depreciation is due to securities with a decline in value of greater than 20%. Approximately 40% of these securities had been in that position for less than six months and approximately 90% less than twelve months. The remaining $264 million of the unrealized depreciation is due to securities with declines in value of less than 20%. There were no equity securities with a fair value significantly lower than cost as of June 30, 2009.

Note 10 — Derivative Financial Instruments

The Company’s investment strategy is to manage the characteristics and risks of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contractholder liabilities (such as paying claims, investment returns and withdrawals). As part of this investment strategy, the Company typically uses derivatives to minimize interest rate, foreign currency and equity price risks of chosen investment assets to conform to the characteristics and risks of the related insurance and contractholder liabilities. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize credit risk. In addition, the Company has written or sold contracts to guarantee minimum income benefits and to enhance investment returns. See Note 7 for a discussion of derivatives associated with GMDB contracts and Note 8 for a discussion of derivatives arising from GMIB contracts.

The Company uses hedge accounting when derivatives are designated, qualify and are highly effective as hedges. Effectiveness is formally assessed and documented at inception and each period throughout the life of a hedge using various qualitative and 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 other realized investment gains and losses).

•

Features of certain investments and obligations, called embedded derivatives, are accounted for as derivatives. As permitted under GAAP, derivative accounting has not been applied to these features of such investments or obligations existing before January 1, 1999.

Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that contain bilateral provisions requiring the parties to such instruments to post collateral depending on net liability thresholds and the party’s financial strength or credit rating. The collateral posting requirements vary by counterparty. The aggregate fair value of derivative instruments with such credit-risk-related contingent features where a subsidiary of the Company was in a net liability position as of June 30, 2009 was $19 million for which the Company was not required to post collateral. If the contingent features underlying the agreements were triggered as of June 30, 2009, the Company would be required to post collateral of $19 million with its counterparties. Such subsidiaries are parties to certain other derivative instruments that contain termination provisions for which the counterparties could demand immediate payment of the total net liability position if the financial strength rating of the subsidiary were to decline below specified levels. As of June 30, 2009, there was no net liability position under such derivative instruments.

The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments including the Company’s purpose for entering into specific derivative transactions, and their locations in and effect on the financial statements as of and for the three and six month periods ended June 30, 2009. Derivatives in the Company’s separate accounts are not included because associated gains and losses generally accrue directly to policyholders.


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

Derivatives Designated as Accounting Hedges — Cash Flow Hedges

Interest rate swaps — $145 million of par value of related investments Foreign currency swaps — $179 million of U.S. dollar equivalent par value of related investments Interest rate and foreign currency swaps — $54 million of U.S. dollar equivalent par value of related investments	Interest rate and foreign currency	To hedge the interest or foreign currency cash flows of fixed maturities and commercial mortgage loans to match associated liabilities. Currency swaps are primarily Canadian dollars, euros, Australian dollars, and British pounds for periods of up to 12 years.	The Company periodically exchanges cash flows between variable and fixed interest rates or between two currencies for both principal and interest. Net interest cash flows are reported in net investment income and included in operating activities.	Using cash flow hedge accounting, fair values are reported in other long-term investments or other liabilities and accumulated other comprehensive income.


	Fair Value Effect on the Financial Statements (in millions)

					Gain (Loss) Recognized in Other
	As of June 30, 2009				Comprehensive Income
			Accounts Payable, Accrued		Three Months Ended			Six Months Ended
Instrument	Other Long-Term Investments		Expenses and Other Liabilities		June 30, 2009			June 30, 2009
Interest rate swaps	$	9	$	—	$	(4	)	$	(5	)
Foreign currency swaps		5		15		(17	)		(15	)
Interest rate and foreign currency swaps		3		4		(9	)		(7	)

Total	$	17	$	19	$	(30	)	$	(27	)


Purchased options — $311 million of cash surrender value of related life insurance policies	Interest rate	To hedge the possibility of early policyholder cash surrender when the amortized cost of underlying invested assets is greater than their fair values.	The Company pays a fee and may receive or pay cash, based on the difference between the amortized cost and fair values of underlying invested assets at the time of policyholder surrender. These cash flows will be reported in financing activities.	Using cash flow hedge accounting, fair values are reported in other assets or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to benefits expense over the life of the underlying invested assets.

	Fair Value Effect on the Financial Statements


Fair values reported in other assets and other comprehensive income were less than $1 million.
Treasury lock	Interest rate	To hedge the variability of and fix at inception date, the benchmark Treasury rate component of future interest payments on debt to be issued.	The Company paid the fair value of the contract at the expiration. Cash flows are reported in operating activities.	Using cash flow hedge accounting, fair values are reported in short-term investments or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to interest expense over the life of the debt issued.
	Fair Value Effect on the Financial Statements

	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 life of the debt. In the second quarter of 2009, the Company issued debt and began amortizing this loss to interest expense. Reclassifications from accumulated other comprehensive income to interest expense for issued debt were less than $1 million for the three and six month periods ended June 30, 2009.

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


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

Derivatives Not Designated As Accounting Hedges
Futures — $1,285 million of U.S. dollar equivalent market price of outstanding contracts	Equity and foreign currency	To reduce domestic and international equity market exposures for certain reinsurance contracts that guarantee death benefits resulting from changes in variable annuity account values based on underlying mutual funds. Currency futures are primarily euros, Japanese yen and British pounds.	The Company receives (pays) cash daily in the amount of the change in fair value of the futures contracts. Cash flows are included in operating activities.	Fair value changes are reported in other revenues. Amounts not yet settled from the previous day’s fair value change (daily variation margin) are reported in premiums, accounts and notes receivable, net or accounts payable, accrued expenses and other liabilities.
	Fair Value Effect on the Financial Statements (in millions)


	Other Revenues
	Three Months Ended			Six Months Ended
	June 30, 2009			June 30, 2009

Futures	$	(188	)	$	(71	)



Interest rate swaps — $76 million of par value of related investments	Interest rate	To hedge the interest cash flows of fixed maturities to match associated liabilities.	The Company periodically exchanges cash flows between variable and fixed interest rates for both principal and interest. Net interest cash flows are reported in other realized investment gains (losses) and included in operating activities.	Fair values are reported in other long-term investments or other liabilities, with changes in fair value reported in other realized investment gains and losses.

	Fair Value Effect on the Financial Statements (in millions)


			Realized Investment Gains (Losses)
	As of June 30, 2009		Three Months Ended		Six Months Ended
	Other Long-Term Investments		June 30, 2009		June 30, 2009
Interest rate swaps	$	4	$	1	$	1



Written options (GMIB liability) — $1,508 million of maximum potential undiscounted future payments as defined in Note 17 Purchased options (GMIB asset) — $829 million of maximum potential undiscounted future receipts as defined in Note 17	Equity and interest rate	The Company has written certain reinsurance contracts to guarantee minimum income benefits resulting from the level of variable annuity account values compared with a contractually guaranteed amount. The actual payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments. The Company purchased reinsurance contracts to hedge a portion of the market risks assumed. These contracts are accounted for as written and purchased options.	The Company periodically receives (pays) fees based on either contractholders’ account values or deposits increased at a contractual rate. The Company will also pay (receive) cash depending on changes in account values and interest rates when account holders first elect to receive minimum income payments. These cash flows are reported in operating activities.	Fair values are reported in other liabilities (GMIB liability) and other assets (GMIB asset). Changes in fair value are reported in guaranteed minimum income benefits (income) expense.

	Fair Value Effect on the Financial Statements (in millions)


					Guaranteed Minimum Income Benefits
	As of June 30, 2009				(Income) Expense
			Accounts Payable, Accrued		Three Months Ended			Six Months Ended
Instrument	Other Assets		Expenses and Other Liabilities		June 30, 2009			June 30, 2009
Written options (GMIB liability)	$	—	$	1,224	$	(362	)	$	(432	)
Purchased options (GMIB asset)		685		—		198			236

Total	$	685	$	1,224	$	(164	)	$	(196	)

Note 11 — Reinsurance

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

Retirement benefits business. The Company had a reinsurance recoverable of $1.8 billion as of June 30, 2009, and $1.9 billion as of December 31, 2008 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable, which is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed maturities and mortgage loans equal to or greater than 100% of the reinsured liabilities. These fixed maturities and mortgage loans are held in a trust established for the benefit of the Company. As of June 30, 2009, the trust was adequately funded and S&P had assigned this reinsurer a rating of AA-.

Individual life and annuity reinsurance. The Company had reinsurance recoverables totaling $4.5 billion as of June 30, 2009 and $4.6 billion as of December 31, 2008 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. Effective December 31, 2007, a substantial portion of the reinsurance recoverables are secured by investments held in a trust established for the benefit of the Company. At June 30, 2009, the trust assets secured approximately 90% of the reinsurance recoverables and S&P had assigned both of these reinsurers a rating of AA-.

Other Ceded and Assumed Reinsurance

Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Health Care, Disability and Life, and International segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $309 million as of June 30, 2009 are expected to be collected from more than 90 reinsurers which have been assigned the following financial strength ratings from S&P:


						Percent of Reinsurance
	Reinsurance		Percent			Recoverable Protected
Ongoing operations (In millions)	Recoverable		of Total			by Collateral

AA- (Single reinsurer)	$	45		15	%		0	%
AA- or higher (All other reinsurers)		33		11	%		0	%
A (Single reinsurer)		31		10	%		0	%
A+ to A- (All other reinsurers)		106		34	%		4	%
Unrated (Single reinsurer)		34		11	%		96	%
Below A- or unrated (All other reinsurers)		60		19	%		29	%

Total	$	309		100	%		18	%

The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of June 30, 2009, the Company’s recoverables related to these segments were net of a reserve of $11 million.


	Page
PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Income		1

Consolidated Balance Sheets		2

Consolidated Statements of Comprehensive Income and Changes in Total Equity		3

Consolidated Statements of Cash Flows		5

Notes to the Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		42

Item 3. Quantitative and Qualitative Disclosures About Market Risk		78

Item 4. Controls and Procedures		79

PART II OTHER INFORMATION

Item 1. Legal Proceedings		80

Item 1. A. Risk Factors		81

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		82

Item 4. Submission of Matters to a Vote of Security Holders		83

Item 6. Exhibits		84

SIGNATURE		85

INDEX TO EXHIBITS		E-1

Exhibit 10.1
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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