Table of Contents

UNITED STATES
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 September 30, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission file number 1-08323
CIGNA Corporation
(Exact name of registrant as specified in its charter)
     
Delaware   06-1059331
     
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
Two Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania 19192
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (215) 761-1000
Registrant’s facsimile number, including area code (215) 761-3596
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 October 15, 2010, 270,920,033 shares of the issuer’s common stock were outstanding.

 


 

CIGNA CORPORATION
INDEX
         
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    87  
 
       
    E-1  
 
       
 Exhibit 12
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
As used herein, “CIGNA” or the “Company” refers to one or more of CIGNA Corporation and its consolidated subsidiaries.

 


Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CIGNA Corporation
Consolidated Statements of Income
                                 
    Unaudited     Unaudited  
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions, except per share amounts)   2010     2009     2010     2009  
Revenues
                               
Premiums and fees
  $ 4,621     $ 3,985     $ 13,668     $ 12,049  
Net investment income
    280       263       829       752  
Mail order pharmacy revenues
    354       316       1,053       944  
Other revenues
    (17 )     (61 )     230       73  
Realized investment gains (losses):
                               
Other-than-temporary impairments on debt securities, net
          (16 )     (1 )     (42 )
Other realized investment gains
    28       30       45       2  
 
                       
Total realized investment gains (losses)
    28       14       44       (40 )
 
                       
Total revenues
    5,266       4,517       15,824       13,778  
 
                       
Benefits and Expenses
                               
Health Care medical claims expense
    2,148       1,698       6,435       5,226  
Other benefit expenses
    892       754       2,748       2,551  
Mail order pharmacy cost of goods sold
    291       255       866       762  
GMIB fair value (gain) loss
    22       (19 )     182       (215 )
Other operating expenses
    1,449       1,342       4,268       4,064  
 
                       
Total benefits and expenses
    4,802       4,030       14,499       12,388  
 
                       
Income from Continuing Operations before Income Taxes
    464       487       1,325       1,390  
 
                       
Income taxes:
                               
Current
    101       68       256       138  
Deferred
    55       89       182       279  
 
                       
Total taxes
    156       157       438       417  
 
                       
Income from Continuing Operations
    308       330       887       973  
Income from Discontinued Operations, Net of Taxes
                      1  
 
                       
Net Income
    308       330       887       974  
Less: Net Income Attributable to Noncontrolling Interest
    1       1       3       2  
 
                       
Shareholders’ Net Income
  $ 307     $ 329     $ 884     $ 972  
 
                       
Basic Earnings Per Share:
                               
Shareholders’ income from continuing operations
  $ 1.13     $ 1.20     $ 3.23     $ 3.55  
Shareholders’ income from discontinued operations
                       
 
                       
Shareholders’ net income
  $ 1.13     $ 1.20     $ 3.23     $ 3.55  
 
                       
Diluted Earnings Per Share:
                               
Shareholders’ income from continuing operations
  $ 1.13     $ 1.19     $ 3.20     $ 3.54  
Shareholders’ income from discontinued operations
                       
 
                       
Shareholders’ net income
  $ 1.13     $ 1.19     $ 3.20     $ 3.54  
 
                       
Dividends Declared Per Share
  $     $     $ 0.040     $ 0.040  
 
                       
Amounts Attributable to CIGNA:
                               
Shareholders’ income from continuing operations
  $ 307     $ 329     $ 884     $ 971  
Shareholders’ income from discontinued operations
                      1  
 
                       
Shareholders’ Net Income
  $ 307     $ 329     $ 884     $ 972  
 
                       
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA Corporation
Consolidated Balance Sheets
                                 
            Unaudited                
            As of             As of  
            September 30,             December 31,  
(In millions, except per share amounts)           2010             2009  
Assets
                               
Investments:
                               
Fixed maturities, at fair value (amortized cost, $13,488; $12,580)
          $ 15,354             $ 13,443  
Equity securities, at fair value (cost, $139; $137)
            124               113  
Commercial mortgage loans
            3,486               3,522  
Policy loans
            1,577               1,549  
Real estate
            180               124  
Other long-term investments
            670               595  
Short-term investments
            132               493  
 
                           
Total investments
            21,523               19,839  
Cash and cash equivalents
            1,404               924  
Accrued investment income
            266               238  
Premiums, accounts and notes receivable, net
            1,438               1,361  
Reinsurance recoverables
            6,406               6,597  
Deferred policy acquisition costs
            1,069               943  
Property and equipment
            894               862  
Deferred income taxes, net
            602               1,029  
Goodwill
            3,119               2,876  
Other assets, including other intangibles
            1,460               1,056  
Separate account assets
            7,798               7,288  
 
                           
Total assets
          $ 45,979             $ 43,013  
 
                           
Liabilities
                               
Contractholder deposit funds
          $ 8,532             $ 8,484  
Future policy benefits
            8,460               8,136  
Unpaid claims and claim expenses
            3,985               3,968  
Health Care medical claims payable
            1,300               921  
Unearned premiums and fees
            415               427  
 
                           
Total insurance and contractholder liabilities
            22,692               21,936  
Accounts payable, accrued expenses and other liabilities
            6,144               5,797  
Short-term debt
            326               104  
Long-term debt
            2,510               2,436  
Nonrecourse obligations
            23               23  
Separate account liabilities
            7,798               7,288  
 
                           
Total liabilities
            39,493               37,584  
 
                           
Contingencies — Note 18
                               
Shareholders’ Equity
                               
Common stock (par value per share, $0.25; shares issued, 351)
            88               88  
Additional paid-in capital
            2,530               2,514  
Net unrealized appreciation, fixed maturities
  $ 767             $ 378          
Net unrealized appreciation, equity securities
    3               4          
Net unrealized depreciation, derivatives
    (21 )             (30 )        
Net translation of foreign currencies
    15               (12 )        
Postretirement benefits liability adjustment
    (1,049 )             (958 )        
 
                           
Accumulated other comprehensive loss
            (285 )             (618 )
Retained earnings
            9,421               8,625  
Less treasury stock, at cost
            (5,285 )             (5,192 )
 
                           
Total shareholders’ equity
            6,469               5,417  
Noncontrolling interest
            17               12  
 
                           
Total equity
            6,486               5,429  
 
                           
Total liabilities and equity
          $ 45,979             $ 43,013  
 
                           
Shareholders’ Equity Per Share
          $ 23.88             $ 19.75  
 
                           
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity

(In millions, except per share amounts)
                                 
    Unaudited  
Three Months Ended September 30,   2010     2009  
    Compre-             Compre-        
  hensive     Total     hensive     Total  
    Income     Equity     Income     Equity  
Common Stock, July 1 and September 30,
          $ 88             $ 88  
 
                           
Additional Paid-In Capital, July 1,
            2,526               2,506  
Effects of stock issuance for employee benefit plans
            4               4  
 
                           
Additional Paid-In Capital, September 30,
            2,530               2,510  
 
                           
Accumulated Other Comprehensive Loss, July 1,
            (539 )             (837 )
Net unrealized appreciation, fixed maturities
  $ 198       198     $ 302       302  
Net unrealized depreciation, equity securities
                (3 )     (3 )
 
                           
Net unrealized appreciation on securities
    198               299          
Net unrealized depreciation, derivatives
    (11 )     (11 )     (6 )     (6 )
Net translation of foreign currencies
    66       66       29       29  
Postretirement benefits liability adjustment
    1       1       (1 )     (1 )
 
                           
Other comprehensive income
    254               321          
 
                       
Accumulated Other Comprehensive Loss, September 30,
            (285 )             (516 )
 
                           
Retained Earnings, July 1,
            9,129               7,986  
Shareholders’ net income
    307       307       329       329  
Effects of stock issuance for employee benefit plans
            (15 )             (12 )
 
                           
Retained Earnings, September 30,
            9,421               8,303  
 
                           
Treasury Stock, July 1,
            (5,228 )             (5,254 )
Repurchase of common stock
            (78 )              
Other, primarily issuance of treasury stock for employee benefit plans
            21               26  
 
                           
Treasury Stock, September 30,
            (5,285 )             (5,228 )
 
                       
Shareholders’ Comprehensive Income and Shareholders’ Equity
    561       6,469       650       5,157  
 
                       
Noncontrolling interest, July 1,
            15               9  
Net income attributable to noncontrolling interest
    1       1       1       1  
Accumulated other comprehensive income attributable to noncontrolling interest
    1       1       1       1  
 
                       
Noncontrolling interest, September 30,
    2       17       2       11  
 
                       
Total Comprehensive Income and Total Equity
  $ 563     $ 6,486     $ 652     $ 5,168  
 
                       
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity


(In millions, except per share amounts)
                                 
    Unaudited  
Nine Months Ended September 30,   2010     2009  
    Compre-             Compre-        
    hensive     Total     hensive     Total  
    Income     Equity     Income     Equity  
Common Stock, January 1 and September 30,
          $ 88             $ 88  
 
                           
Additional Paid-In Capital, January 1,
            2,514               2,502  
Effects of stock issuance for employee benefit plans
            16               8  
 
                           
Additional Paid-In Capital, September 30,
            2,530               2,510  
 
                           
Accumulated Other Comprehensive Loss, January 1,
            (618 )             (1,074 )
Implementation effect of updated guidance on other-than-temporary impairments
                          (18 )
Net unrealized appreciation, fixed maturities
  $ 389       389     $ 567       567  
Net unrealized depreciation, equity securities
    (1 )     (1 )     (3 )     (3 )
 
                           
Net unrealized appreciation on securities
    388               564          
Net unrealized appreciation (depreciation), derivatives
    9       9       (14 )     (14 )
Net translation of foreign currencies
    27       27       43       43  
Postretirement benefits liability adjustment
    (91 )     (91 )     (17 )     (17 )
 
                           
Other comprehensive income
    333               576          
 
                       
Accumulated Other Comprehensive Loss, September 30,
            (285 )             (516 )
 
                           
Retained Earnings, January 1,
            8,625               7,374  
Shareholders’ net income
    884       884       972       972  
Effects of stock issuance for employee benefit plans
            (77 )             (50 )
Implementation effect of updated guidance on other-than-temporary impairments
                          18  
Common dividends declared (per share: $0.04; $0.04)
            (11 )             (11 )
 
                           
Retained Earnings, September 30,
            9,421               8,303  
 
                           
Treasury Stock, January 1,
            (5,192 )             (5,298 )
Repurchase of common stock
            (201 )              
Other, primarily issuance of treasury stock for employee benefit plans
            108               70  
 
                           
Treasury Stock, September 30,
            (5,285 )             (5,228 )
 
                       
Shareholders’ Comprehensive Income and Shareholders’ Equity
    1,217       6,469       1,548       5,157  
 
                       
Noncontrolling interest, January 1,
            12               6  
Net income attributable to noncontrolling interest
    3       3       2       2  
Accumulated other comprehensive income attributable to noncontrolling interest
    2       2       3       3  
 
                       
Noncontrolling interest, September 30,
    5       17       5       11  
 
                       
Total Comprehensive Income and Total Equity
  $ 1,222     $ 6,486     $ 1,553     $ 5,168  
 
                       
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA Corporation
Consolidated Statements of Cash Flows
                 
    Unaudited  
    Nine Months Ended September 30,  
(In millions)   2010     2009  
Cash Flows from Operating Activities
               
Net income
  $ 887     $ 974  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    204       207  
Realized investment (gains) losses
    (44 )     40  
Deferred income taxes
    182       279  
Gains on sale of businesses (excluding discontinued operations)
    (20 )     (24 )
Income from discontinued operations, net of taxes
          (1 )
Net changes in assets and liabilities, net of non-operating effects:
               
Premiums, accounts and notes receivable
    (55 )     (72 )
Reinsurance recoverables
    12       (1 )
Deferred policy acquisition costs
    (118 )     (60 )
Other assets
    (191 )     350  
Insurance liabilities
    409       (271 )
Accounts payable, accrued expenses and other liabilities
    16       (1,126 )
Current income taxes
    38       (29 )
Other, net
    (37 )     3  
 
           
Net cash provided by operating activities
    1,283       269  
 
           
Cash Flows from Investing Activities
               
Proceeds from investments sold:
               
Fixed maturities
    685       655  
Equity securities
    3       21  
Commercial mortgage loans
    45       23  
Other (primarily short-term and other long-term investments)
    800       485  
Investment maturities and repayments:
               
Fixed maturities
    575       791  
Commercial mortgage loans
    60       44  
Investments purchased:
               
Fixed maturities
    (2,047 )     (2,257 )
Equity securities
    (5 )     (8 )
Commercial mortgage loans
    (160 )     (121 )
Other (primarily short-term and other long-term investments)
    (473 )     (489 )
Property and equipment purchases
    (209 )     (218 )
Acquisitions, net of cash acquired
    (332 )      
 
           
Net cash used in investing activities
    (1,058 )     (1,074 )
 
           
Cash Flows from Financing Activities
               
Deposits and interest credited to contractholder deposit funds
    1,019       1,011  
Withdrawals and benefit payments from contractholder deposit funds
    (920 )     (946 )
Change in cash overdraft position
    38       82  
Net change in short-term debt
          (199 )
Issuance of long-term debt
    296       346  
Repayment of long-term debt
    (2 )     (2 )
Repurchase of common stock
    (201 )      
Issuance of common stock
    31       9  
Common dividends paid
    (11 )     (11 )
 
           
Net cash provided by financing activities
    250       290  
 
           
Effect of foreign currency rate changes on cash and cash equivalents
    5       9  
 
           
Net increase (decrease) in cash and cash equivalents
    480       (506 )
Cash and cash equivalents, January 1,
    924       1,342  
 
           
Cash and cash equivalents, September 30,
  $ 1,404     $ 836  
 
           
Supplemental Disclosure of Cash Information:
               
Income taxes paid, net of refunds
  $ 215     $ 171  
Interest paid
  $ 116     $ 107  
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 — Basis of Presentation
The Consolidated Financial Statements include the accounts of CIGNA Corporation and its significant subsidiaries (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, 2009.
The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the health care and related benefits business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
Discontinued operations for the nine months ended September 30, 2009 primarily represented a tax benefit associated with a past divestiture related to the completion of the 2005 and 2006 IRS examinations.
Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.
Note 2 — Recent Accounting Pronouncements
Deferred acquisition costs. In October 2010, the Financial Accounting Standards Board (“FASB”) amended guidance (ASC 944) for the accounting of costs related to the acquisition or renewal of insurance contracts to require costs such as certain sales compensation or telemarketing costs that are related to unsuccessful efforts and any indirect costs to be expensed as incurred. This new guidance must be implemented on January 1, 2012 or may be implemented earlier and any changes in the Company’s consolidated financial statements may be recognized prospectively for acquisition costs incurred beginning in 2012 or through retrospective adjustment of comparative prior periods. The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its International segment and, to a lesser extent, the Health Care and corporate-owned life insurance businesses. The Company is presently evaluating these new requirements to determine the timing, method and potential effects of their implementation.
Variable interest entities. Effective January 1, 2010, the Company adopted the FASB’s amended guidance that requires ongoing qualitative analysis to determine whether a variable interest entity must be consolidated based on the entity’s purpose and design, the Company’s ability to direct the entity’s activities that most significantly impact its economic performance, and the Company’s right or obligation to participate in that performance (ASC 810). A variable interest entity is insufficiently capitalized or is not controlled by its equity owners through voting or similar rights. These amendments must be applied to qualifying special-purpose entities and troubled debt restructures formerly excluded from such analysis. On adoption and through September 30, 2010, the Company was not required to consolidate any variable interest entities and there were no effects to its results of operations or financial condition. Although consolidation was not required, disclosures about the Company’s involvement with variable interest entities have been provided in Note 11.
Transfers of financial assets. Effective January 1, 2010, the Company adopted the FASB’s guidance for accounting for transfers of financial assets (ASC 860) that 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. On adoption, there were no effects to the Company’s results of operations or financial condition.
Fair value measurements. The Company adopted the FASB’s updated guidance on fair value measurements (ASU 2010-06) in the first quarter of 2010, which requires separate disclosures of significant transfers between levels in the fair value hierarchy. See Note 8 for additional information.

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Other-than-temporary impairments. On April 1, 2009, the Company adopted the FASB’s updated guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost (ASC 320). A reclassification adjustment from retained earnings to accumulated other comprehensive income was required for previously impaired fixed maturities that had a non-credit loss as of the date of adoption, net of related tax effects.
The cumulative effect of adoption increased the Company’s retained earnings in the second quarter of 2009 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.
Note 3 — Acquisitions
The Company may from time to time acquire or dispose of assets, subsidiaries or lines of business. Significant transactions are described below.
Vanbreda International. On August 31, 2010, the Company acquired 100% of the voting stock of Vanbreda International NV (Vanbreda International), based in Antwerp, Belgium for a cash purchase price of approximately $410 million. Vanbreda International specializes in providing worldwide medical insurance and employee benefits to intergovernmental and non-governmental organizations, including international humanitarian operations, as well as corporate clients. Vanbreda International’s strong presence in Europe complements the Company’s position in providing expatriate benefits primarily to corporate clients in North America, as well as Europe and Asia.
In accordance with GAAP, the total estimated purchase price has been allocated on a provisional basis to the tangible and intangible net assets acquired based on management’s estimates of their fair values and may change when appraisals are finalized and as additional information becomes available over the next several months. The condensed balance sheet at the acquisition date was estimated as follows:
         
(In millions)        
Tangible net assets acquired
  $ 41  
Intangible assets (primarily customer relationships)
    220  
Goodwill
    223  
Deferred tax liability
    (74 )
 
     
Net assets acquired
  $ 410  
 
     
Goodwill is allocated to the International segment. For foreign tax purposes, the acquisition of Vanbreda International is being treated as a stock purchase. Accordingly, goodwill and other intangible assets will not be amortized for foreign tax purposes but may reduce the taxability of earnings repatriated to the U.S. by Vanbreda International. Since the difference between the Belgium and U.S. corporate tax rates is only 1%, U.S. income taxes on repatriated earnings are expected to be immaterial.
The results of Vanbreda International are included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effect on total revenues and net income assuming the acquisition had occurred as of January 1, 2009 was not material to the Company’s total revenues and shareholders’ net income for the three months and nine months ended September 30, 2010 or 2009.

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Note 4 — Earnings Per Share (“EPS”)
Basic and diluted earnings per share were computed as follows:
                         
            Effect of        
(Dollars in millions, except per share amounts)   Basic     Dilution     Diluted  
Three Months Ended September 30,
                       
2010
                       
Shareholders’ income from continuing operations
  $ 307             $ 307  
 
                   
Shares (in thousands):
                       
Weighted average
    270,497               270,497  
Common stock equivalents
            2,343       2,343  
 
                 
Total shares
    270,497       2,343       272,840  
 
                 
EPS
  $ 1.13     $     $ 1.13  
 
                 
2009
                       
Shareholders’ income from continuing operations
  $ 329             $ 329  
 
                   
Shares (in thousands):
                       
Weighted average
    274,398               274,398  
Common stock equivalents
            1,732       1,732  
 
                 
Total shares
    274,398       1,732       276,130  
 
                 
EPS
  $ 1.20     $ (0.01 )   $ 1.19  
 
                 
                         
            Effect of        
(Dollars in millions, except per share amounts)   Basic     Dilution     Diluted  
Nine Months Ended September 30,
                       
2010
                       
Shareholders’ income from continuing operations
  $ 884             $ 884  
 
                   
Shares (in thousands):
                       
Weighted average
    273,748               273,748  
Common stock equivalents
            2,395       2,395  
 
                 
Total shares
    273,748       2,395       276,143  
 
                 
EPS
  $ 3.23     $ (0.03 )   $ 3.20  
 
                 
2009
                       
Shareholders’ income from continuing operations
  $ 971             $ 971  
 
                   
Shares (in thousands):
                       
Weighted average
    273,698               273,698  
Common stock equivalents
            993       993  
 
                 
Total shares
    273,698       993       274,691  
 
                 
EPS
  $ 3.55     $ (0.01 )   $ 3.54  
 
                 
The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect would have increased diluted earnings per share (antidilutive) as their exercise price was greater than the average share price of the Company’s common stock for the period.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Antidilutive options
    6.7       8.7       6.2       10.0  

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The Company held 80,096,166 shares of common stock in Treasury as of September 30, 2010, and 77,475,700 shares as of September 30, 2009.
Note 5 — Health Care Medical Claims Payable
Medical claims payable for the Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not yet reported, those which have been reported but not yet paid (reported claims in process) and other medical expense payable, which primarily comprises accruals for provider incentives and other amounts payable to providers. Incurred but not yet reported comprises the majority of the reserve balance as follows:
                 
    September 30,     December 31,  
(In millions)   2010     2009  
Incurred but not yet reported
  $ 1,127     $ 790  
Reported claims in process
    158       114  
Other medical expense payable
    15       17  
 
           
Medical claims payable
  $ 1,300     $ 921  
 
           
Activity in medical claims payable was as follows:
                 
    For the period ended  
    September 30,     December 31,  
(In millions)   2010     2009  
Balance at January 1,
  $ 921     $ 924  
Less: Reinsurance and other amounts recoverable
    206       211  
 
           
Balance at January 1, net
    715       713  
 
               
Incurred claims related to:
               
Current year
    6,527       6,970  
Prior years
    (92 )     (43 )
 
           
Total incurred
    6,435       6,927  
Paid claims related to:
               
Current year
    5,514       6,278  
Prior years
    584       647  
 
           
Total paid
    6,098       6,925  
Ending Balance, net
    1,052       715  
Add: Reinsurance and other amounts recoverable
    248       206  
 
           
Ending Balance
  $ 1,300     $ 921  
 
           

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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 12 for additional information on reinsurance. For the nine months ended September 30, 2010, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $92 million, or 1.3% of the current year incurred claims as reported for the year ended December 31, 2009. Actual completion factors resulted in a reduction in medical claims payable of $49 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $43 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business.
For the year ended December 31, 2009, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $43 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction of the medical claims payable of $21 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $22 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.
The favorable impacts in 2010 and 2009 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.
The corresponding impact of prior year development on shareholders’ net income was not material for the nine months ended September 30, 2010 and 2009. 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 experience-rated accounts in deficit affect shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue directly to the policyholder with no impact on the Company’s shareholders’ net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.
Second, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice, which require that the liabilities be adequate under moderately adverse conditions. As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase determined appropriate to address moderately adverse conditions for the current year incurred claims, the Company does not consider that offset amount as having any impact on shareholders’ net income.
The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2009 Form 10-K.

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Note 6 — Cost Reduction
As part of its strategy, the Company has undertaken several initiatives to realign its organization and consolidate support functions in an effort to increase efficiency and responsiveness to customers and to reduce costs.
During 2008 and 2009, the Company conducted a comprehensive review to reduce the operating expenses of its ongoing businesses (“cost reduction program”). As a result, the Company recognized severance-related and real estate charges in other operating expenses as follows:
  during the fourth quarter of 2009, a charge of $20 million pre-tax ($13 million after-tax), for severance resulting from reductions of approximately 470 positions in its workforce;
  during the third quarter of 2009, a charge of $10 million pre-tax ($7 million after-tax), for severance resulting from reductions of approximately 230 positions in its workforce; and
  during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax), for severance resulting from reductions of approximately 480 positions in its workforce. There have been no charges in 2010.
Substantially all of these charges were recorded in the Health Care segment, and are expected to be paid in cash by the end of 2010.
Cost reduction activity, related to the 2009 charges listed above, for 2010 was as follows:
                         
(In millions)   Severance     Real estate     Total  
Balance, January 1, 2010
  $ 33     $ 8     $ 41  
Less:
                       
First quarter payments
    10       1       11  
Second quarter payments
    8       5       13  
Third quarter payments
    7       1       8  
 
                 
Balance, September 30, 2010
  $ 8     $ 1     $ 9  
 
                 
Note 7 — Guaranteed Minimum Death Benefit Contracts
The Company had future policy benefit reserves for guaranteed minimum death benefit (“GMDB”) contracts of $1.2 billion as of September 30, 2010 and $1.3 billion as of December 31, 2009. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, claim 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.
In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company tests for premium deficiency by reviewing its reserve each quarter using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.
During the third quarter of 2010, the Company performed its periodic review of assumptions resulting in a charge of $52 million pre-tax ($34 million after-tax) to strengthen GMDB reserves. At December 31, 2009, the Company considered the low level of current short-term interest rates in determining the mean investment performance assumption. As of September 30, 2010, current short-term interest rates had declined from the level anticipated at December 31, 2009, leading the Company to increase reserves. Interest rate risk is not covered by the GMDB equity hedge program discussed below. The Company also updated the lapse assumption for policies that have already taken or may take a significant partial withdrawal, which had a lesser reserve impact.

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In the first quarter of 2009, the Company reported a charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves. The reserve strengthening primarily reflected an increase in the provision for future partial surrenders due to market declines, adverse volatility-related impacts due to turbulent equity market conditions, and interest rate impacts.
The following provides updates to the Company’s long-term assumptions for GMDB since December 31, 2009:
  The annual election rates used to estimate the provision for partial surrenders that essentially lock in the death benefit for a particular policy were updated from 0%-22% at December 31, 2009 to 0%-21% at September 30, 2010. The range of rates reflects the variation in the net amount at risk for each policy and whether surrender charges apply.
  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 volatility assumption for equity fund types has been updated from 16%-30% at December 31, 2009 to 16%-26% at September 30, 2010.
  The claim mortality assumption has been updated from 70%-75% of the 1994 Group Annuity Mortality table at December 31, 2009 to 65%-89% at September 30, 2010, with 1% annual improvement beginning January 1, 2000 applying to both periods. The update reflects that for certain contracts, a spousal beneficiary is allowed to elect to continue a contract by becoming its new owner, thereby postponing the death claim rather than receiving the death benefit currently. For certain issuers of these contracts, the claim mortality assumption depends on age, gender, and net amount at risk for the policy. Overall assumed claim mortality rates have increased since December 31, 2009.
  The lapse rate assumption has been updated from 0%-21% at December 31, 2009 to 0%-24% at September 30, 2010, depending on contract type, policy duration and the ratio of the net amount at risk to account value. Although the upper end of the range has increased, there is also a higher proportion of policies experiencing lower lapse rates, so overall, assumed lapse rates have declined since December 31, 2009.
  The assumed mean investment performance for the underlying equity mutual funds considers the Company’s GMDB equity hedge program using futures contracts, and is based on the Company’s view of average short-term interest rates over future periods, but considers the current level of short-term interest rates. The current level of short-term rates remains below the level anticipated when the impact of the current level of short-term interest rates was last reviewed at December 31, 2009. As a result, in consideration of the current level of short-term rates, the liability was increased as of September 30, 2010.
Activity in future policy benefit reserves for the GMDB business was as follows:
                 
    For the period ended  
    September 30,     December 31,  
(In millions)   2010     2009  
Balance at January 1
  $ 1,285     $ 1,609  
Add: Unpaid Claims
    36       34  
Less: Reinsurance and other amounts recoverable
    53       83  
 
           
Balance at January 1, net
    1,268       1,560  
Add: Incurred benefits
    44       (122 )
Less: Paid benefits
    94       170  
 
           
Ending balance, net
    1,218       1,268  
Less: Unpaid Claims
    39       36  
Add: Reinsurance and other amounts recoverable
    56       53  
 
           
Ending balance
  $ 1,235     $ 1,285  
 
           
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 charge 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.
The aggregate value of the underlying mutual fund investments was $16.0 billion as of September 30, 2010 and $17.2 billion as of December 31, 2009. The death benefit coverage in force was $6.2 billion as of September 30, 2010 and $7.0 billion as of December 31, 2009. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 540,000 as of September 30, 2010 and 590,000 as of December 31, 2009).

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The Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines, and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity market and foreign currency risks associated with this business. The notional amount of futures contract positions held by the Company at September 30, 2010 was $1.1 billion. The Company recorded in other revenues pre-tax losses of $119 million for the three months and $72 million for the nine months ended September 30, 2010, and pre-tax losses of $161 million for the three months and $232 million for the nine months ended September 30, 2009.
The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits (“GMIB”). All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 8 for further information.
Note 8 — Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, such as when impaired.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
Fair values are based on quoted market prices when available. When market prices are not available, fair value is generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality. In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair value using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment by the Company which becomes significant with increasingly complex instruments or pricing models.
The Company’s financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The Company performs ongoing analyses of prices used to value the Company’s invested assets to determine that they represent appropriate estimates of fair value. This process involves quantitative and qualitative analysis including reviews of pricing methodologies, judgments of valuation inputs, the significance of any unobservable inputs, pricing statistics and trends. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. These procedures are overseen by the Company’s investment professionals.

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Financial Assets and Financial Liabilities Carried at Fair Value
The following tables provide information as of September 30, 2010 and December 31, 2009 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.
September 30, 2010
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
    Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Financial assets at fair value:
                               
Fixed maturities:
                               
Federal government and agency
  $ 136     $ 685     $ 4     $ 825  
State and local government
          2,604             2,604  
Foreign government
          1,143       19       1,162  
Corporate
          9,580       368       9,948  
Federal agency mortgage-backed
          17             17  
Other mortgage-backed
          85       5       90  
Other asset-backed
          152       556       708  
 
                       
Total fixed maturities (1)
    136       14,266       952       15,354  
Equity securities
    3       87       34       124  
 
                       
Subtotal
    139       14,353       986       15,478  
Short-term investments
          129       3       132  
GMIB assets (2)
                673       673  
Other derivative assets (3)
          21             21  
 
                       
Total financial assets at fair value, excluding separate accounts
  $ 139     $ 14,503     $ 1,662     $ 16,304  
 
                       
Financial liabilities at fair value:
                               
GMIB liabilities
  $     $     $ 1,246     $ 1,246  
Other derivative liabilities (3)
          26             26  
 
                       
Total financial liabilities at fair value
  $     $ 26     $ 1,246     $ 1,272  
 
                       
     
(1)   Fixed maturities includes $683 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $129 million of appreciation for securities classified in Level 3.
 
(2)   The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts.
 
(3)   Other derivative assets includes $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. Other derivative liabilities reflect foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 10 for additional information.

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December 31, 2009
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
    Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Financial assets at fair value:
                               
Fixed maturities:
                               
Federal government and agency
  $ 43     $ 527     $ 1     $ 571  
State and local government
          2,521             2,521  
Foreign government
          1,056       14       1,070  
Corporate
          8,241       344       8,585  
Federal agency mortgage-backed
          34             34  
Other mortgage-backed
          114       7       121  
Other asset-backed
          92       449       541  
 
                       
Total fixed maturities (1)
    43       12,585       815       13,443  
Equity securities
    2       81       30       113  
 
                       
Subtotal
    45       12,666       845       13,556  
Short-term investments
          493             493  
GMIB assets (2)
                482       482  
Other derivative assets (3)
          16             16  
 
                       
Total financial assets at fair value, excluding separate accounts
  $ 45     $ 13,175     $ 1,327     $ 14,547  
 
                       
Financial liabilities at fair value:
                               
GMIB liabilities
  $     $     $ 903     $ 903  
Other derivative liabilities (3)
          30             30  
 
                       
Total financial liabilities at fair value
  $     $ 30     $ 903     $ 933  
 
                       
     
(1)   Fixed maturities includes $274 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $38 million of appreciation for securities classified in Level 3.
 
(2)   The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts.
 
(3)   Other derivative assets include $12 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. Other derivative liabilities reflect foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 10 for additional information.
Level 1 Financial Assets
Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. Given the narrow definition of Level 1 and the Company’s investment asset strategy to maximize investment returns, a relatively small portion of the Company’s investment assets are classified in this category.
Level 2 Financial Assets and Financial Liabilities
Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.

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Fixed maturities and equity securities. Approximately 93% of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Because many fixed maturities and preferred stocks do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.
Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued, consistent with local market practice, using a single unadjusted market-observable input derived by averaging multiple broker-dealer quotes.
Short-term investments are carried at fair value, which approximates cost. On a regular basis the Company compares market prices for these securities to recorded amounts to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.
Other derivatives classified in Level 2 represent over-the-counter instruments such as interest rate and foreign currency swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties, and determined that no adjustment for credit risk was required as of September 30, 2010 or December 31, 2009. The nature and use of these other derivatives are described in Note 10.
Level 3 Financial Assets and Financial Liabilities
Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The Company classifies certain newly issued, privately placed, complex or illiquid securities, as well as assets and liabilities relating to GMIB, in Level 3.
Fixed maturities and equity securities. Approximately 6% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:
                 
    September 30,     December 31,  
(In millions)   2010     2009  
Other asset and mortgage-backed securities
  $ 561     $ 456  
Corporate bonds (1)
    320       288  
Subordinated loans and private equity investments
    108       101  
 
           
Total
  $ 989     $ 845  
 
           
     
(1)   As of September 30, 2010, corporate bonds include $3 million of short-term investments.
Fair values of mortgage and asset-backed securities and corporate bonds are determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. For mortgage and asset-backed securities, inputs and assumptions to pricing may also include collateral attributes and prepayment speeds. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research, as well as the issuer’s financial statements, in its evaluation. 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.

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Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and interest rates but are without significant life insurance risk and are settled in lump sum payments, the Company reports these liabilities and assets as derivatives at fair value. The Company estimates the fair value of the assets and liabilities for GMIB contracts using assumptions regarding capital markets (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments), future annuitant behavior (including mortality, lapse, and annuity election rates), and non-performance risk, as well as risk and profit charges. As certain assumptions (primarily related to future annuitant behavior) 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 with a complex internal model using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants’ accounts at the time of annuitization. Generally, market return, interest rate and volatility assumptions are based on market observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The significant assumptions used to value the GMIB assets and liabilities as of September 30, 2010 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 1.91% at September 30, 2010 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 55% 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 17% to 34% for equity funds, 4% to 12% for bond funds, and 1% to 2% for money market funds.
  The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.
  The annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts. This range has been updated from 2% to 17% at December 31, 2009 to 1% to 19% as of September 30, 2010, and depends on the time since contract issue and the relative value of the guarantee. Although the upper end of the range has increased, there is also a higher proportion of policies experiencing lower lapse rates, so overall, assumed lapse rates have declined since December 31, 2009.
  The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts and depends on the annuitant’s age, the relative value of the guarantee and whether a contractholder has had a previous opportunity to elect the benefit. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. Actual data is still emerging for the Company as well as the industry and the estimates are based on this limited data.

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  The nonperformance risk adjustment is incorporated by adding an additional spread to the discount rate in the calculation of both (1) the GMIB liability to reflect a hypothetical market participant’s view of the risk of the Company not fulfilling its GMIB obligations, and (2) the GMIB asset to reflect a hypothetical market participant’s view of the reinsurers’ credit risk, after considering collateral. The estimated market-implied spread is company-specific for each party involved to the extent that company-specific market data is available and is based on industry averages for similarly rated companies when company-specific data is not available. The spread is impacted by the credit default swap spreads of the specific parent companies, adjusted to reflect subsidiaries’ credit ratings relative to their parent company and any available collateral. The additional spread over LIBOR incorporated into the discount rate ranged from 15 to 115 basis points for the GMIB liability and from 20 to 85 basis points for the GMIB reinsurance asset for that portion of the interest rate curve most relevant to these policies.
  The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be required by a hypothetical market participant.
The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting currently observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that impact the net liability. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain situations, could be material to the Company’s financial condition.
GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles.

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Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three and nine months ended September 30, 2010 and 2009. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.
For the Three Months Ended September 30, 2010
                                 
    Fixed Maturities &                    
(In millions)   Equity Securities (2)     GMIB Assets     GMIB Liabilities     GMIB Net  
Balance at July 1, 2010
  $ 945     $ 658     $ (1,221 )   $ (563 )
 
                       
Gains (losses) included in shareholders’ net income:
                               
GMIB fair value gain/(loss)
          24       (46 )     (22 )
Other
    5                    
 
                       
Total gains (losses) included in shareholders’ net income
    5       24       (46 )     (22 )
 
                       
Gains included in other comprehensive income
    9                    
Gains required to adjust future policy benefits for settlement annuities (1)
    30                    
Purchases, issuances, settlements, net
    (3 )     (9 )     21       12  
Transfers into/(out of) Level 3:
                               
Transfers into Level 3
    27                    
Transfers out of Level 3
    (24 )                  
 
                       
Total transfers into/(out of) Level 3
    3                    
 
                       
Balance at September 30, 2010
  $ 989     $ 673     $ (1,246 )   $ (573 )
 
                       
Total gains (losses) included in income attributable to instruments held at the reporting date
  $ 5     $ 24     $ (46 )   $ (22 )
 
                       
     
(1)   Amounts do not accrue to shareholders.
 
(2)   Amounts include $3 million of short-term investments.
For the Three Months Ended September 30, 2009
                                 
    Fixed Maturities &                    
(In millions)   Equity Securities     GMIB Assets     GMIB Liabilities     GMIB Net  
Balance at July 1, 2009
  $ 923     $ 685     $ (1,224 )   $ (539 )
 
                       
Gains (losses) included in shareholders’ net income:
                               
GMIB fair value gain/(loss)
          (27 )     46       19  
Other
    (9 )                  
 
                       
Total gains (losses) included in shareholders’ net income
    (9 )     (27 )     46       19  
 
                       
Gains included in other comprehensive income
    36                    
Gains required to adjust future policy benefits for settlement annuities
    56                    
Purchases, sales, settlements, net
    7       (44 )     52       8  
Transfers into/(out of) Level 3:
                               
Transfers into Level 3
    40                    
Transfers out of Level 3
    (53 )                  
 
                       
Total transfers into/(out of) Level 3
    (13 )                  
 
                       
Balance at September 30, 2009
  $ 1,000     $ 614     $ (1,126 )   $ (512 )
 
                       
Total gains (losses) included in income attributable to instruments held at the reporting date
  $ (9 )   $ (27 )   $ 46     $ 19  
 
                       
     
(1)   Amounts do not accrue to shareholders.

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For the Nine Months Ended September 30, 2010
                                 
    Fixed Maturities &                    
(In millions)   Equity Securities (2)     GMIB Assets     GMIB Liabilities     GMIB Net  
Balance at January 1, 2010
  $ 845     $ 482     $ (903 )   $ (421 )
 
                       
Gains (losses) included in shareholders’ net income:
                               
GMIB fair value gain/(loss)
          211       (393 )     (182 )
Other
    17                    
 
                       
Total gains (losses) included in shareholders’ net income
    17       211       (393 )     (182 )
 
                       
Gains included in other comprehensive income
    30                    
Gains required to adjust future policy benefits for settlement annuities (1)
    91                    
Purchases, issuances, settlements, net
    (29 )     (20 )     50       30  
Transfers into/(out of) Level 3:
                               
Transfers into Level 3
    99                    
Transfers out of Level 3
    (64 )                  
 
                       
Total transfers into/(out of) Level 3
    35                    
 
                       
Balance at September 30, 2010
  $ 989     $ 673     $ (1,246 )   $ (573 )
 
                       
Total gains (losses) included in income attributable to instruments held at the reporting date
  $ 14     $ 211     $ (393 )   $ (182 )
 
                       
     
(1)   Amounts do not accrue to shareholders.
 
(2)   Amounts include $3 million of short-term investments.
For the Nine Months Ended September 30, 2009
                                 
    Fixed Maturities &                    
(In millions)   Equity Securities     GMIB Assets     GMIB Liabilities     GMIB Net  
Balance at January 1, 2009
  $ 889     $ 953     $ (1,757 )   $ (804 )
 
                       
Gains (losses) included in shareholders’ net income:
                               
GMIB fair value gain/(loss)
          (263 )     478       215  
Other
    (19 )                  
 
                       
Total gains (losses) included in shareholders’ net income
    (19 )     (263 )     478       215  
 
                       
Gains included in other comprehensive income
    46                    
Losses required to adjust future policy benefits for settlement annuities(1)
    (51 )                  
Purchases, issuances, settlements, net
    (3 )     (76 )     153       77  
Transfers into/(out of) Level 3:
                               
Transfers into Level 3
    275                    
Transfers out of Level 3
    (137 )                  
 
                       
Total transfers into/(out of) Level 3
    138                    
 
                       
Balance at September 30, 2009
  $ 1,000     $ 614     $ (1,126 )   $ (512 )
 
                       
Total gains (losses) included in income attributable to instruments held at the reporting date
  $ (19 )   $ (263 )   $ 478     $ 215  
 
                       
     
(1)   Amounts do not accrue to shareholders.
As noted in the tables above, total gains and losses included in net income are reflected in the following captions in the Consolidated Statements of Income:
  Realized investment gains (losses) and net investment income for amounts related to fixed maturities and equity securities; and
  GMIB fair value (gain) loss for amounts related to GMIB assets and liabilities.

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Reclassifications impacting Level 3 financial instruments are reported as transfers into or out of the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore gains and losses in income only reflect activity for the period the instrument was classified in Level 3.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. For the nine months ended September 30, 2009, transfers into Level 3 from Level 2 primarily reflect an increase in the unobservable inputs used to value certain private corporate bonds, principally related to credit risk of the issuers.
The Company provided reinsurance for other insurance companies that offer a guaranteed minimum income benefit, and then retroceded a portion of the risk to other insurance companies. These arrangements with third-party insurers are the instruments still held at the reporting date for GMIB assets and liabilities in the table above. Because these reinsurance arrangements remain in effect at the reporting date, the Company has reflected the total gain or loss for the period as the total gain or loss included in income attributable to instruments still held at the reporting date. However, the Company reduces the GMIB assets and liabilities resulting from these reinsurance arrangements when annuitants lapse, die, elect their benefit, or reach the age after which the right to elect their benefit expires.
Under FASB’s guidance for fair value measurements, the Company’s GMIB assets and liabilities are expected to be volatile in future periods because the underlying capital markets assumptions will be based largely on market-observable inputs at the close of each reporting period including interest rates and market-implied volatilities.
GMIB fair value losses of $22 million for the three months ended September 30, 2010, and $182 million for the nine months ended September 30, 2010 were primarily due to declining interest rates, partially offset by increases in underlying account values that occurred during the three and nine months ended September 30, 2010.
GMIB fair value gains of $19 million for the three months ended September 30, 2009 were primarily a result of increases in underlying account values during the period and updates to the risk and profit charge estimates, partially offset by decreases in interest rates and experience varying from assumptions. GMIB fair value gains of $215 million for the nine months ended September 30, 2009, were primarily a result of increases in interest rates, increases in underlying account values and updates to the risk and profit charge estimates, partially offset by increases to the annuitization assumption, experience varying from assumptions and updates to the lapse assumption.

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Separate account assets
Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company’s revenues and expenses. As of September 30, 2010 and December 31, 2009 separate account assets were as follows:
September 30, 2010
                                 
    Quoted Prices in Active                    
    Markets for Identical     Significant Other     Significant        
    Assets     Observable Inputs     Unobservable Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Guaranteed separate accounts (See Note 18)
  $ 271     $ 1,496     $     $ 1,767  
Non-guaranteed separate accounts (1)
    1,801       3,666       564       6,031  
 
                       
Total separate account assets
  $ 2,072     $ 5,162     $ 564     $ 7,798  
 
                       
     
(1)   As of September 30, 2010, non-guaranteed separate accounts include $2.7 billion in assets supporting the Company’s pension plans, including $515 million classified in Level 3.
December 31, 2009
                                 
    Quoted Prices in Active                    
    Markets for Identical     Significant Other     Significant        
    Assets     Observable Inputs     Unobservable Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Guaranteed separate accounts (See Note 18)
  $ 275     $ 1,480     $     $ 1,755  
Non-guaranteed separate accounts (1)
    1,883       3,100       550       5,533  
 
                       
Total separate account assets
  $ 2,158     $ 4,580     $ 550     $ 7,288  
 
                       
     
(1)   As of December 31, 2009, non-guaranteed separate accounts include $2.6 billion in assets supporting the Company’s pension plans, including $517 million classified in Level 3.
Separate account assets in Level 1 include exchange-listed equity securities. Level 2 assets primarily include:
  equity securities and corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and
  actively-traded institutional and retail mutual fund investments and separate accounts priced using the daily net asset value which is their exit price.
Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments. In addition, certain fixed income funds priced using their net asset values are classified in Level 3 due to restrictions on their withdrawal.
The following tables summarize the changes in separate account assets reported in Level 3 for the three months and nine months ended September 30, 2010 and 2009.
                 
    Three Months Ended  
    September 30,  
(In millions)   2010     2009  
Balance at July 1
  $ 534     $ 625  
Policyholder gains (losses) (1)
    17       (18 )
Purchases, issuances, settlements
    12       (23 )
Transfers into/(out of) Level 3:
               
Transfers into Level 3
    3        
Transfers out of Level 3
    (2 )      
 
           
Total transfers into/(out of) Level 3
    1        
 
           
Balance at September 30
  $ 564     $ 584  
 
           

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(1)   Includes gains of $5 million attributable to instruments still held at September 30, 2010 and losses of $20 million attributable to instruments still held at September 30, 2009.
                 
    Nine Months Ended  
    September 30,  
(In millions)   2010     2009  
Balance at January 1
  $ 550     $ 475  
Policyholder gains (losses) (1)
    31       (85 )
Purchases, issuances, settlements, net
    1       34  
Transfers into/(out of) Level 3:
               
Transfers into Level 3
    4       174  
Transfers out of Level 3
    (22 )     (14 )
 
           
Total transfers into/(out of) Level 3
    (18 )     160  
 
           
Balance at September 30
  $ 564     $ 584  
 
           
     
(1)   Includes gains of $16 million attributable to instruments still held at September 30, 2010 and losses of $88 million attributable to instruments still held at September 30, 2009.
For the nine months ended September 30, 2009, transfers into Level 3 primarily represented fixed income funds that are priced using the net asset value where restrictions were placed on withdrawal.
Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as investments in real estate entities and commercial mortgage loans when they become impaired. During the three months ended September 30, 2010, impaired commercial mortgage loans with carrying values of $47 million were written down to their fair values of $46 million, resulting in pre-tax realized investment losses of $1 million. During the nine months ended September 30, 2010, impaired commercial mortgage loans with carrying values of $138 million were written down to their fair values of $121 million, resulting in pre-tax realized investment losses of $17 million. Also during the nine months ended September 30, 2010, impaired real estate entities carried at cost of $35 million were written down to their fair values of $21 million, resulting in pre-tax realized investment losses of $14 million.
During 2009, impaired commercial mortgage loans with carrying values of $143 million were written down to their fair values of $126 million, resulting in pre-tax realized investment losses of $17 million. Also during 2009, impaired real estate entities with carrying values of $48 million were written down to their fair values of $12 million, resulting in pre-tax realized investment losses of $36 million.
These fair values were calculated by discounting the expected future cash flows at estimated market interest rates. Such market rates were derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the characteristics of the underlying collateral, including the type, quality and location of the assets. The fair value measurements were classified in Level 3 because these cash flow models incorporate significant unobservable inputs.
Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
Most financial instruments that are subject to fair value disclosure requirements are carried in the Company’s consolidated financial statements at amounts that approximate fair value. The following table provides the fair values and carrying values of the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at September 30, 2010 and December 31, 2009:
                                 
    September 30, 2010     December 31, 2009  
            Carrying             Carrying  
(In millions)   Fair Value     Value     Fair Value     Value  
Commercial mortgage loans
  $ 3,508     $ 3,486     $ 3,323     $ 3,522  
Contractholder deposit funds, excluding universal life products
  $ 1,008     $ 986     $ 940     $ 941  
Long-term debt, including current maturities, excluding capital leases
  $ 3,087     $ 2,727     $ 2,418     $ 2,427  

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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 determined using an internal discounted cash flow model.
Contractholder deposit funds, excluding universal life products. Generally, these 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, including current maturities, excluding capital leases. The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company’s estimated current borrowing rate for debt of similar terms and remaining maturities.
Fair values of off-balance-sheet financial instruments were not material.
Note 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 the run-off settlement annuity business:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Fixed maturities
  $ 14     $ 2     $ 48     $ (9 )
Equity securities
    4       16       7       10  
Commercial mortgage loans
    (1 )     (4 )     (16 )     (4 )
Other investments, including derivatives
    11             5       (37 )
 
                       
Realized investment gains (losses), before income taxes
    28       14       44       (40 )
Less income taxes (benefits)
    10       5       15       (16 )
 
                       
Net realized investment gains (losses)
  $ 18     $ 9     $ 29     $ (24 )
 
                       

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Included in pre-tax realized investment gains (losses) above were other-than-temporary impairments on debt securities, asset write-downs and changes in valuation reserves as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Credit-related (1)
  $ 1     $ 18     $ 31     $ 72  
Other (2)
          3       1       12  
 
                       
Total (3)
  $ 1     $ 21     $ 32     $ 84  
 
                       
     
(1)   Credit-related losses include other-than-temporary declines in value of fixed maturities and equity securities, and impairments of commercial mortgage loans 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 GAAP guidance for other-than-temporary impairments 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.
 
(3)   Includes other-than-temporary impairments on debt securities of $1 million for the nine months ended September 30, 2010 and $16 million for the three months ended September 30, 2009 and $42 million for the nine months ended September 30, 2009. These impairments are included in the other category in 2010 and in both the credit-related and other categories for 2009.
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.
                 
    As of September 30,     As of December 31,  
(In millions)   2010     2009  
Included in fixed maturities:
               
Trading securities (amortized cost: $7; $8)
  $ 7     $ 8  
Hybrid securities (amortized cost: $36; $37)
    43       43  
 
           
Total
  $ 50     $ 51  
 
           
Included in equity securities:
               
Hybrid securities (amortized cost: $106; $109)
  $ 87     $ 81  
 
           
Fixed maturities included $181 million at September 30, 2010, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities 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 September 30, 2010:
                 
    Amortized     Fair  
(In millions)   Cost     Value  
Due in one year or less
  $ 876     $ 896  
Due after one year through five years
    4,424       4,777  
Due after five years through ten years
    4,907       5,538  
Due after ten years
    2,582       3,279  
Other asset and mortgage-backed securities
    656       814  
 
           
Total
  $ 13,445     $ 15,304  
 
           
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.

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Mortgage-backed securities consist principally of commercial mortgage-backed securities and collateralized mortgage obligations of which $20 million of fair value were residential mortgages and home equity lines of credit, all of which were originated using standard underwriting practices and are not sub-prime loans.
Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities with a fair value of $50 million at September 30, 2010 and $51 million at December 31, 2009) by type of issuer is shown below.
                                 
    September 30, 2010  
            Unrealized     Unrealized        
    Amortized     Appre-     Depre-     Fair  
(In millions)   Cost     ciation     ciation     Value  
Federal government and agency
  $ 514     $ 311     $     $ 825  
State and local government
    2,337       270       (3 )     2,604  
Foreign government
    1,074       89       (1 )     1,162  
Corporate
    8,864       1,056       (21 )     9,899  
Federal agency mortgage-backed
    16       1             17  
Other mortgage-backed
    85       10       (6 )     89  
Other asset-backed
    555       160       (7 )     708  
 
                       
Total
  $ 13,445     $ 1,897     $ (38 )   $ 15,304  
 
                       
                                 
(In millions)   December 31, 2009  
Federal government and agency
  $ 398     $ 174     $ (1 )   $ 571  
State and local government
    2,341       188       (8 )     2,521  
Foreign government
    1,040       38       (8 )     1,070  
Corporate
    8,104       529       (98 )     8,535  
Federal agency mortgage-backed
    33       1             34  
Other mortgage-backed
    125       5       (10 )     120  
Other asset-backed
    494       55       (8 )     541  
 
                       
Total
  $ 12,535     $ 990     $ (133 )   $ 13,392  
 
                       
The above table includes investments with a fair value of $2.7 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of $697 million and gross unrealized depreciation of $14 million at September 30, 2010. Such unrealized amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other comprehensive income. At December 31, 2009, investments supporting this business had a fair value of $2.3 billion, gross unrealized appreciation of $326 million and gross unrealized depreciation of $52 million.
Sales information for available-for-sale fixed maturities and equity securities were as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Proceeds from sales
  $ 239     $ 266     $ 688     $ 676  
Gross gains on sales
  $ 9     $ 24     $ 36     $ 39  
Gross losses on sales
  $     $ (5 )   $ (3 )   $ (8 )

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Review of declines in fair value. Management reviews fixed maturities with a decline in fair value from cost for impairment based on criteria that include:
  length of time and severity of decline;
  financial health and specific near term prospects of the issuer;
  changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and
  the Company’s intent to sell or the likelihood of a required sale prior to recovery.
Excluding trading and hybrid securities, as of September 30, 2010, 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
  $ 180     $ 183     $ (3 )     75  
Below investment grade
  $ 43     $ 45     $ (2 )     30  
More than one year:
                               
Investment grade
  $ 297     $ 325     $ (28 )     60  
Below investment grade
  $ 52     $ 57     $ (5 )     30  
The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. There were no equity securities with a fair value significantly lower than cost as of September 30, 2010.
Short-term investments and cash equivalents. Short-term investments and cash equivalents includes corporate securities of $933 million, federal government securities of $82 million and money market funds of $78 million at September 30, 2010. Short-term investments also include $3 million of hybrid securities carried at fair value. The Company’s short-term investments and cash equivalents at December 31, 2009 included corporate securities of $624 million, federal government securities of $402 million and money market funds of $104 million.

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Note 10 — Derivative Financial Instruments
The Company’s investment strategy is to manage the characteristics of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contractholder liabilities (such as paying claims, investment returns and withdrawals). As part of this investment strategy, the Company typically uses derivatives to minimize interest rate, foreign currency and equity price risks. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize credit risk. From time to time, the Company has used derivatives to enhance investment returns. In addition, the Company has written or sold contracts to guarantee minimum income benefits.
The Company uses hedge accounting when derivatives are designated, qualified and highly effective as hedges. Effectiveness is formally assessed and documented at inception and each period throughout the life of a hedge using various quantitative methods appropriate for each hedge, including regression analysis and dollar offset. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income.
The Company accounts for derivative instruments as follows:
  Derivatives are reported on the balance sheet at fair value with changes in fair values reported in 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 net income (generally as part of realized investment gains and losses).
Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that contain provisions requiring both 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 September 30, 2010 was $24 million for which the Company was not required to post collateral with its counterparties. If the various contingent features underlying the agreements were triggered as of September 30, 2010, the Company would be required to post collateral equal to the total net liability. 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 September 30, 2010, there was no net liability position under such derivative instruments.
See Note 7 for a discussion of derivatives associated with GMDB contracts and Note 8 for a discussion of derivatives associated with GMIB contracts. The effects of other derivatives were not material to the Company’s consolidated results of operations, liquidity or financial condition for the nine months ended September 30, 2010 and 2009.
The tables below present information about the nature and accounting treatment of the Company’s primary derivative financial instruments including the Company’s purpose for entering into specific derivative transactions, and their locations in and effect on the financial statements as of September 30, 2010 and December 31, 2009 and for the three and nine months ended September 30, 2010 and 2009. Derivatives in the Company’s separate accounts are excluded from the tables because associated gains and losses generally accrue directly to policyholders.

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Instrument / Volume                
of Activity   Primary Risk   Purpose   Cash Flows   Accounting Policy
 
             
Derivatives Designated as Accounting Hedges — Cash Flow Hedges
             
 
               
Interest rate swaps — $157 million of par value of related investments

Foreign currency swaps — $169 million of U.S. dollar equivalent par value of related investments

Combination swaps (interest rate and foreign currency) — $64 million of U.S. dollar equivalent par value of related investments
  Interest rate and foreign currency   To hedge the interest and/or foreign currency cash flows of fixed maturities and commercial mortgage loans to match associated liabilities. Currency swaps are primarily euros, Australian dollars, Canadian dollars and British pounds for periods of up to 11 years.   The Company periodically exchanges cash flows between variable and fixed interest rates and/or between two currencies for both principal and interest. Net interest cash flows are reported in operating activities.   Using cash flow hedge accounting, fair values are reported in other long-term investments or other liabilities and accumulated other comprehensive income and amortized into net investment income or reported in other realized investment gains and losses as interest or principal payments are received.
 
               
   
Fair Value Effect on the Financial Statements (In millions)
                                                                 
                    Accounts Payable, Accrued     Gain (Loss) Recognized in Other  
    Other Long-Term Investments     Expenses and Other Liabilities     Comprehensive Income (1)  
    As of     As of     As of     As of     Three Months Ended     Nine Months Ended  
    September 30,     December 31,     September 30,     December 31,     September 30,     September 30,  
Instrument   2010     2009     2010     2009     2010     2009     2010     2009  
Interest rate swaps
  $ 12     $ 8     $     $     $ 1     $ 1     $ 4     $ (4 )
Foreign currency swaps
    5       4       19       24       (11 )     (7 )     7       (22 )
Interest rate and foreign currency swaps
                7       6       (9 )     (4 )     (1 )     (11 )
 
                                               
Total
  $ 17     $ 12     $ 26     $ 30     $ (19 )   $ (10 )   $ 10     $ (37 )
 
                                               
     
(1)   Other comprehensive income for foreign currency swaps excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
                 
Purchased options — $318 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 other benefit expenses 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 not significant.
 
               
Treasury lock
  Interest rate   To hedge the variability of and fix at inception date, the benchmark Treasury rate component of future interest payments on debt to be issued.   The Company paid the fair value of the contract at the expiration. Cash flows were reported in operating activities.   Using cash flow hedge accounting, fair values are reported in other assets or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to interest expense over the 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.
For the three and nine months ended September 30, 2010 and 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.

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Instrument / Volume                
of Activity   Primary Risk   Purpose   Cash Flows   Accounting Policy
Derivatives Not Designated As Accounting Hedges
 
               
Futures — $1,103 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 minimum death benefits (GMDB) 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     Nine Months Ended  
                                    September 30,     September 30,  
                                    2010     2009     2010     2009  
Futures
                                  $ (119 )   $ (161 )   $ (72 )   $ (232 )
                 
Interest rate swaps —
$45 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 and these cash flows are included in investing activities.   Fair values are reported in other long-term investments or other liabilities, with changes in fair value reported in other realized investment gains and losses.
 
               
    Fair Value Effect on the Financial Statements (In millions)
     
                                                                 
    Other Long-Term Investments                     Realized Investment Gains (Losses)  
    As of     As of                     Three Months Ended     Nine Months Ended  
    September 30,     December 31,                     September 30,     September 30,  
    2010     2009                     2010     2009     2010     2009  
Interest rate swaps
  $ 4     $ 4                     $     $     $ 2     $ (1 )
                 
Written options (GMIB liability) — $1,289 million of maximum potential undiscounted future payments as defined in Note 18

Purchased options (GMIB asset) — $709 million of maximum potential undiscounted future receipts as defined in Note 18
  Equity and interest rate   The Company has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees of minimum income benefits, resulting from the level of variable annuity account values compared with a contractually guaranteed amount. Payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments. The Company purchased reinsurance contracts to reduce a portion of the 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 contractholders first elect to receive minimum income payments. These cash flows are reported in operating activities.   Fair values are reported in other liabilities (GMIB liability) and other assets (GMIB asset). Changes in fair value are reported in GMIB fair value (gain)/loss.
 
               
    Fair Value Effect on the Financial Statements (In millions)
     
                                                                 
                    Accounts Payable, Accrued        
                    Expenses and Other        
    Other Assets     Liabilities     GMIB Fair Value (Gain)/Loss  
    As of     As of     As of     As of     Three Months Ended     Nine Months Ended  
    September 30,     December 31,     September 30,     December 31,     September 30,     September 30,  
Instrument   2010     2009     2010     2009     2010     2009     2010     2009  
Written options (GMIB liability)
  $     $     $ 1,246     $ 903     $ 46     $ (46 )   $ 393     $ (478 )
Purchased options (GMIB asset)
    673       482                   (24 )     27       (211 )     263  
 
                                               
Total
  $ 673     $ 482     $ 1,246     $ 903     $ 22     $ (19 )   $ 182     $ (215 )
 
                                               

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Note 11 — Variable Interest Entities
When the Company becomes involved with a variable interest entity and when the nature of the Company’s involvement with the entity changes, in order to determine if the Company is the primary beneficiary and must consolidate the entity, it evaluates:
  the structure and purpose of the entity;
 
  the risks and rewards created by and shared through the entity; and
 
  the entity’s participants’ ability to direct the activities, receive its benefits and absorb its losses. Participants include the entity’s sponsors, equity holders, guarantors, creditors and servicers.
In the normal course of its investing activities, the Company makes passive investments in debt and equity securities that are issued by variable interest entities. The Company does not consolidate these entities because either:
  it was not the sponsor or manager and had no power to direct the activities that most significantly impacted the entities’ economic performance; or
  it had no right to receive benefits nor obligation to absorb losses that could be significant to these variable interest entities.
The Company’s maximum exposure to loss related to these entities is limited to the carrying amount of its investment. The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.
The Company recorded pre-tax income of $9 million for the three months and $22 million for the nine months ended September 30, 2010 from these investments. Additional information about the nature and activities of these unconsolidated variable interest entities is provided below.
             
Variable       Factors Considered in Determining   Risk Exposure and Effect on the
Interests   Nature, Purpose and Activities   Consolidation Not Required   Financial Statements
 
Fixed maturities — Foreign bank obligations — $409 million par value interest of total $1,125 million par value
  To create a more active market for perpetual floating-rate subordinated notes issued by foreign banks, special-purpose trusts are formed to purchase these notes and sell participation interests to investors in the form of fixed-rate debt securities and equity interests. The trusts also purchase derivative contracts to exchange the floating-rate cash flows for fixed-rate and obtain guarantees from third parties to support these fixed-rate payments to its debt holders. In certain trusts, the foreign bank perpetual notes were replaced with U.S. government-sponsored bonds. The Company owns a share of the debt securities issued by the trust and receives fixed-rate cash flows for a stated period.   The third-party guarantors of the debt securities issued by the trust generally control the activities that most significantly impact the trusts’ economic performance, are obligated to absorb any losses, and are the primary beneficiaries.   The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in fixed maturities. Unrealized changes in fair value are reported in accumulated other comprehensive income. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.
     
 
           
    Effect on the Financial Statements (In millions)
     
                                     
        Gain (Loss) Recognized in Other     Income from Continuing Operations before  
Fixed Maturities     Comprehensive Income (1)     Income Taxes (1)  
      Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
As of September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010  
$ 534     $ 3     $ 10     $ 1     $ 3  
                           
     
(1)   Other comprehensive income excludes gains of $30 million for the three months and gains of $87 million for the nine months ended September 30, 2010 and income from continuing operations before income taxes excludes gains of $7 million for the three months and gains of $20 million for the nine months ended September 30, 2010 of amounts required to adjust future policy benefits for the run-off settlement annuity business.

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Variable       Factors Considered in Determining   Risk Exposure and Effect on the
Interests   Nature, Purpose and Activities   Consolidation Not Required   Financial Statements
 
 
Fixed maturities — Mortgage and other asset backed securities — $338 million par value interest of total $44,075 million par value
  Special-purpose entities are created by third-party sponsors to increase the availability of financing for commercial or residential mortgages or other assets and provide investors with diversified exposure to these assets. Generally, the entities purchase mortgage loans or other assets, assemble pools of these assets and sell senior or subordinated securities to investors based on their risk tolerance. The securities represent a right to a share of the cash flows from the underlying assets in the pool. Typically, the most subordinate holder bears the first risk of loss and potential for higher returns. The Company owns a minority share of senior securities and receives fixed-rate cash flows.   Third-party sponsors generally control the activities that most significantly impact the entities’ economic performance, bear the first risk of loss and receive any residual returns, and are primary beneficiaries. In certain circumstances (such as when unexpected losses occur), the sponsor may lose the power to direct the entity’s activities and control would rest with the next most subordinate investor.   The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in fixed maturities. Unrealized changes in fair value are reported in accumulated other comprehensive income. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.
     
 
           
    Effect on the Financial Statements (In millions)
     
                                     
        Gain (Loss) Recognized in Other     Income from Continuing Operations before  
Fixed Maturities     Comprehensive Income     Income Taxes  
      Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
As of September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010  
$ 319     $ 4     $ 19     $ 5     $ 14  
             
Equity securities and fixed maturities — Other — $56 million par value interest of total $6,145 million par value
  Special-purpose trust entities are created by banks to gain access to capital markets, maintain required regulatory capital and receive tax deductions for interest paid on debt obligations. These entities purchase subordinated notes issued and guaranteed by the sponsoring banks and sell debt or equity securities. Equity interests in these entities are held by their sponsoring banks. The Company owns a minority share of these debt and equity securities and receives fixed cash flows.   The banks that create these trusts control the activities that most significantly impact their economic performance, are obligated to absorb any losses and are the primary beneficiaries.   The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in equity securities and fixed maturities. Unrealized changes in fair value are reported in accumulated other comprehensive income. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.
     
 
           
    Effect on the Financial Statements (In millions)
     
                                     
Equity Securities and     Gain (Loss) Recognized in Other     Income from Continuing Operations before  
Fixed Maturities     Comprehensive Income (1)     Income Taxes (1)  
      Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
As of September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010     September 30, 2010  
$ 52     $     $     $ 3     $ 5  
     
(1)   Other comprehensive income excludes gains of $2 million for the three months and gains of $6 million for the nine months ended September 30, 2010 and income from continuing operations before income taxes excludes gains of $1 million for the three months and gains of $2 million for the nine months ended September 30, 2010 of amounts required to adjust future policy benefits for the run-off settlement annuity business.

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In addition to the variable interest entities described above, as of September 30, 2010 the Company was also involved in:
  trusts that are variable interest entities controlled by contractual provisions and holding investments that secure certain reinsurance recoverables resulting from the sales of the retirement benefits and individual life insurance and annuity businesses (see Note 12 for further information);
  a real estate joint venture with a carrying value of $11 million where all decisions significantly affecting the entity’s economic performance are subject to unanimous approval by the equity holders. As a result, the Company determined that the power over this entity is shared equally, and there is no primary beneficiary. The Company’s maximum exposure to loss was equal to its carrying value; and
  certain fixed maturities with an aggregate fair value of $13 million issued by entities subject to troubled debt restructurings or bankruptcy proceedings. As a result, the equity owners no longer have the power to direct the significant activities of the entities. The Company’s maximum exposure to loss was equal to its fair value.
The Company does not have the power to direct these entities’ activities; therefore, it was not the primary beneficiary and did not consolidate these entities.
Note 12 — Reinsurance
The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.
Retirement benefits business. The Company had reinsurance recoverables of $1.7 billion as of September 30, 2010 and December 31, 2009 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable, which is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed maturities whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities are held in a trust established for the benefit of the Company. As of September 30, 2010, the book value of the trust assets exceeded the recoverable.
Individual life and annuity reinsurance. The Company had reinsurance recoverables of $4.3 billion as of September 30, 2010 and $4.4 billion as of December 31, 2009 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. At September 30, 2010, the $3.9 billion reinsurance recoverable from The Lincoln National Life Insurance Company was secured by assets held in a trust established for the benefit of the Company, and was less than the market value of the trust assets. The remaining recoverable from Lincoln Life & Annuity of New York of $410 million is currently unsecured, however, if this reinsurer does not maintain a specified minimum credit or claims paying rating, it is required to fully secure the outstanding balance. As of September 30, 2010 both companies had ratings sufficient to avoid triggering a contractual obligation.
Other Ceded and Assumed Reinsurance
Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Health Care, Disability and Life, and International segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $295 million as of September 30, 2010 are expected to be collected from more than 90 reinsurers.
The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of September 30, 2010, the Company’s recoverables related to these segments were net of a reserve of $8 million.
Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Company’s Run-off Reinsurance operations assumed risks related to GMDB contracts, GMIB contracts, workers’ compensation, and personal accident business. The Company’s Run-off Reinsurance operations also purchased retrocessional coverage to reduce the risk of loss on these contracts.

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Liabilities related to GMDB, workers’ compensation and personal accident are included in future policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under GAAP, the asset related to GMIB is recorded in the caption Other assets, including other intangibles and the liability related to GMIB is recorded in the caption Accounts payable, accrued expenses, and other liabilities on the Company’s Consolidated Balance Sheets (see Notes 8 and 18 for additional discussion of the GMIB assets and liabilities).
The reinsurance recoverables for GMDB, workers’ compensation, and personal accident of $108 million as of September 30, 2010 are expected to be collected from approximately 80 retrocessionaires.
The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of September 30, 2010, the Company’s recoverables related to this segment were net of a reserve of $6 million.
The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on the ceding companies’ claim payments. For GMDB, claim payments vary because of changes in equity markets and interest rates, as well as claim mortality and contractholder behavior. For workers’ compensation and personal accident, the payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from retrocessionaires, may not be known with certainty for some time.
Summary. The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of September 30, 2010, based on current information. However, it is possible that future developments could have a material adverse effect on the Company’s consolidated results of operations and, in certain situations, such as if actual experience differs from the assumptions used in estimating reserves for GMDB, could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.
Effects of reinsurance. In the Company’s Consolidated Statements of Income, Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Ceded premiums and fees
                               
Individual life insurance and annuity business sold
  $ 47     $ 49     $ 142     $ 150  
Other
    52       56       181       171  
 
                       
Total
  $ 99     $ 105     $ 323     $ 321  
 
                       
Reinsurance recoveries
                               
Individual life insurance and annuity business sold
  $ 87     $ 87     $ 235     $ 214  
Other
    45       42       138       124  
 
                       
Total
  $ 132     $ 129     $ 373     $ 338  
 
                       

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Note 13 — Pension and Other Postretirement Benefit Plans
The Company and certain of its subsidiaries provide pension, health care and life insurance defined benefits to eligible retired employees, spouses and other eligible dependents through various domestic and foreign plans. The effect of its foreign pension and other postretirement benefit plans is immaterial to the Company’s results of operations, liquidity and financial position. Effective July 1, 2009, the Company froze its primary domestic defined benefit pension plans.
For the nine months ended September 30, 2010, the Company’s postretirement benefits liability increased by $150 million pre-tax ($91 million after-tax). This was primarily a result of the completion of the annual actuarial study during second quarter. The Company updated its mortality assumption to provide for mortality improvement, which resulted in most of the increase in the liability.
As a result of the 2009 plan freeze discussed above, a curtailment of benefits occurred in the second quarter of 2009 because it eliminated all future service for active employees in the domestic plans. Accordingly, the Company recognized a pre-tax curtailment gain of $46 million ($30 million after-tax) during the second quarter of 2009, which was the remaining unamortized negative prior service cost at May 31, 2009.
Pension and Other Postretirement Benefits. Components of net pension and net other postretirement benefit costs were as follows:
                                                                 
    Pension Benefits     Other Postretirement Benefits  
    Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
(In millions)   2010     2009     2010     2009     2010     2009     2010     2009  
Service cost
  $     $ 1     $ 1     $ 43     $     $ 1     $ 1     $ 1  
Interest cost
    61       64       181       187       7       6       17       18  
Expected long-term return on plan assets
    (63 )     (60 )     (189 )     (180 )     (1 )           (1 )     (1 )
Amortization of:
                                                               
Net (gain) loss from past experience
    7       3       21       30             (1 )           (3 )
Prior service cost
                      (4 )     (5 )     (5 )     (14 )     (14 )
Curtailment gain
                      (46 )                        
 
                                               
Net pension cost
  $ 5     $ 8     $ 14     $ 30     $ 1     $ 1     $ 3     $ 1  
 
                                               
The Company funds its qualified pension plans at least at the minimum amount required by the Pension Protection Act of 2006. For the nine months ended September 30, 2010, the Company contributed $212 million, of which $69 million was required and $143 million was voluntary. For the remainder of 2010, the Company is not required to make any additional contributions.

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Note 14 — Debt
Short-term and long-term debt were as follows:
                 
    September 30,     December 31,  
(In millions)   2010     2009  
Short-term:
               
Commercial paper
  $ 100     $ 100  
Current maturities of long-term debt
    226       4  
 
           
Total short-term debt
  $ 326     $ 104  
 
           
Long-term:
               
Uncollateralized debt:
               
7% Notes due 2011
  $     $ 222  
6.375% Notes due 2011
    226       226  
5.375% Notes due 2017
    250       250  
6.35% Notes due 2018
    300       300  
8.5% Notes due 2019
    349       349  
5.125% Notes due 2020
    299        
6.37% Notes due 2021
    78       78  
7.65% Notes due 2023
    100       100  
8.3% Notes due 2023
    17       17  
7.875% Debentures due 2027
    300       300  
8.3% Step Down Notes due 2033
    83       83  
6.15% Notes due 2036
    500       500  
Other
    8       11  
 
           
Total long-term debt
  $ 2,510     $ 2,436  
 
           
In the first quarter of 2010, the 7% Notes due 2011 were reclassified into current maturities of long-term debt because they will mature in less than one year.
On May 12, 2010, the Company issued $300 million of 5.125% Notes ($299 million, net of discount, with an effective interest rate of 5.36% per year). Interest is payable on June 15 and December 15 of each year beginning December 15, 2010. The proceeds of this debt were used for general corporate purposes. These Notes will mature on June 15, 2020.
On May 4, 2009, the Company issued $350 million of 8.5% Notes ($349 million, net of debt discount, with an effective interest rate of 9.90% per year). The difference between the stated and effective interest rates primarily reflects the effect of treasury locks. Interest is payable on May 1 and November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for general corporate purposes, including the repayment of some of the Company’s outstanding commercial paper. These Notes will mature on May 1, 2019.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal to the greater of:
  100% of the principal amount of the Notes to be redeemed; or
  the present value of the remaining principal and interest payments on the Notes being redeemed discounted at the applicable treasury rate plus 25 basis points (5.125% Notes due 2020) or 50 basis points (8.5% Notes due 2019).

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Note 15 — Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss excludes amounts required to adjust future policy benefits for the run-off settlement annuity business. Changes in accumulated other comprehensive loss were as follows:
                         
            Tax        
            (Expense)     After-  
(In millions)   Pre-Tax     Benefit     Tax  
Three Months Ended September 30, 2010
                       
Net unrealized appreciation, securities:
                       
Net unrealized appreciation on securities arising during the period
  $ 320     $ (110 )   $ 210  
Reclassification adjustment for (gains) included in shareholders’ net income
    (18 )     6       (12 )
 
                 
Net unrealized appreciation, securities
  $ 302     $ (104 )   $ 198  
 
                 
Net unrealized depreciation, derivatives
  $ (17 )   $ 6     $ (11 )
 
                 
Net translation of foreign currencies
  $ 95     $ (29 )   $ 66  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 2     $ (1 )   $ 1  
 
                 
Net postretirement benefits liability adjustment
  $ 2     $ (1 )   $ 1  
 
                 
 
Three Months Ended September 30, 2009
                       
Net unrealized appreciation, securities:
                       
Net unrealized appreciation on securities arising during the period
  $ 479     $ (168 )   $ 311  
Reclassification adjustment for (gains) included in shareholders’ net income
    (18 )     6       (12 )
 
                 
Net unrealized appreciation, securities
  $ 461     $ (162 )   $ 299  
 
                 
Net unrealized depreciation, derivatives
  $ (9 )   $ 3     $ (6 )
 
                 
Net translation of foreign currencies
  $ 46     $ (17 )   $ 29  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ (3 )   $ 2     $ (1 )
 
                 
Net postretirement benefits liability adjustment
  $ (3 )   $ 2     $ (1 )
 
                 

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            Tax        
            (Expense)     After-  
(In millions)   Pre-Tax     Benefit     Tax  
Nine Months Ended September 30, 2010
                       
Net unrealized appreciation, securities:
                       
Net unrealized appreciation on securities arising during the year
  $ 645     $ (221 )   $ 424  
Reclassification adjustment for (gains) included in shareholders’ net income
    (55 )     19       (36 )
 
                 
Net unrealized appreciation, securities
  $ 590     $ (202 )   $ 388  
 
                 
Net unrealized appreciation, derivatives
  $ 13     $ (4 )   $ 9  
 
                 
Net translation of foreign currencies
  $ 42     $ (15 )   $ 27  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 7     $ 4     $ 11  
Net change due to valuation update
    (157 )     55       (102 )
 
                 
Net postretirement benefits liability adjustment
  $ (150 )   $ 59     $ (91 )
 
                 
 
Nine Months Ended September 30, 2009
                       
Net unrealized appreciation, securities:
                       
Implementation effect of updated guidance on other-than-temporary impairments
  $ (27 )   $ 9     $ (18 )
Net unrealized appreciation on securities arising during the year
    867       (300 )     567  
Reclassification adjustment for losses included in shareholders’ net income
    (1 )     (2 )     (3 )
 
                 
Net unrealized appreciation, securities
  $ 839     $ (293 )   $ 546  
 
                 
Net unrealized depreciation, derivatives
  $ (22 )   $ 8     $ (14 )
 
                 
Net translation of foreign currencies
  $ 68     $ (25 )   $ 43  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 9     $ (2 )   $ 7  
Curtailment gain
    (46 )     16       (30 )
 
                 
Reclassification adjustment for (gains) included in shareholders’ net income
    (37 )     14       (23 )
Net change due to valuation update
    10       (4 )     6  
 
                 
Net postretirement benefits liability adjustment
  $ (27 )   $ 10     $ (17 )
 
                 
Note 16 — Income Taxes
A. Income Tax Expense
The Company has historically accrued U.S. income taxes on the undistributed earnings of its foreign subsidiaries. However, the Company recently began computing income taxes attributable to the South Korea and Hong Kong operations using the foreign jurisdiction tax rate, as compared to the higher U.S. statutory tax rate. This change, adopted in 2009 for South Korea and earlier in 2010 for Hong Kong, was based upon a determination that the prospective earnings of these operations would be permanently invested overseas.
As a result, shareholders’ net income for the nine months ended September 30, 2010 increased by $25 million, which included $15 million relative to South Korea and $10 million relative to Hong Kong. The Hong Kong amount includes $6 million associated with first quarter transition. Shareholders’ net income for the nine months of 2009 increased by $22 million, all attributable to South Korea. Permanent investment of foreign operation earnings has resulted in cumulative unrecognized deferred tax liabilities of $49 million through September 30, 2010.
B. Unrecognized Tax Benefits
Gross unrecognized tax benefits declined for the nine months ended September 30, 2010 by $36 million due primarily to the reversal of previously established liabilities which were reevaluated in light of new factors and regulatory guidance. The effect on shareholders’ net income was not material.

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During the first quarter of 2009, the IRS completed its examination of the Company’s 2005 and 2006 consolidated federal income tax returns, resulting in an increase to shareholders’ net income of $21 million ($20 million in continuing operations and $1 million in discontinued operations). This increase reflected a reduction in net unrecognized tax benefits of $8 million ($17 million reported in income tax expense, partially offset by a $9 million pre-tax charge) and a reduction of interest and penalties of $13 million (reported in income tax expense).
Within the next twelve months, the Company has determined it is reasonably possible that the level of unrecognized tax benefits could change significantly, subject to the development of matters in dispute with the IRS. These same developments could also, within the next twelve months, result in a significant decline in the level of valuation allowances recorded against deferred tax benefits of the reinsurance operations. These potential changes could increase shareholders’ net income by approximately $30 million in the fourth quarter of 2010, subject to the settlement of certain disputed matters for tax years 2005 and 2006, and an additional $60 million for post-2006 tax years, the timing of which is uncertain.
C. Other Tax Matters
During the first quarter of 2009, final resolution was reached in one of the two disputed issues associated with the IRS examination of the Company’s 2003 and 2004 consolidated federal income tax returns. The second of these disputed matters remains unresolved and on June 4, 2009 the Company initiated litigation of this matter by filing a petition in the United States Tax Court. Due to the nature of the litigation process, the timing of the resolution of this matter is uncertain. Though the Company expects to prevail, an unfavorable resolution of this litigation would result in a charge to shareholders’ net income of approximately $20 million, representing net interest expense on the cumulative incremental tax for all affected years. In addition, two issues remain unresolved from the IRS examination of the Company’s 2005 and 2006 consolidated federal income tax returns, for which a formal protest of the proposed adjustments was filed on March 31, 2009. One of these unresolved issues relates to the same matter that is the subject of the litigation in the U.S. Tax Court. The Company continues its effort to resolve the other matter through the administrative appeals process.
The recently enacted Patient Protection & Affordable Care Act, including the Reconciliation Act of 2010, included provisions limiting the tax deductibility of certain future retiree benefit and compensation related payments. The effect of these provisions reduced shareholders’ net income for the nine months ended September 30, 2010 by $8 million. The Company will continue to evaluate guidance as issued relative to these provisions.

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Note 17 — Segment Information
The Company’s operating segments generally reflect groups of related products, except for the International segment which is generally based on geography. In accordance with GAAP, operating segments that do not require separate disclosure have been combined into Other Operations. The Company measures the financial results of its segments using “segment earnings (loss),” which is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses.
Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated. The effect on prior periods is not material.
Summarized segment financial information was as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees, Mail order pharmacy revenues and Other revenues
                               
Health Care
  $ 3,771     $ 3,194     $ 11,194     $ 9,723  
Disability and Life
    692       684       2,060       2,074  
International
    582       486       1,666       1,392  
Run-off Reinsurance
    (113 )     (149 )     (53 )     (211 )
Other Operations
    42       42       130       132  
Corporate
    (16 )     (17 )     (46 )     (44 )
 
                       
Total
  $ 4,958     $ 4,240     $ 14,951     $ 13,066  
 
                       
Shareholders’ income from continuing operations
                               
Health Care
  $ 240     $ 200     $ 654     $ 549  
Disability and Life
    60       64       219       220  
International
    50       38       186       144  
Run-off Reinsurance
    (37 )     30       (137 )     116  
Other Operations
    22       23       65       63  
Corporate
    (46 )     (35 )     (132 )     (97 )
 
                       
Segment Earnings
    289       320       855       995  
Realized investment gains (losses), net of taxes
    18       9       29       (24 )
 
                       
Shareholders’ income from continuing operations
  $ 307     $ 329     $ 884     $ 971  
 
                       

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Note 18 — Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business.
Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business
Separate account assets are contractholder funds maintained in accounts with specific investment objectives. The Company records separate account liabilities equal to separate account assets. In certain cases, primarily associated with the sold retirement benefits business (which was sold in April 2004), the Company guarantees a minimum level of benefits for retirement and insurance contracts written in separate accounts. The Company establishes an additional liability if management believes that the Company will be required to make a payment under these guarantees.
The Company guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. This percentage varies depending on the asset class within a sponsoring employer’s portfolio (for example, a bond fund would require a lower percentage than a riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers do not maintain the required levels of separate account assets, the Company or an affiliate of the buyer has the right to redirect the management of the related assets to provide for benefit payments. As of September 30, 2010, employers maintained assets that exceeded the benefit obligations. Benefit obligations under these arrangements were $1.8 billion as of September 30, 2010. Approximately 75% of these guarantees are reinsured by an affiliate of the buyer of the retirement benefits business. The remaining guarantees are provided by the Company with minimal reinsurance from third parties. There were no additional liabilities required for these guarantees as of September 30, 2010. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy. See Note 8 for further information on the fair value hierarchy.
The Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.
Other Financial Guarantees
Guaranteed minimum income benefit contracts. The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income benefits under certain variable annuity contracts issued by other insurance companies. A contractholder can elect the guaranteed minimum income benefit (“GMIB”) within 30 days of any eligible policy anniversary after a specified contractual waiting period. The Company’s exposure arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the policy’s current account value. At the time of annuitization, the Company pays the excess (if any) of the guaranteed benefit over the benefit based on the current account value in a lump sum to the direct writing insurance company.
In periods of declining equity markets or declining interest rates, the Company’s GMIB liabilities increase. Conversely, in periods of rising equity markets and rising interest rates, the Company’s liabilities for these benefits decrease.
The Company estimates the fair value of the GMIB assets and liabilities using assumptions for market returns and interest rates, volatility of the underlying equity and bond mutual fund investments, mortality, lapse, annuity election rates, nonperformance risk, and risk and profit charges. See Note 8 for additional information on how fair values for these liabilities and related receivables for retrocessional coverage are determined.
The Company is required to disclose the maximum potential undiscounted future payments for GMIB contracts. Under these guarantees, the future payment amounts are dependent on equity and bond fund market and interest rate levels prior to and at the date of annuitization election, which must occur within 30 days of a policy anniversary, after the appropriate waiting period. Therefore, the future payments are not fixed and determinable under the terms of the contract. Accordingly, the Company has estimated the maximum potential undiscounted future payments using hypothetical adverse assumptions, defined as follows:
  no annuitants surrendered their accounts;
  all annuitants lived to elect their benefit;
  all annuitants elected to receive their benefit on the next available date (2010 through 2014); and
  all underlying mutual fund investment values remained at the September 30, 2010 value of $1.2 billion with no future returns.

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The maximum potential undiscounted payments that the Company would make under those assumptions would aggregate $1.3 billion before reinsurance recoveries. The Company expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The Company has retrocessional coverage in place from two external reinsurers which covers 55% of the exposures on these contracts. The receivable from one of these reinsurers is substantially collateralized by assets held in a trust. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.
Certain other guarantees. The Company had indemnification obligations to lenders of up to $192 million as of September 30, 2010, related to borrowings by certain real estate joint ventures which the Company either records as an investment or consolidates. These borrowings, which are nonrecourse to the Company, are secured by the joint ventures’ real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in 2011 through 2017. The Company’s indemnification obligations would require payment to lenders for actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of September 30, 2010.
As of September 30, 2010, the Company guaranteed that it would compensate the lessors for a shortfall of up to $44 million in the market value of certain leased equipment at the end of the lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had liabilities for these guarantees of $10 million as of September 30, 2010.
As part of the reinsurance and administrative service arrangements acquired from Great-West Life and Annuity, Inc., the Company is responsible to pay claims for the group medical and long-term disability business of Great-West Healthcare and collect related amounts due from their third party reinsurers. Any such amounts not collected will represent additional assumed liabilities of the Company and decrease shareholders’ net income if and when these amounts are determined uncollectible. At September 30, 2010, there were no receivables recorded for paid claims due from third party reinsurers for this business and unpaid claims related to this business were estimated at $20 million.
The Company had indemnification obligations as of September 30, 2010 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, the filing of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations, since not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities required for these indemnification obligations as of September 30, 2010.
The Company has agreements with certain banks that provide banking services to settle claim checks processed by the Company for ASO and certain minimum premium customers. The customers are responsible for adequately funding their accounts as claim checks are presented for payment. Under these agreements, the Company guarantees that the banks will not incur a loss if a customer fails to properly fund its account. The amount of the guarantee fluctuates daily. As of September 30, 2010, the aggregate maximum exposure under these guarantees was approximately $329 million and there were no liabilities required. After-tax charges related to these guarantees were approximately $3 million for the nine months ended September 30, 2010 and there were no charges for the same period in 2009. Through October 22, 2010, the exposure that existed at September 30, 2010 has been reduced by approximately 89% through customers’ funding of claim checks when presented for payment. In addition, the Company can limit its exposure under these guarantees by suspending claim payments for any customer who has not adequately funded their bank account.
The Company contracts on an administrative services only (“ASO”) basis with customers who fund their own claims. The Company charges these customers administrative fees based on the expected cost of administering their self-funded programs. In some cases, the Company provides performance guarantees associated with meeting certain service-related and other performance standards. If these standards are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company establishes liabilities for estimated payouts associated with these performance guarantees. Approximately 12% of ASO fees reported for the nine months ended September 30, 2010 were at risk, with reimbursements estimated to be less than 1%.

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The Company does not expect that these guarantees will have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.
Regulatory and Industry Developments
Employee benefits regulation. The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the Federal Departments of Labor and Justice, as well as the courts. Regulation, legislation and judicial decisions have resulted in changes to industry and the Company’s business practices and will continue to do so in the future. In addition, the Company’s subsidiaries are routinely involved with various claims, lawsuits and regulatory and IRS audits and investigations that could result in financial liability, changes in business practices, or both. Health care regulation and legislation in its various forms, including the implementation of the Patient Protection and Affordable Care Act (including the Reconciliation Act) that was signed into law during the first quarter of 2010, could have an adverse effect on the Company’s health care operations if it inhibits the Company’s ability to respond to market demands, adversely affects the way the Company does business, or results in increased medical or administrative costs without improving the quality of care or services.
Other possible regulatory and legislative changes or judicial decisions that could have an adverse effect on the Company’s employee benefits businesses include:
  additional mandated benefits or services that increase costs;
  legislation that would grant plan participants broader rights to sue their health plans;
  changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for the Company’s health care products and services;
  changes in Employee Retirement Income Security Act of 1974 (“ERISA”) regulations resulting in increased administrative burdens and costs;
  additional restrictions on the use of prescription drug formularies and rulings from pending purported class action litigation, which could result in adjustments to or the elimination of the average wholesale price of pharmaceutical products as a benchmark in establishing certain rates, charges, discounts, guarantees and fees for various prescription drugs;
  additional privacy legislation and regulations that interfere with the proper use of medical information for research, coordination of medical care and disease and disability management;
  additional variations among state laws mandating the time periods and administrative processes for payment of health care provider claims;
  legislation that would exempt independent physicians from antitrust laws; and
  changes in federal tax laws, such as amendments that could affect the taxation of employer provided benefits.
The employee benefits industry remains under scrutiny by various state and federal government agencies and could be subject to government efforts to bring criminal actions in circumstances that could previously have given rise only to civil or administrative proceedings.
Concentration of risk. For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated 32% of the segment’s revenues and 53% of the segment’s earnings for the three months ended September 30, 2010. For the nine months ended September 30, 2010, South Korea generated 32% of the segment’s revenues and 45% of the segment’s earnings. Due to the concentration of business in South Korea, the International segment is exposed to potential losses resulting from economic and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, which could have a significant impact on the segment’s results and the Company’s consolidated financial results.

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Litigation and Other Legal Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits, investigations and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs including payments to providers and benefit level disputes. Litigation of income tax matters is accounted for under FASB’s accounting guidance for uncertainty in income taxes. Further information can be found in Note 16. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously and has recorded accruals in accordance with GAAP. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to the Company’s consolidated results of operations, liquidity or financial condition.
Managed care litigation. On April 7, 2000, several pending actions were consolidated in the United States District Court for the Southern District of Florida in a multi-district litigation proceeding captioned In re Managed Care Litigation challenging, in general terms, the mechanisms used by managed care companies in connection with the delivery of or payment for health care services. The consolidated cases include Shane v. Humana, Inc., et al., Mangieri v. CIGNA Corporation, Kaiser and Corrigan v. CIGNA Corporation, et al. and Amer. Dental Ass’n v. CIGNA Corp. et al.
In 2004, the court approved a settlement agreement between the physician class and CIGNA. However, a dispute over disallowed claims under the settlement submitted by a representative of certain class member physicians is in arbitration. Separately, in 2005, the court approved a settlement between CIGNA and a class of non-physician health care providers. Only the American Dental Association case remains unresolved. On March 2, 2009, the Court dismissed with prejudice five of the six counts of the complaint. On March 20, 2009, the Court declined to exercise supplemental jurisdiction over the remaining state law claim and dismissed the case. Plaintiffs filed a notice of appeal with the Eleventh Circuit Court of Appeals on April 17, 2009. On May 14, 2010, the Court of Appeals issued a decision affirming the District Court’s dismissal.
CIGNA has received insurance recoveries related to the In re Managed Care Litigation. In 2008, the Court of Common Pleas of Philadelphia County ruled that the Company is not entitled to insurance recoveries from one of the two insurers from which the Company is pursuing further recoveries. CIGNA appealed that decision and on June 3, 2009, the Superior Court of Pennsylvania reversed the trial court’s decision, remanding the case to the trial court for further proceedings. Trial is scheduled for the week of November 8, 2010.
Broker compensation. Beginning in 2004, the Company, other insurance companies and certain insurance brokers received subpoenas and inquiries from various regulators, including the New York and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorney’s Office for the Southern District of California and the U.S. Department of Labor relating to their investigations of insurance broker compensation. CIGNA cooperated with the inquiries and investigations.
On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life Insurance Company of North America, were named as defendants in a multi-district litigation proceeding, In re Insurance Brokerage Antitrust Litigation, consolidated in the United States District Court for the District of New Jersey. The complaint alleges that brokers and insurers conspired to hide commissions, thus increasing the cost of employee benefit plans, and seeks treble damages and injunctive relief. Numerous insurance brokers and other insurance companies are named as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in favor of the defendants. Plaintiffs appealed. On August 16, 2010, the Third Circuit Court of Appeals affirmed that decision as to employee benefit companies. On September 27, 2010, the District Court entered final judgment against plaintiffs consistent with the Third Circuit Court of Appeals’ opinion.
Amara cash balance pension plan litigation. On December 18, 2001, Janice Amara filed a class action lawsuit, captioned Janice C. Amara, Gisela R. Broderick, Annette S. Glanz, individually and on behalf of all others similarly situated v. CIGNA Corporation and CIGNA Pension Plan, in the United States District Court for the District of Connecticut against CIGNA Corporation and the CIGNA Pension Plan on behalf of herself and other similarly situated participants in the CIGNA Pension Plan affected by the 1998 conversion to a cash balance formula. The plaintiffs allege various ERISA violations including, among other things, that the Plan’s cash balance formula discriminates against older employees; the conversion resulted in a wear away period (during which the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are not adequately disclosed in the Plan.

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In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension Plan on the age discrimination and wear away claims. However, the court found in favor of the plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from the existing cash balance formula for the majority of the class, requiring class members to receive their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment and post-judgment interest. Both parties appealed the court’s decisions to the United States Court of Appeals for the Second Circuit which issued a decision on October 6, 2009 affirming the District Court’s judgment and order on all issues. On January 4, 2010, the Company and the plaintiffs filed separate petitions for a writ of certiorari to the United States Supreme Court. On June 28, 2010, CIGNA’s petition was granted and is scheduled to be argued on November 30, 2010. The United States Supreme Court held the plaintiffs’ petition for writ of certiorari and the Company expects it to be disposed of when an opinion is issued. The implementation of the judgment is currently stayed. The Company will continue to vigorously defend itself in this case. In the second quarter of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax), which principally reflects the Company’s best estimate of the liabilities related to the court order.
Ingenix. On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of UnitedHealthcare, used to calculate payments for services provided by out-of-network providers. The Company received four subpoenas from the New York Attorney General’s office in connection with this investigation and responded appropriately. On February 17, 2009, the Company entered into an Assurance of Discontinuance resolving the investigation. In connection with the industry-wide resolution, the Company contributed $10 million to the establishment of a new non-profit company that will compile and provide the data currently provided by Ingenix. In addition, on March 28, 2008, the Company received a voluntary request for production of documents from the Connecticut Attorney General’s office seeking certain out-of-network claim payment information. The Company has responded appropriately. Since January 2009, the Company has received and responded to inquiries regarding the use of Ingenix data from the Illinois and Texas Attorneys General and the Departments of Insurance in Illinois, Florida, Vermont, Georgia, Pennsylvania, Connecticut, and Alaska.
The Company was named as a defendant in eight putative nationwide class actions asserting that due to the use of data from Ingenix, Inc., the Company improperly underpaid claims, an industry-wide issue. Three actions were brought on behalf of members, (Franco v. CIGNA Corp. et al., Chazen v. CIGNA Corp. et al and Nelson v. Connecticut General Life Insurance Co. et al.), and five actions were brought on behalf of providers, (American Medical Association et al. v. CIGNA Corp. et al., Shiring et al. v. CIGNA Corp. et al.; Higashi et al. v. CGLIC et al.; Pain Management and Surgery Center of Southern Indiana v. CGLIC et al.; and North Peninsula Surgical Center v. Connecticut General Life Insurance Co. et al.), all of which were consolidated into the Franco case pending in the United States District Court for the District of New Jersey. The consolidated amended complaint, filed on August 7, 2009, asserts claims under ERISA, the RICO statute, the Sherman Antitrust Act and New Jersey state law. CIGNA filed a motion to dismiss the consolidated amended complaint on September 9, 2009, which is fully briefed and pending. Plaintiffs filed a motion for class certification on May 28, 2010, which is also fully briefed and pending.
On June 9, 2009, CIGNA filed motions in the United States District Court for the Southern District of Florida to enforce the In re Managed Care Litigation settlement described above by enjoining the RICO and antitrust causes of action asserted by the provider and medical association plaintiffs in the Ingenix litigation on the ground that they arose prior to and were released in the April 2004 settlement. On November 30, 2009, the Court granted the motions and ordered the provider and association plaintiffs to withdraw their RICO and antitrust claims from the Ingenix litigation by December 21, 2009. The plaintiffs filed notices of appeal with the United States Court of Appeals for the Eleventh Circuit on December 10 and 11, 2009. On April 21, 2010 and June 16, 2010, the appeals were dismissed for lack of appellate jurisdiction. Plaintiffs’ motion for reconsideration was denied on August 18, 2010.
Two of the provider plaintiffs, Higashi and Pain Management and Surgery Center of Southern Indiana, have voluntarily dismissed their claims.
It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to use of data provided by Ingenix, Inc. The Company denies the allegations asserted in the investigations and litigation and will vigorously defend itself in these matters.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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INTRODUCTION
In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (“the Company”) make certain forward-looking statements relating to the Company’s financial condition and results of operations, as well as to trends and assumptions that may affect the Company. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2010”). Actual results may differ from the Company’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis (“MD&A”), including in the Cautionary Statement beginning on page 79. The forward-looking statements contained in this filing represent management’s current estimate as of the date of this filing. Management does not assume any obligation to update these estimates.
The following discussion addresses the financial condition of the Company as of September 30, 2010, compared with December 31, 2009, and its results of operations for the three and nine months ended September 30, 2010 compared with the same periods last year. This discussion should be read in conjunction with MD&A included in the Company’s 2009 Form 10-K, to which the reader is directed for additional information.
The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the health care and related benefits business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
Overview
The Company constitutes one of the largest investor-owned health service organizations in the United States. Its subsidiaries are major providers of health care and related benefits, the majority of which are offered through the workplace. In addition, the Company has an international operation that offers supplemental health, life and accident insurance products as well as international health care products and services to businesses and individuals in selected markets. The Company also has certain inactive businesses, including a Run-off Reinsurance segment.

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Ongoing Operations
The Company’s ability to increase revenue, shareholders’ net income and operating cash flow from ongoing operations is directly related to progress in executing on its strategic initiatives, the success of which is measured by certain key factors, including the Company’s ability to:
  profitably price products and services at competitive levels that reflect emerging experience;
  maintain and grow its customer base;
  cross sell its various health and related benefit products;
  invest available cash at attractive rates of return for appropriate durations;
  reduce other operating expenses in the Health Care segment; and
  effectively deploy capital.
Strategy
As a global health service organization, CIGNA’s mission remains focused on helping the people it serves improve their health, well-being and sense of security. CIGNA’s long-term growth strategy is based on: (1) growth in targeted geographies, product lines, buying segments and distribution channels; (2) pursuing additional opportunities in high-growth markets with particular focus on individuals; and (3) improving its strategic and financial flexibility.
CIGNA expects to focus on the following areas it believes represent the markets or areas with the most potential for profitable growth:
  In the Health Care segment, the Company is concentrating on: (1) further enhancing its geographic focus in the middle market in order to create geographic density; (2) growing the “Select” market, which generally includes employers with more than 50 but fewer than 250 employees, by leveraging the Company’s customer knowledge, differentiated service model, product portfolio and distribution model; and (3) engaging those national account employers who share and will benefit from the Company’s value proposition of using health advocacy and employee engagement to increase productivity, performance and the health outcomes of their employees.
  In the Disability and Life segment, CIGNA’s strategy is to grow its disability business by fully leveraging the key components of its industry-leading disability management model to reduce medical costs for its clients and return their employees to work sooner through: (1) early claim notification and outreach; (2) a full suite of clinical and return-to-work resources; and (3) specialized case management services.
  In the International segment, the Company is targeting growth through: (1) product and channel expansion in its supplemental health, life and accident insurance business in key Asian geographies; (2) the introduction of new expatriate benefits products; and (3) further geographic expansion.
The Company plans to improve its strategic and financial flexibility by driving further reductions in its Health Care operating expenses, improving its medical cost competitiveness in targeted markets and effectively managing balance sheet exposures.
In addition, the Company is focused on improving its strategic and financial flexibility in an effort to optimize value for its shareholders, including the consideration of various financing alternatives. The Company is also continually evaluating various strategic options and risk mitigation alternatives related to the Run-off Reinsurance business including expanding its current hedging program to cover unhedged equity risks and interest rate risk inherent in our growth assumptions related to the GMDB and GMIB products.
Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to health advocacy as a means of creating sustainable solutions for employers, improving the health of the individuals that the Company serves, and lowering the costs of health care for all constituencies.
Acquisition of Vanbreda International
On August 31, 2010, the Company acquired 100% of the voting stock of Vanbreda International NV (Vanbreda International), based in Antwerp, Belgium for a cash purchase price of approximately $410 million. Vanbreda International specializes in providing worldwide medical insurance and employee benefits to intergovernmental and non-governmental organizations, including international humanitarian operations, as well as corporate clients. Vanbreda International’s strong presence in Europe complements the Company’s position in providing expatriate benefits primarily to corporate clients in North America, as well as Europe and Asia. See Note 3 to the Consolidated Financial Statements for additional information about the acquisition of Vanbreda International.

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Health Care Reform
In the first quarter of 2010, the Patient Protection and Affordable Care Act, including the Reconciliation Act of 2010, (collectively, “the Act”) was signed into law. The Act mandates broad changes in the delivery of health care benefits that may impact the Company’s current business model, including its relationship with current and future customers, producers and health care providers, products, services, processes and technology. The Act includes provisions for mandatory coverage of benefits and a minimum medical loss ratio, eliminates lifetime and annual benefit limits and creates health insurance exchanges. These provisions are expected to take effect over the next several years from 2010 to 2018 and several have yet to be finalized. Given the broad scope of these changes, many of which have yet to be finalized, it is possible that the effects of the Act could have a material impact on the Company’s results of operations. The Company is evaluating potential business opportunities resulting from the Act that will enable it to leverage the strengths and capabilities of its broad health and wellness portfolio.
The Act will require that health services companies such as CIGNA and others in the healthcare industry help fund the additional insurance benefits and coverages provided from this legislation through the assessment of fees and excise taxes. The amount which the Company will be required to pay starting in 2014 for these fees and excise taxes will result in charges to the Company’s financial statements in future periods. In addition, since these fees and excise taxes will not be tax deductible, the Company’s effective tax rate is expected to increase in future periods. However, the Company is unable to estimate the amount of these fees and excise taxes or the increase in the effective tax rate because guidance for their calculation has not been finalized.
The Act also changes certain tax laws which affect the Company’s 2010 financial statements. Although these provisions do not become effective until 2013, they are expected to limit the tax deductibility of certain future retiree benefit and compensation-related payments. The Company recorded after-tax charges of approximately $2 million for the three months ended and $8 million for the nine months ended September 30, 2010 related to these changes. The Company expects to record additional after-tax charges of approximately $2 million in the fourth quarter of 2010 with respect to the known effects of the tax provisions, but will continue to evaluate their impact as further guidance is made available.
Management is currently unable to estimate the ultimate impact of the Act on the Company’s results of operations, and its financial condition and liquidity due to the uncertainties of interpretation, implementation and timing of the many provisions of the Act. It is possible, however, that this impact could be material to results of operations. Management is closely monitoring this legislation and has formed a task force to implement and report on the Company’s compliance with the Act, to actively engage with regulators to assist with the conversion of legislation to regulation and to assess potential opportunities arising from the Act.
Run-off Operations
Effectively managing the various exposures of its run-off operations is important to the Company’s ongoing profitability, operating cash flows and available capital. The results are influenced by a range of economic factors, especially movements in equity markets and interest rates. In order to substantially reduce the impact of equity market movements on the liability for guaranteed minimum death benefits (“GMDB”, also known as “VADBe”), the Company operates an equity hedge program. The Company actively monitors the performance of the hedge program, and evaluates the cost/benefit of hedging other risks. Results are also influenced by behavioral factors, including future partial surrender election rates for GMDB contracts, annuity election rates for guaranteed minimum income benefits (“GMIB”) contracts, annuitant lapse rates, as well as the collection of amounts recoverable from retrocessionaires. The Company actively studies policyholder behavior experience and adjusts future expectations based on the results of the studies, as warranted. The Company also performs regular audits of ceding companies to ensure that premiums received and claims paid properly reflect the underlying risks, and to maximize the probability of subsequent collection of claims from retrocessionaires. Finally, the Company monitors the financial strength and credit standing of its retrocessionaires and requests or collects collateral when warranted.

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Summary
The Company’s overall results are influenced by a range of economic and other factors, especially:
  cost trends and inflation for medical and related services;
  utilization patterns of medical and other services;
  employment levels;
  the tort liability system;
  developments in the political environment both domestically and internationally;
  interest rates, equity market returns, foreign currency fluctuations and credit market volatility, including the availability and cost of credit in the future; and
  federal, state and international regulation, including the implementation of U.S. health care reform.
The Company regularly monitors the trends impacting operating results from the above mentioned key factors and economic and other factors affecting its operations. The Company develops strategic and tactical plans designed to improve performance and maximize its competitive position in the markets it serves. The Company’s ability to achieve its financial objectives is dependent upon its ability to effectively execute on these plans and to appropriately respond to emerging economic and company-specific trends.

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CONSOLIDATED RESULTS OF OPERATIONS
The Company measures the financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations before after-tax realized investment results. Adjusted income from operations is defined as consolidated segment earnings (loss) excluding special items (defined below) and the results of the GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the Company’s businesses and permits analysis of trends in underlying revenue, expenses and shareholders’ net income. This measure is not determined in accordance with accounting principles generally accepted in the United States (“GAAP”) and should not be viewed as a substitute for the most directly comparable GAAP measure, which is shareholders’ income from continuing operations.
Summarized below is a reconciliation between shareholders’ income from continuing operations and adjusted income from operations.
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 4,621     $ 3,985     $ 13,668     $ 12,049  
Net investment income
    280       263       829       752  
Mail order pharmacy revenues
    354       316       1,053       944  
Other revenues
    (17 )     (61 )     230       73  
Total realized investment gains (losses)
    28       14       44       (40 )
 
                       
Total revenues
    5,266       4,517       15,824       13,778  
Benefits and expenses
    4,802       4,030       14,499       12,388  
 
                       
Income from continuing operations before taxes
    464       487       1,325       1,390  
Income taxes
    156       157       438       417  
 
                       
Income from continuing operations
    308       330       887       973  
Less: Net income attributable to noncontrolling interest
    1       1       3       2  
 
                       
Shareholders’ income from continuing operations
    307       329       884       971  
Less: realized investment gains (losses), net of taxes
    18       9       29       (24 )
 
                       
Segment earnings
    289       320       855       995  
Less adjustments to reconcile to adjusted income from operations:
                               
Results of GMIB business (after-tax)
    (10 )     16       (109 )     149  
Special items (after-tax):
                               
Curtailment gain (See Note 13 to the Consolidated Financial Statements)
                      30  
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
          (7 )           (16 )
Completion of IRS examination (See Note 16 to the Consolidated Financial Statements)
                      20  
 
                       
Adjusted income from operations
  $ 299     $ 311     $ 964     $ 812  
 
                       
Summarized below is adjusted income from operations by segment:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Adjusted Income (Loss) From Operations
                               
Health Care
  $ 240     $ 204     $ 654     $ 535  
Disability and Life
    60       65       219       213  
International
    50       40       186       144  
Run-off Reinsurance
    (27 )     14       (28 )     (33 )
Other Operations
    22       23       65       62  
Corporate
    (46 )     (35 )     (132 )     (109 )
 
                       
Total
  $ 299     $ 311     $ 964     $ 812  
 
                       

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Overview of September 30, 2010 Consolidated Results of Operations
Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009
Adjusted income from operations decreased for the three months ended September 30, 2010 compared to the same period in 2009, due to losses in the Run-off Reinsurance segment resulting from a required reserve strengthening in 2010 related to the GMDB business, partially offset by improved results in the Health Care and International segments. See the individual segment sections of this MD&A for further discussion.
Shareholders’ income from continuing operations decreased for the three months ended September 30, 2010 compared with the same period in 2009 due to a loss in the GMIB business in 2010 compared to a gain in 2009 and losses in the Run-off Reinsurance segment resulting from a required reserve strengthening in 2010 related to the GMDB business. These losses were partially offset by improved results in the Health Care and International segments in 2010. See the Run-off Reinsurance section of this MD&A beginning on page 63 for further discussion about the GMIB and GMDB businesses.
Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009
Adjusted income from operations increased for the nine months ended September 30, 2010 compared to the same period in 2009, primarily reflecting strong earnings growth in the ongoing business segments (Health Care, Disability and Life and International) as well as improved results in the Run-off Reinsurance segment primarily due to less reserve strengthening required in 2010 related to the GMDB business.
Shareholders’ income from continuing operations decreased for the nine months ended September 30, 2010 compared with the same period in 2009 due to a loss in the GMIB business in 2010 compared to a gain in 2009 as well as the absence in 2010 of a pension curtailment gain and a benefit from the completion of an IRS examination recognized in 2009. See the “Special Items and GMIB” section below for further description of these special items. These effects were partially offset by higher adjusted income from operations as discussed above and the absence in 2010 of charges for cost reduction initiatives.
Special Items and GMIB
Management does not believe that the special items noted in the table above are representative of the Company’s underlying results of operations. Accordingly, the Company excluded these special items from adjusted income from operations in order to facilitate an understanding and comparison of results of operations and permit analysis of trends in underlying revenue, expenses and shareholders’ income from continuing operations.
There were no special items for the three or nine months ended September 30, 2010.
The special item for the three months ended September 30, 2009 reflects charges related to cost reduction actions. The special items for the nine months ended September 30, 2009 reflect benefits for the pension curtailment and completion of the 2005 and 2006 IRS examination and charges related to cost reduction actions. See Notes 6, 13 and 16 to the Consolidated Financial Statements for additional information.
The Company also excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable. See the Critical Accounting Estimates section of the MD&A beginning on page 55 of the Company’s 2009 Form 10-K for more information on the effect of capital market assumption changes on shareholders’ net income. Because of this volatility, and since the GMIB business is in run-off, management does not believe that its results are meaningful in assessing underlying results of operations.

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Outlook for 2010
The Company expects 2010 adjusted income from operations to be higher than 2009. Information is not available for management to reasonably estimate the future results of the GMIB business or realized investment results due in part to interest rate and stock market volatility and other internal and external factors. This outlook reflects break-even results for GMDB (also known as “VADBe”) for the fourth quarter of 2010, which assumes that actual experience, including capital markets performance, will be consistent with long-term reserve assumptions. See Note 7 to the Consolidated Financial Statements and the Critical Accounting Estimates section on page 56 of the MD&A of the Company’s 2009 Form 10-K for more information on the effect of capital market assumption changes on shareholders’ net income. In addition, the Company is not able to identify or reasonably estimate the financial impact of special items in 2010; however they may include potential adjustments associated with cost reduction, litigation, and tax-related items.
This outlook reflects the Company’s best estimate of the impacts of Health Care Reform (“the Act”, see the Introduction section of this MD&A beginning on page 46) on its 2010 results of operations subject to the factors cited in the Cautionary Statement beginning on page 79 of the MD&A. If unfavorable equity market and interest rate movements occur, the Company could experience losses related to investment impairments and the GMIB and GMDB businesses. These losses could adversely impact the Company’s consolidated results of operations and financial condition by potentially reducing the capital of the Company’s insurance subsidiaries and reducing their dividend-paying capabilities.
Revenues
Total revenues increased by 17% for the three months and 15% for the nine months ended September 30, 2010, compared with the same periods in 2009. Changes in the components of total revenue are described more fully below.
Premiums and Fees
Premiums and fees increased by 16% for the three months and 13% for the nine months ended September 30, 2010, compared with the same periods in 2009, primarily reflecting membership growth in the Health Care segment’s risk business as well as growth in the International segment. Excluding the Medicare Private Fee For Service (“Medicare PFFS”) Individual business, premiums and fees increased by 11% for the three months and 9% for the nine months ended September 30, 2010.
Net Investment Income
Net investment income increased by 6% for the three months and 10% for the nine months ended September 30, 2010, compared with the same periods in 2009, primarily reflecting improved results from security partnerships and real estate investments and higher assets due to business growth, partially offset by lower reinvestment yields.
Mail Order Pharmacy Revenues
Mail order pharmacy revenues increased by 12% for the three and nine months ended September 30, 2010, compared with the same periods in 2009, primarily reflecting increases in volume and price.
Other Revenues
Other revenues included the impact of the futures contracts associated with the GMDB equity hedge program. Losses on futures contracts reflect stock market gains, whereas gains reflect stock market losses. The Company reported losses of $119 million for the three months ended September 30, 2010 compared to losses of $161 million in the same period of 2009 associated with the GMDB equity hedge program. The Company recorded losses of $72 million for the nine months ended September 30, 2010 compared to losses of $232 million for the same period in 2009 associated with the GMDB equity hedge program. Amounts reflecting corresponding changes in liabilities for GMDB contracts were included in benefits and expenses consistent with GAAP when a premium deficiency exists. Excluding the impact of these futures contracts, other revenues were flat for the three and nine months ended September 30, 2010 compared with the same periods in 2009.

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Realized Investment Results
Realized investment results improved for the three months ended September 30, 2010, compared with the same period in 2009 primarily due to:
  the absence in 2010 of impairments on fixed maturities recorded in 2009; and
  gain on the sale of real estate held in a joint venture in 2010.
These favorable effects were partially offset by a decrease in realized gains recorded on the sale of fixed maturities and equity securities.
Realized investment results improved for the nine months ended September 30, 2010, compared with the same period in 2009 primarily due to:
  lower impairments on real estate funds and fixed maturities in 2010;
  gains on sales of real estate held in joint ventures and other investments in 2010; and
  increased prepayment fees on fixed maturities received in 2010 as a result of debt restructurings, compared to 2009.
These favorable effects were partially offset by an increase in commercial mortgage loan impairments recorded in 2010, reflecting continued weakness in the commercial real estate markets.
See Note 9 to the Consolidated Financial Statements for additional information.

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CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the consolidated financial statements. Management considers an accounting estimate to be critical if:
  it requires assumptions to be made that were uncertain at the time the estimate was made; and
  changes in the estimate or different estimates that could have been selected could have a material effect on the Company’s consolidated results of operations or financial condition.
Management has discussed the development and selection of its critical accounting estimates and reviewed the disclosures presented below with the Audit Committee of the Company’s Board of Directors.
The Company’s most critical accounting estimates, as well as the effects of hypothetical changes in material assumptions used to develop each estimate, are described in the Company’s 2009 Form 10-K beginning on page 55 and are as follows:
  future policy benefits — guaranteed minimum death benefits;
  Health Care medical claims payable;
  accounts payable, accrued expenses and other liabilities, and other assets — guaranteed minimum income benefits;
  reinsurance recoverables for Run-off Reinsurance;
  accounts payable, accrued expenses and other liabilities — pension liabilities;
  investments — fixed maturities; and
  investments — commercial mortgage loans — valuation reserves.
The Company regularly evaluates items which may impact critical accounting estimates. As of September 30, 2010, there are no significant changes to the critical accounting estimates from what was reported in the Company’s 2009 Form 10-K.
Summary
There are other accounting estimates used in the preparation of the Company’s Consolidated Financial Statements, including estimates of liabilities for future policy benefits other than those identified above, as well as estimates with respect to goodwill, unpaid claims and claim expenses, post-employment and postretirement benefits other than pensions, certain compensation accruals and income taxes.
Management believes the current assumptions used to estimate amounts reflected in the Company’s Consolidated Financial Statements are appropriate. However, if actual experience differs from the assumptions used in estimating amounts reflected in the Company’s Consolidated Financial Statements, the resulting changes 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 liquidity and the Company’s financial condition.
SEGMENT REPORTING
Operating segments generally reflect groups of related products, but the International segment is generally based on geography. The Company measures the financial results of its segments using “segment earnings (loss),” which is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses. “Adjusted income from operations” for each segment is defined as segment earnings excluding special items and the results of the Company’s GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the segment and permits analysis of trends. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is segment earnings. Each segment provides a reconciliation between segment earnings and adjusted income from operations.
Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated; the effect on prior periods was not material.

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Health Care Segment
Segment Description
The Health Care segment includes medical, dental, behavioral health, prescription drug and other products and services that may be integrated to provide consumers with comprehensive health care solutions. This segment also includes group disability and life insurance products that were historically sold in connection with certain experience-rated medical products. These products and services are offered through a variety of funding arrangements such as guaranteed cost, retrospectively experience-rated and administrative services only arrangements.
The Company measures the operating effectiveness of the Health Care segment using the following key factors:
  segment earnings and adjusted income from operations;
  membership growth;
  sales of specialty products to core medical customers;
  changes in operating expenses per member; and
  medical expense as a percentage of premiums (medical care ratio) in the guaranteed cost business.
Results of Operations
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 3,350     $ 2,812     $ 9,945     $ 8,578  
Net investment income
    63       52       181       132  
Mail order pharmacy revenues
    354       316       1,053       944  
Other revenues
    67       66       196       201  
 
                       
Segment revenues
    3,834       3,246       11,375       9,855  
 
                       
Mail order pharmacy cost of goods sold
    291       255       866       762  
Benefits and other expenses
    3,167       2,681       9,489       8,243  
 
                       
Benefits and expenses
    3,458       2,936       10,355       9,005  
 
                       
Income before taxes
    376       310       1,020       850  
Income taxes
    136       110       366       301  
 
                       
Segment earnings
    240       200       654       549  
Less special items (after-tax) included in segment earnings:
                               
Curtailment gain (See Note 12 to the Consolidated Financial Statements)
                      25  
Cost reduction charge (See Note 5 to the Consolidated Financial Statements)
          (4 )           (12 )
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)
                      1  
 
                       
Adjusted income from operations
  $ 240     $ 204     $ 654     $ 535  
 
                       
Realized investment gains (losses), net of taxes
  $ 10     $ (1 )   $ 15     $ (17 )
 
                       

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The Health Care segment’s adjusted income from operations for the three months ended September 30, 2010 increased by 18%, compared with the same period in 2009 primarily due to:
  increased membership in risk businesses, as well as higher specialty earnings;
  a lower guaranteed cost medical care ratio and higher experience-rated margins driven by favorable prior year and current year claim development reflecting lower utilization levels; and
  higher investment results due to improved real estate and security partnership income and higher assets driven by membership growth, partially offset by lower yields.
These favorable effects were partially offset by:
  higher operating expenses reflecting the impact of membership growth in risk products and investment in individual segment expansion, partially offset by the effect of cost reduction initiatives including pension plan changes and staffing reductions, as well as lower amortization expenses; and
  a higher medical care ratio in Medicare HMO and lower revenue driven by lower utilization in the Company’s wholly-owned physician practice.
The Health Care segment’s adjusted income from operations for the nine months ended September 30, 2010 increased by 22%, compared with the same period in 2009 primarily due to:
  increased membership in risk businesses, as well as higher specialty earnings;
  a lower guaranteed cost medical care ratio and higher experience-rated margins driven by favorable prior year claim development and current year experience reflecting lower utilization levels. In addition, results reflect the impact of a change in business mix resulting from significant growth in high deductible plans, which generally experience lower dollar value of claims in the first half of the year followed by higher dollar value of claims in the second half of the year; and
  higher net investment income due to improved real estate and security partnership income and higher assets driven by membership growth, partially offset by lower yields.
These favorable effects were partially offset by:
  higher operating expenses reflecting the impact of membership growth in risk products and investment in individual segment expansion, partially offset by the effect of cost reduction initiatives including pension plan changes and staffing reductions, as well as lower amortization expenses; and
  a higher medical care ratio in stop loss products and Medicare HMO due to unfavorable claim experience, as well as lower revenue driven by lower utilization in the Company’s wholly-owned physician practice.

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Revenues
The table below shows premiums and fees for the Health Care segment:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Medical:
                               
Guaranteed cost(1),(2)
  $ 1,007     $ 842     $ 2,890     $ 2,543  
Experience-rated(2),(3)
    453       418       1,363       1,276  
Stop loss
    323       312       965       965  
Dental
    204       179       602       550  
Medicare
    372       152       1,105       443  
Medicare Part D
    118       71       434       273  
Other (4)
    138       124       409       382  
 
                       
Total medical
    2,615       2,098       7,768       6,432  
Life and other non-medical
    24       46       86       142  
 
                       
Total premiums
    2,639       2,144       7,854       6,574  
Fees(2),(5)
    711       668       2,091       2,004  
 
                       
Total premiums and fees
  $ 3,350     $ 2,812     $ 9,945     $ 8,578  
 
                       
     
(1)   Includes guaranteed cost premiums primarily associated with open access, commercial HMO and voluntary/limited benefits, as well as other risk-related products.
 
(2)   Premiums and/or fees associated with certain specialty products are also included.
 
(3)   Includes minimum premium members who have a risk profile similar to experience-rated funding arrangements. The risk portion of minimum premium revenue is reported in experience-rated medical premium whereas the self funding portion of minimum premium revenue is recorded in fees. Also, includes certain non-participating cases for which special customer level reporting of experience is required.
 
(4)   Other medical premiums include risk revenue for specialty products.
 
(5)   Represents administrative service fees for medical members and related specialty product fees for non-medical members as well as fees related to Medicare Part D of $17 million for the three months and $39 million for the nine months ended September 30, 2010 and $11 million for three months and $28 million for the nine months ended September 30, 2009.
Premiums and fees increased by 19% for the three months and 16% for the nine months ended September 30, 2010 compared with the same periods of 2009 primarily reflecting membership growth in most products, predominantly in Medicare and guaranteed cost products, as well as rate increases, partially offset by modestly lower service membership. The membership growth was driven by strong retention and new sales in targeted market segments. These increases also reflect the Company’s efforts to enhance customer access, improve the quality of care and provide products and services on a cost effective basis. Excluding the Medicare PFFS Individual business, premiums and fees increased by 12% for the three months and 9% for the nine months ended September 30, 2010.
Net investment income increased by 21% for the three months and 37% for the nine months ended September 30, 2010 compared with the same periods of 2009 reflecting improved real estate and security partnership income, as well as, higher assets driven by membership growth, partially offset by lower yields.
Other revenues for the Health Care segment consist of revenues earned on direct channel sales of certain specialty products, including behavioral health and disease management.

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Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Medical claims expense
  $ 2,148     $ 1,698     $ 6,435     $ 5,226  
Other benefit expenses
    22       48       79       134  
Mail order pharmacy cost of goods sold
    291       255       866       762  
Other operating expenses excluding special item(s)
    997       928       2,975       2,902  
Special item(s) (1)
          7             (19 )
 
                       
Total benefits and expenses
  $ 3,458     $ 2,936     $ 10,355     $ 9,005  
 
                       
     
(1)   Pre-tax special items of $7 million for the three months ended September 30, 2009, included a cost reduction charge and pre-tax special items of ($19 million) for the nine months ended September 30, 2009 included a $39 million curtailment gain associated with the freeze of the Company’s pension plan, partially offset by a $20 million cost reduction charge. For further discussion of special items, see the “Consolidated Results of Operations” section of this MD&A beginning on page 50.
Medical claims expense increased by 27% for the three months and 23% for the nine months ended September 30, 2010 compared with the same periods in 2009 largely due to higher medical membership, particularly in the Medicare PFFS Individual business which resulted in an increase of approximately $190 million for the three months ended and approximately $560 million for the nine months ended September 30, 2010 compared with the same periods last year. The increases also reflect higher membership in the commercial risk business as well as increases in medical cost inflation.
Other operating expenses increased by 7% for the three months and 3% for the nine months ended September 30, 2010 compared to the same periods in 2009 reflecting the impact of membership growth in risk products and investment in individual segment expansion, partially offset by the effect of cost reduction initiatives including pension plan changes and staffing reductions, as well as lower amortization expenses.
Other Items Affecting Health Care Results
Health Care Medical Claims Payable
Medical claims payable increased $379 million for the nine months ended September 30, 2010 largely driven by medical membership growth, particularly in the Medicare PFFS and commercial risk business as noted above, as well as seasonality in the Stop Loss products (see Note 5 to the Consolidated Financial Statements for additional information).
Medical Membership
The Health Care segment’s medical membership includes any individual for whom the Company retains medical underwriting risk, who uses the Company’s network for services covered under their medical coverage or for whom the Company administers medical claims. As of September 30, estimated medical membership was as follows:
                 
(In thousands)   2010     2009  
Guaranteed cost (1)
    1,157       982  
Experience-rated (2)
    859       764  
 
           
Total commercial risk
    2,016       1,746  
Medicare
    148       51  
 
           
Total risk
    2,164       1,797  
Service
    9,279       9,307  
 
           
Total medical membership
    11,443       11,104  
 
           
     
(1)   Includes members primarily associated with open access, commercial HMO and voluntary/limited benefits as well as other risk-related products.
 
(2)   Includes minimum premium members, who have a risk profile similar to experience-rated members. Also, includes certain non-participating cases for which special customer level reporting of experience is required.

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The Company’s overall medical membership as of September 30, 2010 increased 3% when compared with September 30, 2009, primarily driven by new business sales and improved persistency in the risk businesses, offset by a modest decline in service membership largely reflecting disenrollment after September 30, 2009.
Disability and Life Segment
Segment Description
The Disability and Life segment includes group disability, life, accident and specialty insurance and case management services for disability and workers’ compensation.
Key factors for this segment are:
  premium and fee growth, including new business and customer retention;
  net investment income;
  benefits expense as a percentage of earned premium (loss ratio); and
  other operating expense as a percentage of earned premiums and fees (expense ratio).
Results of Operations
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 663     $ 654     $ 1,974     $ 1,987  
Net investment income
    66       62       197       180  
Other revenues
    29       30       86       87  
 
                       
Segment revenues
    758       746       2,257       2,254  
Benefits and expenses
    675       656       1,949       1,952  
 
                       
Income before taxes
    83       90       308       302  
Income taxes
    23       26       89       82  
 
                       
Segment earnings
    60       64       219       220  
Less special items (after-tax) included in segment earnings:
                               
Curtailment gain (See Note 13 to the Consolidated Financial Statements)
                      4  
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
          (1 )           (2 )
Completion of IRS examination (See Note 16 to the Consolidated Financial Statements)
                      5  
 
                       
Adjusted income from operations
  $ 60     $ 65     $ 219     $ 213  
 
                       
Realized investment gains (losses), net of taxes
  $ 5     $ 5     $ 8     $ (2 )
 
                       
Segment adjusted income from operations for the three months ended September 30, 2010 was flat compared with the same period in 2009, excluding the $5 million favorable after-tax impact of a reserve study in the third quarter of 2009. These results reflect:
    higher net investment income;
    a lower operating expense ratio; and
    favorable disability claims experience.
These factors were partially offset by less favorable life claims experience.

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Segment adjusted income from operations increased 3% for the nine months ended September 30, 2010 compared with the same period in 2009 reflecting:
    higher net investment income;
    a lower operating expense ratio; and
    continued strong disability claims management.
These favorable impacts were partially offset by less favorable life claims experience. Results in 2010 include the $39 million after-tax favorable impact of reserve studies as compared with the $34 million after-tax favorable impact of reserve studies in 2009.
Revenues
Premiums and fees increased 1% for the three months and decreased 1% for the nine months ended September 30, 2010 compared with the same periods of 2009 reflecting the Company’s decision to exit two large, non-strategic assumed government life insurance programs (a reduction of $48 million for the three months and $125 million for the nine months ended September 30, 2010) and the sale of the renewal rights for the student and participant accident business (a reduction of $2 million for the three months and $12 million for the nine months ended September 30, 2010). Excluding the impact of these two items, premiums and fees increased 10% for the three months and 7% for the nine months ended September 30, 2010 compared to the same periods in 2009 as a result of disability and life sales growth and continued solid persistency.
Net investment income increased 6% for the three months and 9% for the nine months ended September 30, 2010 compared with the same periods of 2009 due to higher income from security and real estate partnerships and higher invested assets, somewhat offset by lower yields.
Benefits and Expenses
Benefits and expenses excluding special items for the three months ended September 30, 2010 increased by 3% as compared with the same period of 2009, which included the impact of the Company’s exit from the two large, non-strategic assumed government life insurance programs and the sale of the renewal rights for the student and participant accident business. Excluding the impact of these two items, benefits and expenses increased 11%, reflecting disability and life business growth, less favorable life claims and the absence of the favorable impact of the 2009 reserve study, partially offset by a lower operating expense ratio and favorable disability claims experience. The less favorable life results reflect higher claims in the group universal life and waiver of premium products. The lower operating expense ratio is driven by the absence of a 2009 expense charge related to a settlement. The favorable disability claims experience was due to continued strong claims management performance.
Benefits and expenses excluding special items for the nine months ended September 30, 2010 were essentially flat as compared with the same period of 2009, which included the Company’s exit from the two large, non-strategic assumed government life insurance programs and the sale of the renewal rights to the student and participant accident business. Excluding the impact of those two items, benefits and expenses increased 7%, reflecting disability and life business growth, less favorable life claims experience, partially offset by a lower operating expense ratio. The less favorable life claims experience was primarily driven by lower experience rated margins and the impact of the Gulf oil rig accident. The lower operating expense ratio reflects the absence of a 2009 expense charge related to a settlement and strong expense management partially offset by the Company’s strategic investments in information technology and the claims operations. Benefits and expenses in 2010 include the $56 million pre-tax favorable impact of reserve studies as compared to the $49 million favorable pre-tax impact of reserve studies in 2009.

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International Segment
Segment Description
The International segment includes supplemental health, life and accident insurance products and international health care products and services, including those offered to expatriate employees of multinational corporations.
The key factors for this segment are:
  premium growth, including new business and customer retention;
  benefits expense as a percentage of earned premium (loss ratio);
  operating expense as a percentage of earned premium (expense ratio); and
  impact of foreign currency movements.
Results of Operations
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 574     $ 482     $ 1,643     $ 1,378  
Net investment income
    20       17       59       50  
Other revenues
    8       4       23       14  
 
                       
Segment revenues
    602       503       1,725       1,442  
Benefits and expenses
    525       447       1,463       1,251  
 
                       
Income before taxes
    77       56       262       191  
Income taxes
    26       17       73       45  
Income attributable to noncontrolling interest
    1       1       3       2  
 
                       
Segment earnings
    50       38       186       144  
Less special items (after-tax) included in segment earnings:
                               
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
          (2 )           (2 )
Curtailment gain (See Note 13 to the Consolidated Financial Statements)
                      1  
Completion of IRS examination (See Note 16 to the Consolidated Financial Statements)
                      1  
 
                       
Adjusted income from operations
  $ 50     $ 40     $ 186     $ 144  
 
                       
Impact of foreign currency movements on current period segment earnings
  $ 1             $ 12          
 
                       
Impact of permanent investment of overseas earnings:
                               
Implementation effect
  $     $     $ 5     $ 14  
Effect of recording taxes at the tax rates of respective foreign jurisdictions
    4       3       18       8  
 
                       
Total
  $ 4     $ 3     $ 23     $ 22  
 
                       
Realized investment gains, net of taxes
  $     $     $ 2     $ 1  
 
                       

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Excluding the impact of the tax adjustments discussed below and foreign currency movements (presented in the table above), the International segment’s adjusted income from operations increased 22% for the three months and 24% for the nine months ended September 30, 2010 compared with the same periods last year. The increases for the three and nine months ended September 30, 2010, were primarily due to strong revenue growth and higher persistency in the supplemental health, life and accident insurance business, particularly in South Korea, as well as favorable loss ratios and membership growth in the expatriate employee benefits business. Both businesses continue to deliver attractive margins.
During the first quarter of 2010, the Company’s International segment implemented a capital management strategy to permanently invest the earnings of its Hong Kong operation overseas. Income taxes for this operation, and the South Korean operation that implemented a similar strategy in the second quarter of 2009, are recorded at the tax rate of the respective foreign jurisdiction. See the Financial Summary table for the effect of these capital management strategies on International’s adjusted income from operations for each applicable period.
Throughout this discussion, the impact of foreign currency movements was calculated by comparing the reported results to what the results would have been had the exchange rates remained constant with the prior year’s comparable period exchange rates.
Revenues
Premiums and fees. Excluding the effect of foreign currency movements, premiums and fees were $568 million for the third quarter of 2010, compared with reported premiums of $482 million for the third quarter of 2009, an increase of 18%, and $1.6 billion for the nine months ended September 30, 2010, compared with reported premiums of $1.4 billion for the same period last year, an increase of 14%. These increases were primarily attributable to new sales growth in the supplemental health, life and accident insurance operations, particularly in South Korea, and rate increases and membership growth in the expatriate employee benefits business.
Net investment income increased by 18% for the three months and the nine months ended September 30, 2010, compared with the same periods last year. The increase was primarily due to favorable foreign currency movements and asset growth, particularly in South Korea.
Benefits and Expenses
Excluding the impact of foreign currency movements, benefits and expenses were $520 million for the third quarter of 2010, compared with reported benefits and expenses of $447 million for the third quarter of 2009, an increase of 16% and $1.4 billion for the nine months ended September 30, 2010, compared to reported benefits and expenses of $1.3 billion for the nine months ended September 30, 2009, an increase of 12%. These increases were primarily due to business growth and higher claims in the supplemental health, life and accident insurance business, particularly in South Korea.
Loss ratios were flat for the three months and increased for the nine months ended September 30, 2010 in the supplemental health, life and accident insurance business compared to the same periods last year. In the expatriate benefits business, loss ratios improved for the three and nine months ended September 30, 2010, compared to the same periods last year, reflecting favorable claim experience and rate increases on renewal business.
Policy acquisition expenses increased for the three and nine months ended September 30, 2010, reflecting business growth and foreign currency movements partially offset by lower amortization of deferred acquisition costs associated with higher persistency in the supplemental health, life and accident insurance business.
Expense ratios increased for the third quarter of 2010 and for the nine months ended September 30, 2010, compared to the same periods last year. The increase for the three months ended September 30, 2010, reflects the acquisition costs associated with the purchase of Vanbreda International.
Other Items Affecting International Results
For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated 32% of the segment’s revenues for the three and nine months ended September 30, 2010. South Korea generated 53% of the segment’s earnings for the third quarter of 2010 and 45% of the segment’s earnings for the nine months ended September 30, 2010. Due to the concentration of business in South Korea, the International segment is exposed to potential losses resulting from economic and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, which could have a significant impact on the segment’s results and the Company’s consolidated financial results.

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Run-off Reinsurance Segment
Segment Description
The Company’s reinsurance operations were discontinued and are now an inactive business in run-off mode since the sale of the U.S. individual life, group life and accidental death reinsurance business in 2000. This segment is predominantly comprised of guaranteed minimum death benefit (“GMDB”, also known as “VADBe”), guaranteed minimum income benefit (“GMIB”), workers’ compensation and personal accident reinsurance products.
The determination of liabilities for GMDB and GMIB requires the Company to make assumptions and critical accounting estimates. The Company describes the assumptions used to develop the reserves for GMDB in Note 7 to the Consolidated Financial Statements and for the assets and liabilities associated with GMIB in Note 8 to the Consolidated Financial Statements. The Company also provides the effects of hypothetical changes in assumptions in the Critical Accounting Estimates section of the MD&A beginning on page 55 of the Company’s 2009 Form 10-K.
The Company excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable.
Results of Operations
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 6     $ 11     $ 20     $ 23  
Net investment income
    31       28       87       86  
Other revenues
    (119 )     (160 )     (73 )     (234 )
 
                       
Segment revenues
    (82 )     (121 )     34       (125 )
Benefits and expenses
    (21 )     (159 )     247       (295 )
 
                       
Income (loss) before income taxes
    (61 )     38       (213 )     170  
Income taxes (benefits)
    (24 )     8       (76 )     54  
 
                       
Segment earnings (loss)
    (37 )     30       (137 )     116  
Less: results of GMIB business
    (10 )     16       (109 )     149  
 
                       
Adjusted income (loss) from operations
  $ (27 )   $ 14     $ (28 )   $ (33 )
 
                       
Realized investment gains (losses), net of taxes
  $ 1     $ 4     $ 2     $ (2 )
 
                       
Segment results for the three months ended September 30, 2010 reflect losses for both the GMDB and GMIB businesses (presented in the table above) compared with essentially break-even results for the GMDB business and earnings for the GMIB business for the same period last year. The GMDB results for the three months ended September 30, 2010 included a reserve strengthening of $34 million after-tax primarily to reflect management’s consideration of the anticipated impact of the continued low level of current short-term interest rates and, to a lesser extent, a reduction in assumed lapse rates for policies that have taken or are assumed to take significant partial withdrawals. Losses on the GMIB business are primarily attributable to the impact of declines in interest rates on the GMIB fair value calculation during the three months ended September 30, 2010, partially offset by the impact of improvements in equity markets. Segment results also include favorable after-tax impacts of reserve studies for the workers compensation and personal accident businesses of $4 million for the three months ended September 30, 2010 and $14 million for the same period of 2009.
Segment results for the nine months ended September 30, 2010 reflect losses for both the GMDB and GMIB businesses (presented in the table above) compared to losses for the GMDB business and favorable results for the GMIB business during the nine months ended September 30, 2009. The GMDB results include charges for strengthening reserves during each of these periods ($34 million after-tax for the nine months ended September 30, 2010, compared to $47 million after-tax for the nine months ended September 30, 2009). Significant losses for the GMIB business for the nine months ended September 30, 2010 are attributed to declining market interest rates during the period, while significant gains on the GMIB business for the nine months ended September 30, 2009 are attributed to increasing interest rates and equity markets during that period. Segment results also include favorable after-tax impacts of reserve studies for the workers compensation and personal accident businesses of $1 million for the nine months ended September 30, 2010 and $16 million for the same period of 2009.

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See the Benefits and Expenses section for further discussion around the results of the GMIB and GMDB businesses.
Other Revenues
Other revenues included pre-tax losses of $119 million for the three months and $72 million for the nine months ended September 30, 2010 from futures contracts used in the GMDB equity hedge program (see Note 7 to the Consolidated Financial Statements), compared with losses of $161 million for the three months and $232 million for the nine months ended September 30, 2009. Amounts reflecting corresponding changes in liabilities for GMDB contracts were included in benefits and expenses consistent with GAAP when a premium deficiency exists (see below “Other Benefits and Expenses”). The Company held futures contract positions related to this program with a notional amount of $1.1 billion at September 30, 2010.
Benefits and Expenses
Benefits and expenses were comprised of the following:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
GMIB fair value (gain) loss
  $ 22     $ (19 )   $ 182     $ (215 )
Other benefits and expenses
    (43 )     (140 )     65       (80 )
 
                       
Benefits and expenses
  $ (21 )   $ (159 )   $ 247     $ (295 )
 
                       
GMIB fair value (gain) loss. Under the GAAP guidance for fair value measurements, the Company’s results of operations are expected to be volatile in future periods because capital market assumptions needed to estimate the assets and liabilities for the GMIB business are based largely on market-observable inputs at the close of each reporting period including interest rates (LIBOR swap curve) and market-implied volatilities. See Note 8 to the Consolidated Financial Statements for additional information about assumptions and asset and liability balances related to GMIB.
GMIB fair value losses of $22 million for the three months ended September 30, 2010, and $182 million for the nine months ended September 30, 2010, were primarily due to declining interest rates, partially offset by improving equity markets which result in decreased exposures.
GMIB fair value gains of $19 million for the three months ended September 30, 2009 were primarily due to increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures and updates to the risk and profit charge estimates. These favorable effects were partially offset by decreases in interest rates and other amounts, including experience varying from assumptions, model and in-force updates.
GMIB fair value gains of $215 million and for the nine months ended September 30, 2009, were primarily due to increases in interest rates, increases in underlying account values in the period and updates to the risk and profit charge estimates. These favorable effects were partially offset by increases to the annuitization assumption, updates to the lapse assumption and other amounts, including experience varying from assumptions, model and in-force updates.
The GMIB liabilities and related assets are calculated using a complex internal model and assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and related asset) is higher than the Company believes will ultimately be required to settle claims primarily because market-observable interest rates are used to project growth in account values of the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market participant. The Company’s payments for GMIB claims are expected to occur over the next 15 to 20 years and will be based on actual values of the underlying mutual funds and the 7-year Treasury rate at the dates benefits are elected. Management does not believe that current market-observable interest rates reflect actual growth expected for the underlying mutual funds over that timeframe, and therefore believes that the recorded liability and related asset do not represent what management believes will ultimately be required as this business runs off.
However, significant declines in mutual fund values that underlie the contracts (increasing the exposure to the Company) together with declines in the 7-year Treasury rates (used to determine claim payments) similar to what occurred periodically during the last few years would increase the expected amount of claims that would be paid out for contractholders who choose to annuitize. It is also possible that such unfavorable market conditions would have an impact on the level of contractholder annuitizations, particularly if such unfavorable market conditions persisted for an extended period.

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Other Benefits and Expenses. Other benefits and expenses reflected income for the three months and expense for the nine months ended September 30, 2010, compared to income for the three months and nine months ended September 30, 2009. These fluctuations reflect the impacts of changes in equity markets on the Company’s liabilities for guaranteed minimum death benefit contracts. Equity market improvements during the third quarter 2010 increased the underlying annuity account values, which decreased the exposure under the contracts and related benefits expense for the three months ended September 30, 2010. However, this was partially offset by additional other benefits and expenses of $52 million to strengthen GMDB reserves (see below) during the three months ended September 30, 2010. The nine months ended September 30, 2010 reflects this additional benefits expense, as well as the impact of decreases in equity markets earlier in the year, partially offset by increasing equity markets in the third quarter. Equity market improvements during the second and third quarters of 2009 increased the underlying annuity account values, which decreased the exposure under the contracts and related benefits expense. For the nine months ended September 30, 2009, this activity was partially offset by the impacts of equity market declines during the first quarter of 2009, in addition to a pre-tax charge of $73 million to strengthen GMDB reserves (see below). These changes in benefits expense are partially offset by futures gains and losses, discussed in Other Revenues above.
During the third quarter of 2010, the Company recorded additional other benefits and expenses of $52 million ($34 million after-tax) to strengthen GMDB reserves. The reserve strengthening was primarily to reflect management’s consideration of the anticipated impact of the continued low level of current short-term interest rates and, to a lesser extent, a reduction in assumed lapse rates for policies that have taken or are assumed to take significant partial withdrawals. In the first quarter of 2009, the Company recorded additional other benefits and expenses of $73 million ($47 million after-tax) to strengthen GMDB reserves. The amounts were primarily due to an increase in the provision for future partial surrenders due to overall market declines, adverse volatility-related impacts due to turbulent equity market conditions and adverse interest rate impacts.
See Note 7 to the Consolidated Financial Statements for additional information about assumptions and reserve balances related to GMDB.
Segment Summary
The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on ceding companies’ claim payments. For GMDB and GMIB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and policyholder behavior. For workers’ compensation and personal accident, the claim payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from its retrocessionaires may not be known with certainty for some time.
The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of September 30, 2010, based on current information. However, it is possible that future developments, which could include but are not limited to worse than expected claim experience and higher than expected volatility, could have a material adverse effect on the Company’s consolidated results of operations and could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to the Company.
Other Operations Segment
Segment Description
Other Operations consist of:
  non-leveraged and leveraged corporate-owned life insurance (“COLI”);
  deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and
  run-off settlement annuity business.

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Results of Operations
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Premiums and fees
  $ 28     $ 26     $ 86     $ 83  
Net investment income
    100       104       305       304  
Other revenues
    14       16       44       49  
 
                       
Segment revenues
    142       146       435       436  
Benefits and expenses
    113       111       342       353  
 
                       
Income before taxes
    29       35       93       83  
Income taxes
    7       12       28       20  
 
                       
Segment earnings
    22       23       65       63  
Less special item (after-tax) included in segment earnings:
                               
Completion of IRS examination (See Note 16 to the Consolidated Financial Statements)
                      1  
 
                       
Adjusted income from operations
  $ 22     $ 23     $ 65     $ 62  
 
                       
Realized investment gains (losses), net of taxes
  $ 2     $ 1     $ 2     $ (4 )
 
                       
Adjusted income from operations for Other Operations decreased for the three months ended September 30, 2010 compared with the same period in 2009, reflecting lower COLI earnings driven by lower investment income and a continued decline in deferred gain amortization associated with the sold businesses, partially offset by a favorable state income tax benefit. Adjusted income from operations increased for the nine months ended September 30, 2010 compared with the same period in 2009, reflecting higher COLI earnings driven by higher investment income and favorable mortality and a favorable state income tax benefit, partially offsetting these factors was a continued decline in deferred gain amortization associated with the sold businesses.
Revenues
Net investment income. Net investment income decreased 4% for the three months ended September 30, 2010, compared with the same period in 2009, reflecting lower average yields in both the COLI and settlement annuity businesses. For the nine months ended September 30, 2010, net investment income was in line with the same period in 2009, reflecting higher COLI average invested assets and higher income on partnership investments, offset by lower settlement annuity average invested assets and reinvestment yields.
Other revenues. Other revenues decreased 13% for three months and 10% for the nine months ended September 30, 2010, compared with the same periods in 2009 primarily due to lower deferred gain amortization related to the sold retirement benefits and individual life insurance and annuity businesses. The amount of the deferred gain amortization recorded was $7 million in the three months and $19 million in the nine months ended September 30, 2010, compared to $8 million in the three months and $24 million in the nine months ended September 30, 2009.
Corporate
Description
Corporate reflects amounts not allocated to segments, such as net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment operations), interest on uncertain tax positions, certain litigation matters, intersegment eliminations, compensation cost for stock options and certain corporate overhead expenses such as directors’ expenses and, beginning in 2010, pension expense related to the Company’s frozen pension plans.
FINANCIAL SUMMARY
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Segment loss
  $ (46 )   $ (35 )   $ (132 )   $ (97 )
Less special item (after-tax) included in segment loss:
                               
Completion of IRS examination (See Note 16 to the Consolidated Financial Statements)
                      12  
 
                       
Adjusted loss from operations
  $ (46 )   $ (35 )   $ (132 )   $ (109 )
 
                       

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Corporate’s adjusted loss from operations was greater for the three months ended September 30, 2010 compared with the same period in 2009 reflecting:
  higher net interest expense, primarily driven by a higher long-term debt balance;
  tax adjustments related to compensation resulting from health care reform; and
  pension expense related to the Company’s frozen pension plans which was reported in Corporate beginning in 2010.
Corporate’s adjusted loss from operations was greater for the nine months ended September 30, 2010 compared with the same period in 2009, primarily reflecting:
  higher net interest expense, primarily driven by a higher long-term debt balance;
  tax adjustments related to postretirement benefits and compensation resulting from health care reform; and
  pension expense related to the Company’s frozen pension plans which was reported in Corporate beginning in 2010.
DISCONTINUED OPERATIONS
Description
Discontinued operations represent results associated with certain investments or businesses that have been sold or are held for sale.
Discontinued operations for the nine months ended 2009 primarily represented a tax benefit from a past divestiture resolved at the completion of the 2005 and 2006 IRS examinations.

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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company maintains liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
  claim and benefit payments to policyholders; and
  operating expense requirements, primarily for employee compensation and benefits.
The Company’s subsidiaries normally meet their operating requirements by:
  maintaining appropriate levels of cash, cash equivalents and short-term investments;
  using cash flows from operating activities;
  selling investments;
  matching investment durations to those estimated for the related insurance and contractholder liabilities; and
  borrowing from its parent company.
Liquidity requirements at the parent company level generally consist of:
  debt service and dividend payments to shareholders; and
  pension plan funding.
The parent normally meets its liquidity requirements by:
  maintaining appropriate levels of cash, cash equivalents and short-term investments;
  collecting dividends from its subsidiaries;
  using proceeds from issuance of debt and equity securities; and
  borrowing from its subsidiaries.
Cash flows for the nine months ended September 30, were as follows:
                 
(In millions)   2010     2009  
Operating activities
  $ 1,283     $ 269  
Investing activities
  $ (1,058 )   $ (1,074 )
Financing activities
  $ 250     $ 290  
Cash flows from operating activities consist of cash receipts and disbursements for premiums and fees, mail order pharmacy and other revenues, gains (losses) recognized in connection with the Company’s GMDB equity hedge program, investment income, taxes, and benefits and expenses.
Because certain income and expense transactions do not generate cash, and because cash transactions related to revenue and expenses may occur in periods different from when those revenues and expenses are recognized in shareholders’ net income, cash flows from operating activities can be significantly different from shareholders’ net income.
Cash flows from investing activities generally consist of net investment purchases or sales and net purchases of property and equipment, which includes capitalized software, as well as cash used to acquire businesses.
Cash flows from financing activities are generally comprised of issuances and re-payment of debt at the parent company level, proceeds on the issuance of common stock resulting from stock option exercises, and stock repurchases. In addition, the subsidiaries report net deposits/withdrawals to/from investment contract liabilities (which include universal life insurance liabilities) because such liabilities are considered financing activities with policyholders.

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2010:
Operating activities
For the nine months ended September 30, 2010, cash flows from operating activities were higher than net income by $396 million. Net income contains certain after-tax income and expense items which neither provide nor use operating cash flow, including:
  unfavorable results of the GMIB business of $109 million;
 
  depreciation and amortization charges of $133 million; and
 
  realized investment gains of $29 million.
Cash flows from operating activities were higher than net income excluding the non-cash items noted above by $183 million. Excluding cash outflows of $72 million associated with the GMDB equity hedge program (which did not affect shareholders’ net income), cash flows from operating activities were higher than net income by $255 million. This result primarily reflects premium growth in the Health Care segment’s risk businesses due to significant new business in 2010, partially offset by pension contributions of $212 million.
Cash flows from operating activities increased by $1,014 million compared with the nine months ended September 30, 2009. Excluding the results of the GMDB equity hedge program (which did not affect shareholders’ net income), cash flows from operating activities increased by $854 million. This increase primarily reflects premium growth in the Health Care segment’s risk businesses as noted above and earnings growth in the Health Care, Disability and Life and International segments as well as lower contributions to the qualified domestic pension plan ($212 million for the nine months ended September 30, 2010, compared with $354 million for the nine months ended September 30, 2009). These favorable effects were partially offset by higher management compensation and income tax payments for the nine months ended September 30, 2010 compared with the same period last year.
Investing activities
Cash used in investing activities was $1,058 million. This use of cash consisted primarily of net purchases of investments of $517 million, cash used to fund acquisitions (net of cash acquired) of $332 million, and net purchases of property and equipment of $209 million.
Financing activities
Cash provided from financing activities consisted primarily of net proceeds from the issuance of long-term debt of $296 million, changes in cash overdraft position of $38 million, proceeds from issuances of common stock from employee benefit plans of $31 million and net deposits to contractholder deposit funds of $99 million. These inflows were partially offset by cash used for common stock repurchases of $201 million.
2009:
Operating activities
For the nine months ended September 30, 2009, cash flows from operating activities were less than net income by $705 million. Net income contains certain after-tax income and expense items which neither provide nor use operating cash flow, including:
  favorable results of the GMIB business of $149 million;
 
  a curtailment gain of $30 million, net of a cost reduction charge of $16 million;
 
  tax benefits related to the IRS examination of $20 million;
 
  depreciation and amortization charges of $135 million; and
 
  realized investment losses of $24 million.
Cash flows from operating activities were lower than net income excluding the non-cash items noted above by $681 million. This decrease was primarily due to cash outflows of $232 million associated with the GMDB equity hedge program which did not affect shareholders’ net income, contributions to the qualified domestic pension plan of approximately $354 million and increases in receivables.

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Investing activities
Cash used in investing activities was $1.1 billion. This use of cash consisted primarily of net purchases of investments of $856 million and net purchases of property and equipment of $218 million.
Financing activities
Cash provided from financing activities consisted primarily of proceeds from the net issuance of long-term debt of $346 million, offset by repayments of short-term debt, primarily commercial paper, of $199 million. Financing activities also included net deposits to contractholder deposit funds of $65 million.
Interest Expense
Interest expense on long-term debt, short-term debt and capital leases was as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2010     2009     2010     2009  
Interest expense
  $ 47     $ 43     $ 135     $ 122  
                &n