Back to Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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 1-8323

GRAPHIC

CIGNA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware   06-1059331
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
900 Cottage Grove Road, Bloomfield, Connecticut   06002
(Address of principal executive offices)   (Zip Code)
(860) 226-6000
Registrant's telephone number, including area code
(860) 226-6741
Registrant's facsimile number, including area code

                 
    SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:    
    Title of each class       Name of each exchange on which registered    
    Common Stock, Par Value $0.25       New York Stock Exchange, Inc.    
                  
    SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:    
    NONE    
                    

    Indicate by check mark       YES       NO    
   

if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

      þ       o    
   

if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

      o       þ    
   

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.

      þ       o    
   

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).

      þ       o    
   

if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

      o       þ    
   

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    

   

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

      o       þ    
                         

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2013 was approximately $20.5 billion.

As of January 31, 2014, 273,566,004 shares of the registrant's Common Stock were outstanding.

Part III of this Form 10-K incorporates by reference information from the registrant's definitive proxy statement related to the 2014 annual meeting of shareholders.



Table of Contents

 
   
   
  Page
CAUTIONARY STATEMENT    
PART I   1
 

ITEM 1.

 

Business

 

1
      Overview   1
      Global Health Care   2
      Global Supplemental Benefits   8
      Group Disability and Life   9
      Run-off Reinsurance   11
      Other Operations   11
      Investments and Investment Income   11
      Regulation   12
      Miscellaneous   17
ITEM 1A.   Risk Factors   18
ITEM 1B.   Unresolved Staff Comments   26
ITEM 2.   Properties   26
ITEM 3.   Legal Proceedings   26
ITEM 4.   Mine Safety Disclosures   26
EXECUTIVE OFFICERS OF THE REGISTRANT   27

PART II

 

28
 

ITEM 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

28
ITEM 6.   Selected Financial Data   30
ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   31
ITEM 7A.   Quantitative and Qualitative Disclosures about Market Risk   59
ITEM 8.   Financial Statements and Supplementary Data   60
ITEM 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   115
ITEM 9A.   Controls and Procedures   115
ITEM 9B.   Other Information   115


 
   
   
  Page
PART III   116
 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

 

116
    A.   Directors of the Registrant   116
    B.   Executive Officers of the Registrant   116
    C.   Code of Ethics and Other Corporate Governance Disclosures   116
    D.   Section 16(a) Beneficial Ownership Reporting Compliance   116
ITEM 11.   Executive Compensation   116
ITEM 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   117
ITEM 13.   Certain Relationships, Related Transactions and Director Independence   117
ITEM 14.   Principal Accountant Fees and Services   117

PART IV

 

118
 
ITEM 15.   Exhibits and Financial Statement Schedules   118
SIGNATURES   119
INDEX TO FINANCIAL STATEMENT SCHEDULES   FS-1
INDEX TO EXHIBITS   E-1


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on Cigna's current expectations and projections about future trends, events and uncertainties. These statements are not historical facts. Forward-looking statements may include, among others, statements concerning our business strategy, strategic or operational initiatives, including our ability to deliver improved health services outcomes and productivity for our customers and clients while lowering the costs of health care; future growth and expansion; future financial or operating performance; economic, regulatory or competitive environments; and our projected cash position, future pension funding and financing or capital deployment plans. You may identify forward-looking statements by the use of words such as "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "may," "should," "will" or other words or expressions of similar meaning, although not all forward-looking statements contain such terms.

Forward-looking statements are subject to risks and uncertainties, both known and unknown, that could cause actual results to differ materially from those expressed or implied in forward-looking statements. Such risks and uncertainties include, but are not limited to: our ability to achieve our financial, strategic and operational plans or initiatives; our ability to predict and manage medical costs and price effectively and develop and maintain good relationships with physicians, hospitals and other health care providers; our ability to realize the expected benefits of strategic transactions and/or acquisitions; the substantial level of government regulation over our business and the potential effects of new laws or regulations or changes in existing laws or regulations; the outcome of litigation, regulatory audits, investigations and actions and/or guaranty fund assessments; uncertainties surrounding participation in government-sponsored programs such as Medicare; and unfavorable industry, economic or political conditions, as well as more specific risks and uncertainties discussed in Part I, Item 1A – Risk Factors and Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K and as described from time to time in our future reports filed with the Securities and Exchange Commission. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Cigna undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.



Back to Contents

PART I
ITEM 1. Business




PART I

ITEM 1.  Business

Overview


Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as "Cigna," the "Company," "we" or "our"), is a global health services organization with a mission to help customers improve their health, well-being and sense of security. Our subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services.

To execute on our mission, we have focused our efforts over the past several years on serving the emerging needs of our customers around the world through our "Go Deep, Go Global, Go Individual" strategy, as follows:

GO DEEP: We seek to increase our presence and brand strength in key "go deep" geographic areas, grow in targeted segments or capabilities, and deepen our relationships with current customers through cross-selling.

GO GLOBAL: We seek to deliver a range of differentiated products and superior service to meet the distinct needs of a growing global middle class and a globally mobile workforce through expansion in existing international markets and extension of our business model to new geographic areas.

GO INDIVIDUAL: We strive to establish a deep understanding of our customers' unique needs and to be a highly customer-centric organization. To do this, we are seeking to further simplify the buying process by providing choice, transparency of information, and a personalized customer experience. Our goal is to build long-term relationships with each of our customers and meet their needs throughout each stage of their lives regardless of the customer's plan type: employer-based, government-sponsored, or individual coverage.

As part of this strategy, we have focused our efforts on delivering innovative health and wellness solutions tailored to our employer and government customers, enhancing collaboration with physicians and hospitals to offer affordable, value-based high quality care to individuals and building deeper relationships with individual customers through the world. Through these efforts, we believe we can achieve better health outcomes for our global customers and improve employee productivity, all while lowering the costs of health care for all parties.

As of December 31, 2013, our consolidated shareholders' equity was $10.6 billion, assets were $54.3 billion and we reported revenues of $32.4 billion for the year then ended. Our revenues are derived principally from premiums on insured products, fees from self-insured products and services, mail-order pharmacy sales, and investment income.

We report the financial results of our businesses in five segments, the following three of which are the most significant:

 
  Segment
   
  % of revenues
   
  Description
   

 

 

Global Health Care

        78%         Aggregates the Commercial and Government operating segments:    

 

                     
Commercial
   

 

                     

  Encompasses both our U.S. commercial and certain international health care businesses.    

 

                     

  Serves employers and their employees, including globally mobile individuals, and other groups (e.g. governmental and non-governmental organizations, unions and associations). In addition, our U.S. commercial health care business also serves individuals.    

 

                     

  Offers our insured and self-insured customers medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated as part of a comprehensive global health care benefit program.    

 

                     
Government
   

 

                     

  Offers Medicare Advantage, Medicare Part D and Medicaid plans.    

 

 

Global Supplemental Benefits

        8%         This segment offers supplemental health, life and accident insurance products in selected international markets and the U.S.    

 

 

Group Disability and Life

        12%         This segment provides group long-term and short-term disability, group life, accident and specialty insurance products and related services.    

CIGNA CORPORATION - 2013 Form 10-K    1



Back to Contents

PART I
ITEM 1. Business

We also report in two other segments: Run-off Reinsurance and Other Operations, including Corporate-owned Life Insurance.


Key Transactions

Over the past two years, we have entered into a number of transactions that have helped us to achieve our strategic goals by: (1) repositioning the portfolio for growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving our strategic and financial flexibility; and (3) pursuing additional opportunities in high growth markets with particular focus on individuals. Specifically:

In February 2013, we effectively exited our Run-off guaranteed minimum death benefit ("GMDB" also known as "VADBe") and guaranteed minimum income benefit ("GMIB") reinsurance businesses by entering into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire") to reinsure 100% of our future exposures for these businesses, net of retrocessional arrangements in place as of February 4, 2013, up to a specified limit.

In June 2013, we entered into a ten-year pharmacy benefit management services agreement with Catamaran Corporation ("Catamaran"). Under this agreement, we will utilize Catamaran's technology and service platforms, prescription drug procurement and inventory management capabilities, and order fulfillment services to lower costs and enhance our home delivery pharmacy, retail network contracting and claims processing services.

In 2012, we entered into three strategically significant transactions targeting several key markets: seniors, individual and global supplemental benefits:

We acquired HealthSpring, a Medicare Advantage provider, to assist us in serving individuals across their life stages and deepen our presence in a number of geographic markets. This acquisition brought us industry-leading physician partnership capabilities, deepened our existing client and customer relationships, and facilitated a broader deployment of our range of health and wellness capabilities and product offerings.

We acquired Great American Supplemental Benefits to both strengthen our capabilities in the individual market and facilitate our expansion into the Medicare supplemental business.

We entered into a joint venture with Finansbank to expand our global footprint in Turkey.


Other Information

The financial information included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2013 ("Form 10-K") is in conformity with accounting principles generally accepted in the United States of America ("GAAP"), unless otherwise indicated. Industry rankings and percentages set forth herein are for the year ended December 31, 2013 unless otherwise indicated. In addition, statements set forth in this document concerning our rank or position in an industry or particular line of business have been developed internally, based on publicly available information, unless otherwise noted.

Cigna Corporation was incorporated in Delaware in 1981. Our annual, quarterly and current reports, proxy statements and other filings, and any amendments to these filings, are made available free of charge on our website (http://www.cigna.com, under the "Investors – Quarterly Reports and SEC Filings" captions) as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the Securities and Exchange Commission (the "SEC"). We use our website as a channel of distribution for material company information. Important information, including news releases, analyst presentations and financial information regarding Cigna is routinely posted on and accessible at www.cigna.com. See "Code of Ethics and Other Corporate Governance Disclosures" in Part III, Item 10 beginning on page 116 of this Form 10-K for additional available information.

Global Health Care


The Global Health Care segment constitutes approximately 80% of our revenues and aggregates the Commercial and Government operating segments due to their similar economic characteristics, products and services and regulatory environment. All products and services sold by this segment are offered by subsidiaries of Cigna Corporation. We seek to differentiate ourselves in this business by providing deep customer insights, high quality care delivery, effective product integration and unique product offerings. We expect to accomplish these goals by targeting selected geographies and market segments and accelerating our engagement with employers, individuals and preferred health care professionals.

Our Commercial operating segment encompasses both our U.S. commercial and certain international health care businesses serving employers and their employees, including globally mobile individuals, and other groups (e.g. governmental and non-governmental organizations, unions and associations). In addition, our U.S. commercial health care business also serves individuals. Through this segment, we offer our insured and self-insured customers medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated as part of a comprehensive global health care benefit program. Our Government operating segment offers Medicare Advantage, Medicare Part D and Medicaid plans.


Principal Products and Services

Commercial Medical Health Plans – U.S. and International

The Commercial operating segment, either directly or through its partners, offers some or all of its products in all 50 states, the District

2    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

of Columbia, the U.S. Virgin Islands, Canada, Europe, the Middle East, and Asia. We offer a variety of medical plans including:

Managed Care Plans. Our managed care benefit plans (including Open Access Plus and Health Maintenance Organizations ("HMO")) encourage the use of "in-network" versus "out-of-network" health care providers and primary care physicians. Employers may elect to use a subset of our network to better manage costs and quality.

Preferred Provider Plans. Our preferred provider ("PPO") product line features a network with broader provider access than the Managed Care Plans. The preferred provider product line may be at a higher medical cost than our Managed Care Plans.

Choice Fund® Suite of Consumer-Driven Products. Our medical plans are often combined with the Cigna Choice Fund suite of products, including Health Reimbursement Accounts ("HRA"), Health Savings Accounts ("HSA") and Flexible Spending Accounts ("FSA") that are designed to encourage customers to understand and manage their health and health benefits. Customers can use these accounts to pay medical care expenses not covered by their base medical plan. In most cases, these products are combined with a high deductible medical plan.

Approximately 85% of our commercial medical customers are in funding arrangements where lower medical costs directly benefit our corporate clients and their employees. These funding arrangements for our commercial medical health plans and dental coverages are as follows:

 

 


Funding Arrangement

        % of Commercial
Medical Customers
     
Description
   

 

 

Administrative Services Only ("ASO" or "self-insured")

        81%      

ASO plan sponsors are responsible for self-funding all claims, but may purchase stop loss insurance to limit exposure for claims in excess of a predetermined amount.

We collect fees from sponsors for providing access to our participating provider network and for other services and programs including: claim administration; behavioral health; disease management; utilization management; cost containment; dental; and pharmacy benefit management.

In some cases, we provide performance guarantees associated with meeting certain service standards, clinical outcomes or financial metrics.

   

 

 

Retrospectively Experience-rated ("Insured – Experience-rated")

        6%      

Premium charged during the policy period ("initial premium") may be adjusted following the policy period for actual claim, and in some cases, administrative cost experience of the policyholder.

When claims and expenses are less than the initial premium charged (an "experience surplus"), the policyholder may be credited for a portion of this premium.

However, if claims and expenses exceed the initial premium (an "experience deficit"), we generally bear the risk. In certain cases, experience deficits may be recovered through future year experience surpluses if the policyholder account renews.

   

 

 

Insured – Guaranteed Cost

        13%      

We establish the cost to the policyholder at the beginning of a policy period and generally cannot subsequently adjust premiums to reflect actual claim experience until the next annual renewal.

Employers and other groups with guaranteed cost policies are generally smaller than those with experience-rated group policies; accordingly, our claim and expense assumptions may be based in whole or in part on prior experience of the policyholder or on a pool of accounts, depending on the policyholder's size and the statistical credibility of their experience.

HMO and individual plans (medical and dental) are offered on a guaranteed cost basis only. Beginning in 2014, the Patient Protection and Affordable Care Act requires that non-grandfathered individual and small group plans be community rated.

   

We offer stop loss insurance coverage for ASO plans that provides reimbursement for claims in excess of a predetermined amount for individuals ("specific"), the entire group ("aggregate"), or both. We also include stop loss features in our experience-rated group medical insurance policies.

In most states, individual and group insurance/HMO premium rates must be approved by the applicable state regulatory agency (typically department of insurance) and state laws may restrict or limit the use of rating methods. Premium rates for groups and individuals are subject to state review for unreasonable increases. In addition, the Patient Protection and Affordable Care Act (also referred to as "Health Care Reform") subjects rate increases above an identified threshold to review by the United States Department of Health and Human Services ("HHS"), requires most non-grandfathered individual and small group health insurance policies to be community rated (beginning in 2014) and requires payment of premium refunds on individual and group medical insurance products if minimum medical loss ratio ("MLR") requirements are not met. The MLR represents the percentage of premiums used to pay customer medical claims and other activities that improve the quality of care. See the "Regulation" section of this Form 10-K for additional information on the commercial MLR requirements of Health Care Reform.


Government Health Plans

Medicare Advantage

We offer Medicare Advantage plans in 15 states and the District of Columbia through Cigna-HealthSpring. Under a Medicare Advantage plan, Medicare-eligible beneficiaries may receive health care benefits, including prescription drugs, through a managed care health plan such as our coordinated care plans. A significant portion of our Medicare Advantage customers receive medical care from our innovative plan models that focus on developing highly engaged physician networks, aligning payment incentives to improved health

CIGNA CORPORATION - 2013 Form 10-K    3



Back to Contents

PART I
ITEM 1. Business

outcomes, and using timely and transparent data sharing. We are focused on continuing to expand these models in the future.

We receive revenue from the Centers for Medicare and Medicaid Services ("CMS") for each plan customer based on customer demographic data and actual customer health risk factors compared to the broader Medicare population. We also may earn additional revenue from CMS related to quality performance measures (known as "Medicare Stars"). Additional premiums may be received from customers, representing the difference between CMS subsidy payments and our assumed revenue determined as part of our annual Medicare Advantage bid submissions. Beginning in 2014, Health Care Reform requires Medicare Advantage and Medicare Part D plans to meet a minimum MLR of 85%. Under the rules proposed by HHS, if the MLR for a CMS contract is less than 85%, the contractor is required to pay a penalty to CMS and could be subject to additional sanctions if the MLR continues to be less than 85% for successive years.


Medicaid

We offer Medicaid coverage to low income individuals in selected markets in Texas. Our Medicaid customers benefit from many of the coordinated care aspects of our Medicare Advantage programs. We expect to expand our Medicaid operations during 2014 as a result of previously awarded contracts in Illinois and Texas.


Medicare Part D

Our Medicare Part D prescription drug program provides a number of plan options, as well as service and information support to Medicare and Medicaid eligible customers. Our plans are available in all 50 states and the District of Columbia and offer the savings of Medicare combined with the flexibility to provide enhanced benefits and a drug list tailored to individuals' specific needs. Retirees benefit from broad network access and value-added services intended to help keep them well and save them money.


Specialty Products

Our specialty products and services described below are designed to improve quality, lower the cost of medical services and help customers achieve better health outcomes. These products can be sold on a standalone basis, but we believe they are most effective when integrated with a Cigna-administered health plan. Our specialty products are focused in the areas of medical, behavioral, pharmacy management, dental and vision.


Medical Specialty


Behavioral Health Specialty

We arrange for behavioral health care services for customers through our network of approximately 83,500 participating behavioral health care professionals and 10,500 facilities and clinics. We offer behavioral health care case management services, employee assistance programs (EAP), and work/life programs to employers, government entities and other groups sponsoring health benefit plans. We focus on integrating our programs and services with medical, pharmacy and disability programs to facilitate customized, holistic care.


Pharmacy Management

We offer prescription drug plans to our insured and ASO customers both in conjunction with our medical products and on a stand-alone basis. With a network of over 65,000 contracted pharmacies, Cigna Pharmacy Management is a comprehensive pharmacy benefits manager ("PBM") offering clinical integration programs and specialty pharmacy solutions. We also offer fast, cost-effective mail order, telephone and on-line pharmaceutical fulfillment services through our home delivery operation. Cigna Home Delivery Pharmacy provides high-quality, efficient home delivery of prescription medications.

Our medical and pharmacy coverage can meet the needs of customers with complex medical conditions requiring specialty pharmaceuticals. These types of medications are covered under both pharmacy and medical benefits and can be expensive, often requiring associated lab work and administration by a health care professional. Therefore, coordination is critical in improving affordability and outcomes. Clients with Cigna-administered medical and pharmacy coverage benefit from continuity of care, integrated reporting, and aggressive unit cost discounts on all specialty drugs – regardless of where they are administered.

Under our 2013 agreement, Catamaran provides us with access to their technology and service platforms, prescription drug procurement and inventory management capabilities, retail network contracting and claims processing services.

4    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business


Dental

We offer a variety of dental care products including dental health maintenance organization plans ("Dental HMO") in 37 states, dental preferred provider organization ("Dental PPO") plans in 42 states and the District of Columbia, exclusive dental provider organization plans, traditional dental indemnity plans and a dental discount program. Employers and other groups can purchase our products as stand-alone products or integrated with medical products. Additionally, individual customers can purchase Dental PPO plans in conjunction with individual medical policies.

As of December 31, 2013, our dental customers totaled approximately 12.1 million, most of whom are in self-insured plans. All of our Dental HMO customers participate in guaranteed cost insured plans. Our customers access care from one of the largest Dental PPO networks and Dental HMO networks in the U.S., with the following approximate number of dental care providers: 304,900 Dental PPO-contracted access points (105,800 unique health care professionals) and 77,400 Dental HMO-contracted access points (19,000 unique health care professionals).


Vision

Cigna Vision offers flexible, cost-effective PPO coverage that includes a range of both in and out-of-network benefits for routine vision services offered in conjunction with our medical and dental product offerings. Our national vision care network, consisting of approximately 63,000 health care providers in over 24,000 locations, includes private practice ophthalmologist and optometrist offices, as well as retail eye care centers.


Service and Quality

Customer Service

For U.S.-based customers, we operate 18 service centers that together processed approximately 160 million medical claims in 2013. As of December 31, 2013, we operated 13 call centers, ten of which serve customers 24 hours a day, 365 days a year. The remaining three call centers exclusively service Medicare Advantage health care providers and customers and operate for extended hours during high volume periods to accommodate customer demands.

In our international health care business, we provide our 1.3 million customers around the globe with access to our health care provider networks and case management experts. Claims specialists are available 24 hours a day, 365 days a year, through service centers dedicated to their unique needs. We use a wide range of measurement tools to better understand customers' needs – ranging from quick 5-minute surveys of their call-center experience to more elaborate tracking of loyalty as measured by the likelihood of them to refer Cigna to a friend.


Technology

We continue to invest in our information technology infrastructure to maximize and leverage the strategic capabilities of our businesses. These investments are focused on improving the customer experience and affordability, ensuring high quality production support for our applications and infrastructure, and ensuring regulatory compliance. The customer enabling investments include retail-centric infrastructure improvements, flexible and efficient transaction processing and innovative mobile tools and Internet-enabled technology that support our focus on providing customers with a personalized experience in making health care decisions and leveraging customer insights to drive our strategy and mission.


Quality Medical Care

Our commitment to promoting quality medical care to the people we serve is reflected in a variety of activities.


Physician Engagement for Health Improvement

Most recently, we have been increasing our engagement with physicians through the rapid development of the types of arrangements discussed below. More than one million medical customers are currently serviced by physicians compensated under these types of arrangements.

Collaborative Accountable Care Organizations ("CACs"). We are focused on collaborating with physicians and other health care professionals and facilities with the goal of improving the quality of care and patient satisfaction while lowering medical costs, resulting in improved overall value. This focus is illustrated by our more than 85 CACs currently established and by our commitment to continue increasing the number of CACs over the next several years. Our goal is to reach 100 of these programs in 2014.

Independent Practice Associations – Cigna-HealthSpring. With the innovative physician engagement models in our Cigna-HealthSpring business, we utilize a variety of business arrangements that shift the physician's reimbursement from the traditional fee-for-service model to one that is focused on rewarding quality medical outcomes and an enhanced patient experience at a lower cost. In these arrangements, the physician groups share financial outcomes with us. The Cigna-HealthSpring clinical model also includes outreach to new and at-risk patients to ensure they are accessing their primary care physician.


Participating Provider Network/Cigna Care NetworkSM

We have an extensive network of participating health care professionals, hospitals, and other facilities, pharmacies and providers of health care services and supplies. In most instances, we contract with them directly; however, in some instances, we contract with third parties for access to their provider networks and care management services. In addition, we have entered into strategic alliances with several regional managed care organizations (e.g. Tufts Health Plan, HealthPartners, Inc., Health Alliance Plan, and MVP Health Plan) to gain access to their provider networks and discounts.

We credential physicians, hospitals and other health care professionals in our participating provider networks using quality criteria that meet

CIGNA CORPORATION - 2013 Form 10-K    5



Back to Contents

PART I
ITEM 1. Business

or exceed the standards of external accreditation or state regulatory agencies, or both. Typically, most health care professionals are re-credentialed every three years.

The Cigna Care Network, a benefit design option available in 69 service areas across the U.S., is a subset of participating specialist physicians so designated based on specific clinical quality and cost-efficiency criteria. Customers pay reduced co-payments or co-insurance when they receive care from a specialist designated as a Cigna Care Network physician. Participating specialists are evaluated regularly for the Cigna Care Network designation.


Onsite Medical Care

Cigna Medical Group is a multi-specialty medical group practice that delivers primary care and certain specialty care services through 25 medical facilities and approximately 180 employed clinicians in the Phoenix, Arizona metropolitan area. Twenty-two of these multi-specialty health care centers and their affiliated primary care physicians have received the top level of accreditation (level 3) from the National Committee for Quality Assurance ("NCQA") a private, nonprofit organization dedicated to improving health care quality. Cigna Medical Group currently holds the highest level of this accreditation for the greatest number of practices and physicians in the state of Arizona.

Cigna Onsite Health. Our onsite services include more than 150 health centers at various employer sites that offer health coaching, wellness seminars and biometric screenings.

LivingWell Health Centers. Our Medicare Advantage customers may receive care from a team of physicians, nurse practitioners and pharmacists. We operate five stand-alone centers and seven "practices" that incorporate the principles of the larger stand-alone centers while allowing the customer to continue to see his or her primary care physician in an office setting. In addition, we expanded our service model to include embedded case management resources in three physician practice locations.


External Validation

We continue to demonstrate our commitment to quality and have a broad scope of quality programs validated through nationally recognized external accreditation organizations. We were awarded Excellent, Commendable or Accredited for Health Plan accreditation from NCQA in 36 of our markets. Additional NCQA recognitions include Full Accreditation for Managed Behavioral Healthcare Organization for Cigna Behavioral Health, Performance Reporting for Wellness & Health Promotion accreditation for our wellness programs and Physician & Hospital Quality Certification for our provider transparency program. We have Full Accreditation for Health Utilization Management, Case Management and Pharmacy Benefit Management from URAC, an independent, nonprofit health care accrediting organization dedicated to promoting health care quality through accreditation, certification and commendation.

We participate in the NCQA's Health Plan Employer Data and Information Set ("HEDIS®") Quality Compass Report, whose Effectiveness of Care measures are a standard set of metrics to evaluate the effectiveness of managed care clinical programs. Our national results compare favorably to industry averages.


Markets and Distribution

We offer health care and related products and services in the following customer segments or markets:

 
   
  % of Medical
Customers

 
   
National   Multi-state employers with 5,000 or more U.S.-based, full-time employees. We primarily offer ASO funding solutions in this market segment.     27%  
Middle Market   Employers generally with 250 to 4,999 U.S.-based, full-time employees. This segment also includes single-site employers with more than 5,000 employees, Taft-Hartley plans and other third party payers. We offer ASO, experience-rated and guaranteed cost funding solutions in this market segment.     52%  
Select   Employers generally with 51-249 eligible employees. We offer ASO and guaranteed cost funding solutions in this market segment.     7%  
Individual   Individuals in ten states as of December 31, 2013: Arizona, California, Colorado, Connecticut, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. Effective October 1, 2013, we began offering coverage on five public health insurance exchanges (Arizona, Colorado, Florida, Tennessee and Texas). We offer plans only on a guaranteed cost basis in this market segment.     2%  
Government   Offers Medicare Advantage (both to individuals who are post-65 retirees, as well as employer group sponsored pre- and post-65 retirees), Prescription Drug programs, and Medicaid products as managed care alternatives to publicly funded health care programs.     3%  
International   Focused on the needs of local and multinational companies and organizations and their local and globally mobile employees and dependents. We offer guaranteed cost, experience-rated and ASO funding solutions in this market segment.     9%  
   

We employ sales representatives to distribute our products and services through insurance brokers and insurance consultants or directly to employers, unions and other groups. We also employ representatives to sell utilization review services, behavioral health care and pharmacy management, and employee assistance services directly to insurance companies, HMOs, third party administrators and employer groups. As of December 31, 2013, our field sales force consisted of over 1,000 sales representatives in more than 100 field

6    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

locations. In our Cigna-HealthSpring business, Medicare Advantage enrollment is generally a decision made individually by the customer, and accordingly, sales agents and representatives focus their efforts on in-person contacts with potential enrollees, as well as telephonic and group selling venues.


Competition and Industry Developments

Our business is subject to intense competition and continuing industry consolidation that has created an even more competitive business environment. In certain geographic locations, some health care companies may have significant market share positions, but no one competitor dominates the health care market nationally. We expect a continuing trend of consolidation in the industry given the current economic and political environment. We also expect continued vertical integration, with the line blurring between clinicians and hospitals, and traditional insurers.

Competition in the health care market exists both for employers and other groups sponsoring plans and for the employees in those instances where the employer offers its employees a choice of products from more than one health care company. Most group policies are subject to annual review by the policyholder, who may seek competitive quotations prior to renewal. We expect competition to increase in the individual market as a result of the introduction of the new health insurance Marketplaces (or exchanges) under Health Care Reform.

The primary competitive factors are quality and cost-effectiveness of service and provider networks; effectiveness of medical care management; products that meet the needs of employers and their employees; total cost management; technology; and effectiveness of marketing and sales. Financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor. We believe that our health advocacy capabilities, holistic approach to consumer engagement, breadth of product offerings, clinical care and medical management capabilities and array of product funding options are competitive advantages. These advantages allow us to respond to the diverse needs of our customer base. We also believe that our focus on helping to improve the health, well-being and sense of security of the customers we serve will allow us to differentiate ourselves from our competitors.

Our principal competitors in the U.S.-based business are:

other large insurance companies that provide group health and life insurance products;

Blue Cross and Blue Shield organizations;

stand-alone HMOs and PPOs;

HMOs affiliated with major insurance companies and hospitals; and

national managed pharmacy, behavioral health and utilization review services companies.

The primary competitors of the international health care business include U.S.-based and European health insurance companies with global health benefits operations. The primary competitors for our international health care operations in the United Kingdom and Spain are regional and local insurers.

Competition also arises from smaller regional or specialty companies with strength in a particular geographic area or product line, administrative service firms and, indirectly, self-insurers. In addition to these traditional competitors, a new group of competitors is emerging. These new competitors are focused on delivering employee benefits and services through internet-enabled technology that allows consumers to take a more active role in the management of their health. This is accomplished primarily through financial incentives, access to enhanced medical quality data and other information sharing. The effective use of our health advocacy, customer insight and physician engagement capabilities, along with decision support tools (some of which are web-based) and enabling technology are critical to success in the health care industry, and we believe our capabilities in these areas will be competitive differentiators.

2014 is a key year in the implementation of Health Care Reform, with the advent of the public Marketplaces (i.e. exchanges), the Health Insurer fee, the reinsurance assessment, and the MLR requirement for Medicare Advantage and Medicare Part D Plans. Despite the administrative challenges involved in the rollout of the public Marketplaces, we continue to operate under the assumption that Health Care Reform will largely be implemented as the law was originally written. See the "Regulation" section of this Form 10-K for additional information regarding Health Care Reform.

On February 21, 2014, CMS issued its Advance Notice of Methodological Changes for Calendar Year 2015 for Medicare Advantage Capitation Rates, Part C and Part D Payment Policies (the "Notice"). The final terms are expected to be published on April 7, 2014. While the terms contained within the Notice are within the range of our expectations, there remain numerous open issues and substantial uncertainties regarding the final terms of the Notice. We expect that CMS will receive a significant number of comments from interested parties (including Cigna) prior to issuance of the final terms; however, there can be no assurance that CMS will amend its current positions. Given the uncertainty regarding the final terms of the Notice, we cannot reliably estimate the impact on our business, revenues or results of operations in 2015 and beyond; under certain circumstances, it is possible that the impact could be materially adverse. In addition, we expect to adjust our programs and services in response to the proposed 2015 terms.

CIGNA CORPORATION - 2013 Form 10-K    7



Back to Contents

PART I
ITEM 1. Business

Global Supplemental Benefits


Our Global Supplemental Benefits segment offers supplemental health, life and accident insurance products in selected international markets and the United States. With local licenses and partnerships in approximately 20 countries and jurisdictions, we are able to offer products and services to local citizens and globally mobile individuals. All products and services are offered by subsidiaries of Cigna Corporation. This segment constituted 8% of our consolidated revenues for the year ended December 31, 2013.

We continue to distinguish ourselves in the global supplemental health, life and accident businesses through our differentiated direct-to-consumer distribution, customer insights and marketing capabilities. We enter new markets when the opportunity to bring our product and health solutions is attractive. Over the past several years, we have continued to extend our product offerings and geographic reach. For example, in 2012, we extended our reach in Turkey through the joint venture with Finansbank and expanded into the U.S. Medigap and supplemental lines of business through the acquisition of Great American Supplemental Benefits. In 2011, our acquisition of FirstAssist in the U.K. added a travel insurance product line and expanded our distribution channels. In 2014, we will begin offering products in India through our joint venture with TTK Group.


Principal Products and Services

Supplemental Health, Life and Accident Insurance

Supplemental health, life and accident insurance products generally provide simple, affordable coverage of risks for the health and financial security of individuals. Supplemental health products provide specified payments for a variety of health risks and include personal accident, accidental death, critical illness, hospitalization, travel, dental, cancer and other dread disease coverages. We also offer customers individual private medical insurance, term and variable universal life insurance, and other savings products.


Medicare Supplement Plans

We offer individual Medicare Supplement plans that provide retirees with federally standardized Medigap-style plans. Retirees may select among the various plans with specific plan options to meet their unique needs and may visit, without the need for a referral, any health care professional or facility that accepts Medicare throughout the United States.


Pricing and Reinsurance

Premium rates for our global supplemental benefits products are based on assumptions about mortality, morbidity, customer acquisition and retention, expenses and target profit margins, as well as interest rates. For variable universal life insurance products, fees consist of mortality, administrative, asset management and surrender charges assessed against the contractholder's fund balance. Mortality charges on variable universal life may be adjusted prospectively to reflect expected mortality experience. For Medicare Supplement products, premium rates and fees reflect assumptions about future claims, customer retention, expenses, customer demographics, investment returns, and profit margins. Most contracts permit premium rate changes at least annually.

A global approach to underwriting risk management allows for each local business to underwrite and accept risk within specified limits. Retentions are centrally managed through cost effective use of external reinsurance to limit our liability on per life, per risk, and per event (catastrophe) bases.


Markets and Distribution

Our supplemental health, life and accident insurance products are offered primarily in South Korea and select markets in Asia and Europe, as well as the United States. In China and Turkey we offer products and services through joint ventures in which we own 50% and 51% interests, respectively. In 2014, we will begin offering products and services in India through a joint venture in which we own a 26% interest. Our Medicare supplement product line is primarily distributed through independent agents and telemarketing directly to the U.S. consumer.

South Korea represents our single largest geographic market for Global Supplemental Benefits. For information on the concentration of risk with respect to the Global Supplemental Benefits segment's business in South Korea, see "Other Items Affecting Results of Global Supplemental Benefits" in the Global Supplemental Benefits section of the MD&A beginning on page 47 of this Form 10-K.

Our supplemental health, life and accident insurance products sold in foreign countries are generally marketed through distribution partners with whom the individual insured has an affinity relationship. These products are sold primarily through direct marketing channels, such as outbound telemarketing, and in-branch bancassurance (where we partner with a bank and use the bank's sales channels to sell our insurance products). Marketing campaigns are conducted through these channels under a variety of arrangements with affinity partners, including banks, credit card companies and other financial and non-financial institutions. We also market directly to consumers via direct response television and the Internet. Our Medicare supplement product line is distributed primarily through independent agents and telemarketing directly to the consumer.

For our supplemental health, life and accident insurance products sold in foreign markets we are increasingly exposed to geopolitical and other risks inherent in foreign operations. Also, given that we bill and collect a significant portion of premiums through credit cards, a substantial contraction in consumer credit could impact our ability to retain existing policies and sell new policies. A decline in customer retention would result in both a reduction of revenue and an acceleration of the amortization of acquisition related costs. Changes

8    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

in regulation for permitted distribution channels also may impact our business or results.


Competition

We expect that the competitive environment for global supplemental benefits will continue to intensify as U.S. and Europe-based insurance and financial services providers more aggressively pursue global expansion opportunities. We believe competitive factors will include product and distribution innovation and differentiation, efficient management of marketing processes and costs, commission levels paid to distribution partners, and the quality of claims and customer services. Additionally, in most overseas markets, perception of financial strength also will likely continue to be an important competitive factor.

Our competitors are primarily locally-based insurance companies, including insurance subsidiaries of banks primarily in Asia and Europe and multi-national companies. Insurance company competitors in this segment primarily focus on traditional product distribution through captive agents, with direct marketing being secondary channels. We estimate that we have less than 2% market share of the total life insurance premiums in any given market in which we operate.

In the Medicare supplement business, the principal competitive factors are underwriting and pricing, relative operating efficiency, broker relations, and the quality of claims and customer service. Our primary competitors in this business include U.S.-based health insurance companies.


Industry Developments

Pressure on social health care systems and increased wealth and education in emerging markets are leading to higher demand for products providing health insurance and financial security. In the supplemental health, life and accident business, direct marketing channels are growing and attracting new competitors and increasing demand for local employee talent, while industry consolidation among financial institutions and other affinity partners continues.

Group Disability and Life


Our Group Disability and Life segment provides group long-term and short-term disability insurance, group life insurance, accident and specialty insurance and related services. We market these products and services in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. All products and services are offered by subsidiaries of Cigna Corporation.


Products and Services

Group Disability

Long-term and short-term group disability insurance products generally provide a fixed level of income to replace a portion of wages lost because of disability. Group disability coverage is typically employer-paid or a combination of employer and employee-paid, but also may include coverage paid for entirely by employees. As part of our group disability insurance products, we also provide assistance to employees in returning to work and assistance to their employers in managing the cost of employee disability. We are an industry leader in helping employees return to work quickly, resulting in higher productivity and lower cost for employers and a better quality of life for their employees.

We seek to integrate our disability insurance products with other disability benefit programs, behavioral programs, medical programs, social security advocacy, and administration of federal and state Family and Medical Leave Act (FMLA) laws and other leave of absence programs. We believe this integration provides our customers with increased efficiency and effectiveness in disability claims management, enhances productivity and reduces overall costs to employers. This integration also provides early insight into employees at risk for future disability claims. Coordinating the administration of these disability programs with medical programs offered by our health care business provides enhanced opportunities to influence outcomes, reduce the cost of both medical and disability events and improve the return to work rate. The benefits of this integrated approach also include:

using information from the health care and disability databases to help identify, treat and manage disabilities before they become chronic, longer in duration and more costly; and

proactively reaching out to assist employees suffering from a mental health or chronic condition, either as a primary condition or as a result of another condition.

Our disability products and services are offered on a fully insured, experience-rated and ASO basis, although most are fully insured. As measured by 2013 premiums and fees, disability constituted approximately 47% of this segment's business. Approximately 13,600 insured disability policies covering approximately 7.5 million lives were in force as of December 31, 2013.


Group Life Insurance

Group life insurance products offered include term life and universal life. Group term life insurance may be employer-paid basic life insurance, employee-paid supplemental life insurance or a combination thereof. Group universal life insurance is an employee-paid, voluntary life insurance product in which the owner may accumulate a cash value. The cash value earns interest at rates declared from time to time, subject to a minimum guaranteed contracted rate, and may be borrowed, withdrawn, or, within certain limits, used to fund future life insurance coverage.

As measured by 2013 premiums and fees, group life insurance constituted approximately 45% of this segment's business. Approximately 7,300 group life insurance policies covering approximately 6.1 million lives were in force as of December 31, 2013.

CIGNA CORPORATION - 2013 Form 10-K    9



Back to Contents

PART I
ITEM 1. Business


Other Products and Services

We also offer personal accident insurance coverage, consisting primarily of accidental death and dismemberment and travel accident insurance to employers. Group accident insurance may be employer-paid or employee-paid. In addition, we offer specialty insurance services that consist primarily of disability and life, accident, and hospital indemnity products to professional or trade associations and financial institutions.

We also provide a number of voluntary products that are typically paid by the employee and offered at the employer's worksite. Our plans provide employers with flexible enrollment options, list billing, medical underwriting, and individual record keeping. These offerings are designed so that employers will have a complete and simple way to manage their benefits, including personalized enrollment communication and administration of the benefits program. In the last year, we have brought to market two new voluntary offerings – accidental injury insurance and critical illness coverage. Both these offerings provide additional dollar payouts to employees for accidental issues or more serious illnesses.


Pricing and Reinsurance

Premiums and fees charged for disability and term life insurance products are usually established in advance of the policy period and are generally guaranteed for one to three years and selectively guaranteed for up to five years; policies are generally subject to termination by the policyholder or by the insurance company annually. Premium rates reflect assumptions about future claims, expenses, credit risk, investment returns and profit margins. These assumptions may be based in whole or in part on prior experience of the account or on a pool of accounts, depending on the group size and the statistical credibility of the experience that varies by product.

Premiums for group universal life insurance products consist of mortality and administrative charges assessed against the policyholder's fund balance. Interest credited and mortality charges for group universal life may be adjusted prospectively to reflect expected interest and mortality experience. Mortality charges are subject to guaranteed maximum rates stated in the policy.

The effectiveness of return to work programs and morbidity levels will impact the profitability of disability insurance products. Our previous claim experience and industry data indicate a correlation between disability claim incidence levels and economic conditions, with submitted claims rising under adverse economic conditions, although this impact is not clear. For life insurance products, the degree to which future experience deviates from mortality and expense assumptions also affects profitability.

To reduce our exposure to large individual and catastrophic losses under group life, disability and accidental death policies, we purchase reinsurance from unaffiliated reinsurers.


Markets and Distribution

We market our group disability and life insurance products and services to employers, employees, professional and other associations and groups in the National, Middle Market and Select segments. In marketing these products, we primarily sell through insurance brokers and consultants and employ a direct sales force. As of December 31, 2013, the field sales force for the products and services of this segment consisted of approximately 230 sales professionals in 27 office locations.


Competition

The principal competitive factors that affect the Group Disability and Life segment are underwriting and pricing, the quality and effectiveness of claims management, relative operating efficiency, investment and risk management, distribution methodologies and producer relations, the breadth and variety of products and services offered, and the quality of customer service. For certain products with longer-term liabilities, such as group long-term disability insurance, the financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, also is a competitive factor.

The principal competitors of our group disability, life and accident businesses are other large and regional insurance companies that market and distribute these or similar types of products. As of December 31, 2013, we are one of the top five providers of group disability, life and accident insurance in the United States, based on premiums.


Industry Developments

Employers are expressing a growing interest in employee wellness, absence management and productivity and likewise are recognizing a strong link between employee health, productivity and their profitability. As this interest grows, we believe our healthy lifestyle and return-to-work programs and integrated family medical leave, disability and health care programs position us to deliver integrated solutions for employers and employees. We also believe that our strong disability management portfolio and fully integrated programs provide employers and employees tools to improve health status. This focus on managing the employee's total absence enables us to increase the number and likelihood of interventions and minimize disabling events.

The group insurance market remains highly competitive as the rising cost of providing medical coverage to employees has forced companies to re-evaluate their overall employee benefit spending, resulting in lower volumes of group disability and life insurance business and more competitive pricing. Demographic shifts have further driven demand for products and services that are sufficiently flexible to meet the evolving needs of employers and employees who want innovative, cost-effective solutions to their insurance needs. Employers continue to shift towards greater employee participatory coverage and voluntary purchases. With our broad suite of voluntary offerings and continued focus on developing additional voluntary products and service capabilities, we believe we are well positioned to meet the needs of both employers and employees as the market shifts to become more retail-focused.

10    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

Over the past few years, there has been heightened review by state regulators of the claims handling practices within the disability and life insurance industry. This has resulted in an increase in coordinated, multi-state examinations that target specific market practices in addition to regularly recurring examinations of an insurer's overall operations conducted by an individual state's regulators. We were recently subject to such an examination. See Note 23 to the Consolidated Financial Statements for additional information.

Run-off Reinsurance


Our reinsurance operations are an inactive business in run-off mode.

In February 2013, we effectively exited the Run-off guaranteed minimum death benefit ("GMDB") and guaranteed minimum income benefit ("GMIB") businesses by reinsuring 100% of our future exposures, net of retrocessional arrangements in place at that time, up to a specified limit. For additional information regarding this reinsurance transaction, see Note 7 to the Consolidated Financial Statements.

Other Operations


Our Other Operations segment includes the following three businesses:


Corporate-owned Life Insurance ("COLI")

The principal products of the COLI business are permanent insurance contracts sold to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations. Permanent life insurance provides coverage that, when adequately funded, does not expire after a term of years. The contracts are primarily non-participating universal life policies. Fees for universal life insurance products consist primarily of mortality and administrative charges assessed against the policyholder's fund balance. Interest credited and mortality charges for universal life and mortality charges on variable universal life may be adjusted prospectively to reflect expected interest and mortality experience. To reduce our exposure to large individual and catastrophe losses, we purchase reinsurance from unaffiliated reinsurers.


Individual Life Insurance and Annuity and Retirement Benefits Businesses

This business includes deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business. For more information regarding the sale of these businesses and the arrangements that secure our reinsurance recoverables for the retirement benefits business, see Note 7 of the Consolidated Financial Statements.


Run-off Settlement Annuity Business

Our settlement annuity business is a closed, run-off block of single premium annuity contracts. These contracts are primarily liability settlements with approximately 26% of the liabilities associated with payments that are guaranteed and not contingent on survivorship. For contracts that involve non-guaranteed payments, such payments are contingent on the survival of one or more parties involved in the settlement.

Investments and Investment Income


General Accounts

Our investment operations provide investment management and related services for our corporate invested assets and the insurance-related invested assets in our General Account ("General Account Invested Assets"). We acquire or originate, directly or through intermediaries, a broad range of investments including private placements and public securities, commercial mortgage loans, real estate, mezzanine, private equity partnerships and short-term investments. Invested assets also include policy loans that are fully collateralized by insurance policy cash values. Invested Assets are managed primarily by our subsidiaries and, to a lesser extent, external managers with whom our subsidiaries contract. Net investment income is included as a component of segment earnings for each of our reporting segments and Corporate. Realized investment gains (losses) are reported by segment but excluded from segment earnings. For additional information about invested assets, see the "Investment Assets" section of the MD&A beginning on page 54 and Notes 10 to 14 of our Consolidated Financial Statements.

We manage our investment portfolios to reflect the underlying characteristics of related insurance and contractholder liabilities and capital requirements, as well as regulatory and tax considerations pertaining to those liabilities and state investment laws. Insurance and contractholder liabilities range from short duration health care products to longer term obligations associated with disability and life insurance products and the run-off settlement annuity business. Assets supporting these liabilities are managed in segregated investment portfolios to facilitate matching of asset durations and cash flows to those of corresponding liabilities. Investment strategy and results are affected by the amount and timing of cash available for investment, competition for investments, economic conditions, interest rates and asset allocation decisions. We routinely monitor and evaluate the status of our investments, obtaining and analyzing relevant investment-specific information and assessing current economic conditions, trends in capital markets and other factors such as industry sector, geographic and/or property-specific information.

CIGNA CORPORATION - 2013 Form 10-K    11



Back to Contents

PART I
ITEM 1. Business



Separate Accounts

Our subsidiaries or external advisors manage Separate Account assets on behalf of contractholders. These assets are legally segregated from our other businesses and are not included in General Account Invested Assets. Income, gains and losses generally accrue directly to the contractholders. As of December 31, 2013, our Separate Account assets consisted of:

$3.8 billion in separate account assets that constitute a portion of the assets of the Cigna Pension Plan;

$3.4 billion in separate account assets that support Variable Universal Life products sold as a part of our corporate-owned life insurance business, as well as through our Global Supplemental Benefits segment; and

$1.1 billion in separate account assets that support primarily health care and other disability and life products.

Regulation


The laws and regulations governing our business continue to increase each year and are subject to frequent change. We have established policies and procedures to comply with applicable requirements.

Our insurance and HMO subsidiaries must be licensed by the jurisdictions in which they conduct business. These subsidiaries are subject to numerous state, federal and international regulations related to their business operations, including, but not limited to:

the form and content of customer contracts including benefit mandates (including special requirements for small groups);

premium rates and medical loss ratios;

the content of agreements with participating providers of covered services;

producer appointment and compensation;

claims processing and appeals;

underwriting practices;

reinsurance arrangements;

unfair trade and claim practices;

protecting the privacy and confidentiality of the information received from customers;

risk sharing arrangements with providers;

reimbursement or payment levels for Medicare services;

advertising; and

the operation of consumer-directed plans (including health savings accounts, health reimbursement accounts, flexible spending accounts and debit cards).

In addition, our international subsidiaries comply with regulations in international jurisdictions where foreign insurers may be faced with more onerous regulations than their domestic competitors. The broader regulatory environment may include anti-corruption laws, economic sanctions laws, various insurance, tax, tariff and trade laws and regulations, corporate governance, employment, intellectual property and investment laws and regulation, discriminatory licensing procedures, compulsory cessions of reinsurance, required localization of records and funds, higher premium and income taxes, and requirements for local participation in an insurer's ownership. In addition, the expansion of our operations into foreign countries increases our exposure to certain U.S. laws, such as the Foreign Corrupt Practices Act of 1977 ("FCPA"). See page 15 for further discussion of international regulations.

The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by state and federal laws and administrative agencies, such as state departments of insurance and the federal departments of Labor, Health and Human Services, Treasury and Justice and the Internal Revenue Service, as well as the courts. Health savings accounts, health reimbursement accounts and flexible spending accounts also are regulated by the U.S. Department of the Treasury and the Internal Revenue Service.

Our operations, accounts and other books and records are subject to examination at regular intervals by regulatory agencies, including state insurance and health and welfare departments, state boards of pharmacy and the Centers for Medicare and Medicaid Services ("CMS") to assess compliance with applicable laws and regulations. In addition, our current and past business practices are subject to review by, and from time to time we receive subpoenas and other requests of information from, various state insurance and health care regulatory authorities, attorneys general, the Office of Inspector General, and other state and federal authorities, including inquiries by, and testimony before committees and subcommittees of the U.S. Congress regarding certain of its business practices. These examinations, reviews, subpoenas and requests may result in changes to or clarifications of our business practices, as well as fines, penalties or other sanctions.


Regulatory and Legislative Developments

The federal and state governments in the U.S. as well as governments in other countries where we do business continue to enact and seriously consider many broad-based legislative and regulatory proposals that could materially impact various aspects of our business.


Health Care Reform

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to as "Health Care Reform") mandates broad changes affecting insured and self-insured health benefit plans that impact our current business model, including our relationship with current and future customers,

12    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

producers and health care providers, products, services, processes and technology. Certain of the law's provisions became effective between 2010 and 2013 and other provisions will take effect from 2014 to 2018. Health Care Reform left many details to be established through regulations. While federal agencies have published proposed and final regulations with respect to most provisions, many issues remain uncertain. For the financial effects of these provisions, see the Overview section of our MD&A beginning on page 31 of this Form 10-K.

Provisions that took effect from 2010-2013.    Commercial minimum medical loss ratio requirements as prescribed by the Department of Health and Human Services ("HHS") became effective in January 2011 and require payment of premium rebates to group and individual policyholders if certain annual minimum medical loss ratios ("MLR") are not met in our commercial business. HHS issued guidance that provides transitional relief from certain Health Care Reform requirements for expatriate health coverage (including the MLR requirements) through plan years ending on or before December 31, 2015. The adjustments allowed for calculating the MLR for limited benefit plans are reduced each year through 2014 after which no adjustments are permitted. For the financial impact of the commercial MLR requirements on our results, see the "Overview" section of our MD&A in this Form 10-K.

Other provisions that have already taken effect include reduced Medicare premium rates beginning in 2011, the requirement to cover preventive services with no enrollee cost-sharing, banning the use of lifetime and annual limits on the dollar amount of essential health benefits, increasing restrictions on rescinding coverage and extending coverage of dependents to the age of 26. Health Care Reform also changed certain tax laws that effectively limit the amount of certain employee compensation that is tax deductible by health insurers.

Provisions becoming effective in 2014-2018.    Various fees, including the health insurance industry fee and the reinsurance fee, will be assessed beginning in 2014. The health insurance industry fee, totaling $8 billion for the industry in 2014 and increasing to $13.9 billion by 2017, will not be tax deductible. Our share of this industry fee will be determined based on our proportion of premiums for both our commercial and government businesses to the industry total. Our effective tax rate is expected to increase beginning in 2014 as a result of this fee. The reinsurance fee is a fixed dollar per customer levy on all commercial business, including ASO and is tax deductible.

Our Medicare Advantage and Medicare Part D prescription drug plan businesses are also impacted by Health Care Reform in a variety of additional ways beginning in 2014, including mandated minimum reductions to risk scores, transition of Medicare Advantage "benchmark" rates to Medicare fee-for-service parity, reduced enrollment periods and limitations on disenrollment, providing "quality bonuses" for Medicare Advantage plans with a rating for four or five stars from CMS and mandated consumer discounts on brand name and generic prescription drugs for Medicare Part D plan participants in the coverage gap. Beginning in 2014, Health Care Reform requires Medicare Advantage and Medicare Part D plans to meet a minimum MLR of 85%. Under the rules proposed by HHS, if the MLR for a CMS contract is less than 85%, the contractor is required to pay a penalty to CMS and could be subject to additional sanctions if the MLR continues to be less than 85% for successive years. Through Health Care Reform and other federal legislation, funding for Medicare Advantage plans has been and may continue to be altered.

Health Insurance Exchanges begin in 2014. Each state is required to have either a state-based, a state and federal partnership, or federally facilitated health insurance exchange for individuals and small employer groups to purchase insurance coverage. The enrollment process began on October 1, 2013. In the ten states where we currently offer individual coverage, most exchanges are federally facilitated. We are offering coverage on five public health insurance exchanges (Arizona, Colorado, Florida, Tennessee, and Texas). We continue to sell individual and family plans off-exchange in all ten states where such coverage is currently offered.

Because individuals seeking to purchase health insurance coverage on the exchanges are guaranteed to be issued a policy, Health Care Reform provides three programs designed to reduce the risk for participating health insurance companies:

a three-year (2014-2016) reinsurance program for non-grandfathered individual business sold either on or off the public exchanges beginning in 2014. This program is designed to provide reimbursement for high cost individual customers and will be funded by the per-customer reinsurance fee assessed against insurers and self-insured group health plans;

a three-year (2014-2016) risk corridor program put in place to limit insurer gains and losses and protect against inaccurate rate setting at the outset of the new program; and

a permanent risk adjustment program that will transfer funds from lower risk to higher risk plans based on the relative health risk scores of plan participants.

We have implemented the provisions of Health Care Reform that are currently in effect (including the commercial minimum MLR requirements) and we continue our implementation planning for those provisions that take effect in the future. Management continues to closely monitor the implementation of Health Care Reform and is actively engaged with regulators and policymakers with respect to rule-making.


Dodd-Frank Act

In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") that provides for a number of reforms and regulations in the corporate governance, financial reporting and disclosure, investments, tax and enforcement areas that affect us. The SEC and other regulatory authorities engaged in rulemaking efforts under the Dodd-Frank Act throughout 2011, 2012 and 2013, and additional rulemaking continues. The Dodd-Frank Act established a Federal Insurance Office that will develop and coordinate federal policy on insurance matters. We are closely monitoring how these regulations impact the Company, however the full impact of the legislation may not be known for several years until regulations become fully effective.

CIGNA CORPORATION - 2013 Form 10-K    13



Back to Contents

PART I
ITEM 1. Business


Regulation of Insurance Companies

Financial Reporting and Internal Control

Regulators closely monitor the financial condition of licensed insurance companies and HMOs. States regulate the form and content of statutory financial statements, the type and concentration of permitted investments, and corporate governance over financial reporting. Our insurance and HMO subsidiaries are required to file periodic financial reports and schedules with regulators in most of the jurisdictions in which they do business as well as annual financial statements audited by independent registered public accountants. Certain insurance and HMO subsidiaries are required to file an annual report of internal control over financial reporting with most jurisdictions in which they do business. Insurance and HMO subsidiaries' operations and accounts are subject to examination by such agencies. We expect states to expand the scope of regulations relating to corporate governance and internal control activities of its insurance and HMO subsidiaries as a result of the National Association of Insurance Commissioners' ("NAIC") amendment to the Annual Financial Reporting Model Regulation to adopt elements of corporate governance and internal control requirements similar to those under federal securities' laws.


Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds

Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty associations or indemnity funds that are established to pay claims on behalf of insolvent insurance companies. In the United States, these associations levy assessments on member insurers licensed in a particular state to pay such claims.

Several states also require HMOs to participate in guaranty funds, special risk pools and administrative funds. For additional information about guaranty fund and other assessments, see Note 23 to our Consolidated Financial Statements.

Some states also require health insurers and HMOs to participate in assigned risk plans, joint underwriting authorities, pools or other residual market mechanisms to cover risks not acceptable under normal underwriting standards.


Solvency and Capital Requirements

Many states have adopted some form of the NAIC model solvency-related laws and risk-based capital rules ("RBC rules") for life and health insurance companies. The RBC rules recommend a minimum level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities incurred. If the ratio of the insurer's adjusted surplus to its risk-based capital falls below statutory required minimums, the insurer could be subject to regulatory actions ranging from increased scrutiny to conservatorship.

In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. During 2013, our HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with applicable RBC and non-U.S. surplus rules.

In September 2012, the National Association of Insurance Commissioners adopted the Risk Management and Own Risk and Solvency Assessment Model Act. The Act provides requirements and principles for maintaining a group solvency assessment and a risk management framework and reflects a broader and more prospective approach to U.S. insurance regulation. The Act, which includes a requirement to file an annual ORSA Summary Report in the lead state of domicile, now must be adopted into law by each state. Our insurance business in the U.S. will be subject to the requirements that are expected to become effective in 2015. We will be prepared to file an ORSA Summary Report with our lead state regulator consistent with the requirements.


Holding Company Laws

Our domestic insurance companies and certain of our HMOs are subject to state laws regulating subsidiaries of insurance holding companies. Under such laws, certain dividends, distributions and other transactions between an insurance or HMO subsidiary and its affiliates may require notification to, or approval by, one or more state insurance commissioners.

In December 2010, the NAIC adopted revisions to the Model Insurance Holding Company System Regulatory Act and Regulation. The revisions were designed to allow a better understanding of the risks and activities of non-insurance entities within a holding company system. The main focus of the revisions has been to incorporate the concept of "enterprise risk" and to enact provisions designed to provide regulators with additional information and authority to manage this new concept. To date, approximately 20 states have taken action to adopt the amended Model Act and Regulation. We continue to follow the states' activity in this area and will amend its processes as necessary to comply with revised state laws.


Marketing, Advertising and Products

In most states, our insurance companies and HMO subsidiaries are required to certify compliance with applicable advertising regulations on an annual basis. Our insurance companies and HMO subsidiaries are also required in most states to file and secure regulatory approval of products prior to the marketing, advertising, and sale of such products. State and/or federal regulatory scrutiny of life and health insurance company and HMO marketing and advertising practices, including the adequacy of disclosure regarding products and their administration, may result in increased regulation.


Licensing Requirements

Pharmacy Licensure Laws

Certain of our subsidiaries are pharmacies that dispense prescription drugs to participants of benefit plans administered or insured by Cigna's HMO and insurance company subsidiaries. These pharmacy-subsidiaries are subject to state licensing requirements and regulation as well as U.S. Drug Enforcement Agency registration requirements.

14    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

Other laws and regulation affecting our pharmacy-subsidiaries include federal and state laws concerning labeling, packaging, advertising and adulteration of prescription drugs and dispensing of controlled substances.


International Licensure Laws

Our international subsidiaries are often required to be licensed when entering new markets or starting new operations in certain jurisdictions. The licensure requirements for these subsidiaries vary by country and are subject to change.


Claim Administration, Utilization Review and Related Services

Certain subsidiaries contract to provide claim administration, utilization management and other related services for the administration of self-insured benefit plans. These subsidiaries may be subject to state third-party administration and other licensing requirements and regulation.


International Regulations

Our operations outside the United States expose us to laws of multiple jurisdictions and the rules and regulations of various governing bodies and regulators, including those related to financial and other disclosures, corporate governance, privacy, data protection, data mining, data transfer, labor and employment, consumer protection and anti-corruption. The operations in countries outside the United States:

are subject to local regulations in the locations in which Cigna subsidiaries conduct business,

in some cases, are subject to regulations in the locations of customers, and

in all cases, are subject to FCPA.

FCPA prohibits offering, promising, providing or authorizing others to give anything of value to a foreign government official to obtain or retain business or otherwise secure a business advantage. We are also subject to applicable anti-corruption laws in the jurisdictions in which we operate. Additionally, in many countries outside of the U.S., health care professionals are employed by the government. Therefore, our dealings with them are subject to regulation under the FCPA. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and Department of Justice have increased their enforcement activities with respect to FCPA. The UK Bribery Act of 2010, which went into effect in 2011, is an anti-corruption law that applies to all companies with a nexus to the United Kingdom and whose scope is even broader than the FCPA. Any voluntary disclosures of FCPA violations may be shared with the UK authorities, thus potentially exposing companies to liability and potential penalties in multiple jurisdictions. We have internal control policies and procedures and have implemented training and compliance programs for our employees to deter prohibited practices. However, if our employees or agents fail to comply with applicable laws governing our international operations, we may face investigations, prosecutions and other legal proceedings and actions that could result in civil penalties, administrative remedies and criminal sanctions. See the Risk Factors section beginning on page 18 for a discussion of the risks related to operating globally.


Federal Regulations

Employee Retirement Income Security Act and the Public Health Service Act

Our domestic subsidiaries sell most of their products and services to sponsors of employee benefit plans that are governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA is complex set of federal laws and regulations that is interpreted and enforced by the IRS, DOL and federal courts. Our domestic subsidiaries are subject to requirements imposed by ERISA affecting claim and appeals procedures for individual health insurance and insured and self-insured group health plans and for the insured dental, disability, life and accident plans we administer. Our domestic subsidiaries may also contractually agree to comply with these requirements on behalf of the self-insured dental, disability, life and accident plans they administer.

Many of the health insurance reform provisions of the Patient Protection and Affordable Care Act impacting insured and self-insured group health plans were incorporated in ERISA. The health insurance reform provisions under ERISA were also incorporated into the Public Health Service Act and are directly applicable to health insurance issuers (i.e., health insurers and HMOs).


Medicare Regulations

Several of our subsidiaries engage in businesses that are subject to federal Medicare regulations such as:

those offering individual and group Medicare Advantage (HMO) coverage;

those offering Medicare Pharmacy (Part D) products that are subject to federal Medicare regulations; and

billing of Medicare Part B claims on behalf of providers with whom we have contractual management agreements.

In our Medicare Advantage business, we contract with CMS to provide services to Medicare beneficiaries pursuant to the Medicare program. As a result, our right to obtain payment (and the determination of the amount of such payments), enroll and retain members and expand into new service areas is subject to compliance with CMS' numerous and complex regulations and requirements that are frequently modified and subject to administrative discretion. The marketing and sales activities (including those of third-party brokers and agents) are also heavily regulated by CMS and other governmental agencies, including applicable state departments of insurance. We expect to continue to allocate significant resources to our compliance, ethics and fraud, waste and abuse programs to comply with the laws and regulations governing Medicare Advantage and prescription drug plan programs.

CIGNA CORPORATION - 2013 Form 10-K    15



Back to Contents

PART I
ITEM 1. Business

Several of our subsidiaries are also subject to reporting requirements pursuant to Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007.


Federal Audits of Government Sponsored Health Care Programs

Participation in government sponsored health care programs subjects us to a variety of federal laws and regulations and risks associated with audits conducted under these programs. These audits may occur in years subsequent to our providing the relevant services under audit. These risks may include reimbursement claims as well as potential fines and penalties. For example, with respect to our Medicare Advantage business, CMS and the Office of the Inspector General perform audits to determine a health plan's compliance with federal regulations and contractual obligations, including compliance with proper coding practices (sometimes referred to as Risk Adjustment Data Validation Audits or RADV audits) and compliance with fraud and abuse enforcement practices through Recovery Audit Contractor (RAC) audits in which third-party contractors conduct post-payment reviews on a contingency fee basis to detect and correct improper payments. See "Business – Global Health Care" beginning on page 2 of this Form 10-K for additional information about our participation in government health-related programs.

The Federal government has made investigating and prosecuting health care fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of customers, billing for unnecessary medical services, improper marketing, and violation of patient privacy rights. The regulations and contractual requirements in this area are complex, are frequently modified, and are subject to administrative discretion. We expect to continue to allocate significant resources to comply with these regulations and requirements and to maintain audit readiness.


Health Insurance Portability and Accountability Act Regulations

The federal Health Insurance Portability and Accountability Act of 1996 and its implementing regulations ("HIPAA") impose requirements on health insurers, HMOs, health plans, health care providers and clearinghouses. Health insurers and HMOs are further subject to regulations related to guaranteed issuance (for groups with 50 or fewer lives), guaranteed renewal, and portability of health insurance.

HIPAA also imposes minimum standards for the privacy and security of protected health information. HIPAA's privacy and security requirements were expanded by the Health Information Technology for Economic and Clinical Health Act ("HITECH") that enhanced penalties for HIPAA violations and requires regulated entities to provide notification to various parties in the event of a breach of unsecured protected health information. Regulations pursuant to HITECH continue to be promulgated and are monitored and implemented as they are finalized.

HIPAA also established rules that standardize the format and content of certain electronic transactions, including, but not limited to, eligibility and claims. Federal regulations were issued requiring entities subject to HIPAA to update their transaction formats for electronic data interchange from HIPAA 4010 to version 5010 standards and convert from the ICD-9 diagnosis and procedure codes to the ICD-10 diagnosis and procedure codes. The ICD-10 conversion is required by October 1, 2014.


Other Confidentiality Requirements

The federal Gramm-Leach-Bliley Act generally places restrictions on the disclosure of non-public information to non-affiliated third parties, and requires financial institutions, including insurers, to provide customers with notice regarding how their non-public personal information is used, including an opportunity to "opt out" of certain disclosures. State departments of insurance and certain federal agencies adopted implementing regulations as required by federal law. Neither the HIPAA nor the Gramm-Leach-Bliley privacy regulations preempt more stringent state laws and regulations that apply to us, and a number of states have adopted data security laws and regulations, regulating data security and requiring security breach notification that may apply to us in certain circumstances.


Antitrust Regulations

Our subsidiaries also are engaged in activities that may be scrutinized under federal and state antitrust laws and regulations. These activities include the administration of strategic alliances with competitors, information sharing with competitors and provider contracting.


Anti-Money Laundering Regulations

Certain of our products ("Covered Products" as defined in the Bank Secrecy Act) are subject to U.S. Department of the Treasury anti-money laundering regulations. We have implemented anti-money laundering policies designed to ensure that its Covered Products are underwritten and sold in compliance with these regulations. We may also be subject to anti-money laundering laws in non-U.S. jurisdictions where it operates.


Office of Foreign Assets Control

We are also subject to regulation put forth by the Office of Foreign Assets Control of the U.S. Department of the Treasury which administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. In addition, we may be subject to similar regulations in non-U.S. jurisdictions in which it operates.


Investment-Related Regulations

Depending upon their nature, our investment management activities are subject to U.S. federal securities laws, ERISA, and other federal

16    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1. Business

and state laws governing investment related activities. In many cases, the investment management activities and investments of individual insurance companies are subject to regulation by multiple jurisdictions.

Miscellaneous


Premiums and fees from CMS represented 22% of our total consolidated revenues for the year ended December 31, 2013 under a number of contracts. We are not dependent on business from one or a few customers. Other than CMS, no one customer accounted for 10% or more of our consolidated revenues in 2013. We are not dependent on business from one or a few brokers or agents. In addition, our insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to its approval and acceptance.

We had approximately 36,500 employees as of December 31, 2013; 35,800 employees as of December 31, 2012; and 31,400 employees as of December 31, 2011.

CIGNA CORPORATION - 2013 Form 10-K    17



Back to Contents

PART I
ITEM 1A. Risk Factors

Item 1A.  Risk Factors

As a large company operating in a complex industry, we encounter a variety of risks and uncertainties that could have a material adverse effect on our business, liquidity, results of operations or financial condition. You should carefully consider each of the risks and uncertainties discussed below, in Management's Discussion and Analysis of Results of Operations and Financial Condition and information contained elsewhere in this Annual Report on Form 10-K. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect us.


Our business is subject to substantial government regulation, as well as new laws or regulations or changes in existing laws or regulations that could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Our business is regulated at the federal, state, local and international levels. The laws and rules governing our business and related interpretations, including, among others, those associated with Health Care Reform, are increasing in number and complexity, are subject to frequent change and can be inconsistent or in conflict with each other. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, such as those related to financial and other disclosures, corporate governance, privacy, data protection, labor and employment, consumer protection, tax and anti-corruption.

We must identify, assess and respond to new trends in the legislative and regulatory environment, as well as comply with the various existing regulations applicable to our business. Existing or future laws, rules, regulatory interpretations or judgments could force us to change how we conduct our business, restrict revenue and enrollment growth, increase health care, technology and administrative costs, including capital requirements, and require enhancements to our compliance infrastructure and internal controls environment. Existing or future laws and rules also could require us to take other actions such as changing our business practices, thereby increasing our liability in federal and state courts for coverage determinations, contract interpretation and other actions.

In the foreseeable future, the impact of existing regulations and future regulatory and legislative changes could materially adversely affect our business, results of operations, financial condition and cash flows by, among other things:

reducing the potential for growth in revenues and customers by disrupting the employer-based market (currently the primary market for our Commercial operating segment) if employers cease to offer health care coverage for their employees;

restricting revenue, premium and customer growth in certain products and markets or expansion into new markets;

increasing health care or other benefit costs through enhanced or guaranteed coverage requirements;

increasing operating costs through the imposition of new or increased taxes and other financial assessments,;

restricting our ability to increase premium rates to meet costs (including denial or delays in approval and implementation of those rates);

limiting the level of margin we can earn on premiums through mandated minimum medical loss ratios; and

significantly reducing the level of Medicare program payments.

Specifically, in the United States, significant changes are occurring in the health care system as a result of Health Care Reform. Certain of Health Care Reform's provisions have already become effective and other significant provisions become effective in 2014. While federal agencies have published interim and final regulations with respect to certain requirements, many issues remain uncertain. It is difficult to predict the impact of Health Care Reform on our business due to the law's complexity, the political environment, the continuing development of implementing regulations and interpretive guidance and possible future legislative changes. We are unable to predict how these events will develop and what impact they will have on Health Care Reform, and in turn, on our business including, but not limited to, our relationships with current and future customers, producers and health care providers, products, services, processes and technology. Further, if we fail to effectively implement or adjust our strategic and operational initiatives, such as by reducing operating costs, adjusting premium pricing or benefit design or transforming our business model, in response to Health Care Reform and any other future legislative or regulatory changes, this failure may have a material adverse effect on our results of operations, financial condition and cash flows, including our ability to maintain the value of our goodwill and other intangible assets.

In addition to the regulation discussed above, we are required to obtain and maintain insurance and other regulatory approvals to market many of our products, increase prices for certain regulated products and consummate some of our acquisitions and divestitures. Delays in obtaining or failure to obtain or maintain these approvals could reduce our revenue or increase our costs.

For further information on regulation, see "Business – Regulation" in Part I, Item 1 of this Form 10-K. See also the description of Health Care Reform's minimum medical loss ratio and customer rebate requirements in the "Business – Global Health Care" section beginning on page 2 of this Form 10-K.


We face risks related to litigation, regulatory audits and investigations.

We are routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other legal matters arising in the ordinary course of business, including that of administering and insuring employee benefit programs. These could include benefit claims, breach of contract actions, tort claims, disputes regarding reinsurance arrangements, employment and employment discrimination-related suits, employee benefit claims, wage and hour claims, tax, privacy, and intellectual property and real estate related disputes. In addition, we have incurred and likely will continue to incur liability for claims

18    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1A. Risk Factors

related to our health care business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against the industry.

Court decisions and legislative activity may increase our exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. We seek to procure insurance coverage to cover some of these potential liabilities. However, certain potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may be insufficient to cover the entire damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. It is possible that the resolution of current or future legal matters and claims could result in losses material to our results of operations, financial condition and liquidity.

We are frequently the subject of regulatory market conduct and other reviews, audits and investigations by state insurance and health and welfare departments, attorneys general, the Centers for Medicare and Medicaid Services ("CMS") and the Office of Inspector General ("OIG"). With respect to our Medicare Advantage business, CMS and OIG perform audits to determine a health plan's compliance with federal regulations and contractual obligations, including compliance with proper coding practices and fraud and abuse enforcement practices through audits designed to detect and correct improper payments. There also continues to be heightened review by federal and state regulators of business and reporting practices within the health care and disability insurance industry and increased scrutiny by other state and federal governmental agencies (such as state attorney general offices) empowered to bring criminal actions in circumstances that could have previously have given rise only to civil or administrative proceedings. These regulatory audits or reviews or actions by other governmental agencies could result in changes to or clarifications of our business practices, retroactive adjustments to certain premiums, significant fines, penalties, civil liabilities, criminal liabilities or other sanctions that could have a material adverse effect on our business, results of operation, financial condition and liquidity.

A description of material pending legal actions and other legal matters is included in Note 23 to our Consolidated Financial Statements included in this Form 10-K. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence or existing law can occur.


Future performance of our business will depend on our ability to execute our strategic and operational initiatives effectively.

The future performance of our business will depend in large part on our ability to effectively implement and execute our strategic and operational initiatives including: (1) driving growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving our strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals. Successfully executing these initiatives depends on a number of factors, including our ability to:

differentiate our products and services from those of our competitors;

develop and introduce new products or programs, particularly in response to government regulation and the increased focus on consumer-directed products;

identify and introduce the proper mix or integration of products that will be accepted by the marketplace;

attract and retain sufficient numbers of qualified employees;

attract and maintain good relationships with a sufficient number of qualified partners, including physicians and other health care providers in an environment of growing shortages of primary care professionals and consolidation within the provider industry;

improve medical cost competitiveness in targeted markets;

manage our medical and administrative costs effectively;

manage our balance sheet exposures effectively, including our pension funding obligations; and

reduce our Global Health Care operating expenses to achieve sustainable benefits.

If these initiatives fail or are not executed effectively, it could harm our consolidated financial position and results of operations. For example, efforts to reduce operating expenses while maintaining the necessary resources and talent pool are important and, if not managed effectively, could have long-term effects on our business by negatively impacting our ability to drive improvements in the quality of our products. For our strategic initiatives to succeed, we must effectively integrate our operations, including our acquired businesses, actively work to ensure consistency throughout the organization, and promote a global mind-set and a focus on individual customers. If we fail to do so, our business may be unable to grow as planned, or the result of expansion may be unsatisfactory. In addition, the current competitive, economic and regulatory environment requires our organization to adapt rapidly and nimbly to new opportunities and challenges. We will be unable to do so if we do not make important decisions quickly, define our appetite for risk specifically, implement new governance, managerial and organizational processes smoothly and communicate roles and responsibilities clearly.


As a global company, we face political, legal, operational, regulatory, economic and other risks that present challenges and could negatively affect our multinational operations and/or our long-term growth.

As a global company, our business is increasingly exposed to risks inherent in foreign operations. These risks, which can vary substantially by market, include political, legal, operational, regulatory, economic and other risks, including government intervention that we do not face in our U.S. operations. The global

CIGNA CORPORATION - 2013 Form 10-K    19



Back to Contents

PART I
ITEM 1A. Risk Factors

nature of our business and operations may present challenges including, but not limited, to those arising from:

varying regional and geopolitical business conditions and demands;

discriminatory regulation, nationalization or expropriation of assets;

price controls or other pricing issues and exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which we operate or converting local currencies that our foreign operations hold into U.S. dollars or other currencies;

foreign currency exchange rates and fluctuations that may have an impact on the future costs or on future sales and cash flows from our international operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our international operations may not be effective;

our reliance on local sales forces for some operations in countries that may have labor problems and/or less flexible employee relationships that can be difficult and expensive to terminate, or where changes in local regulation or law may disrupt business operations;

effectively managing our partner relationships in countries outside of the United States;

managing more geographically diverse operations and projects;

operating in new foreign markets that may require considerable management time before operations generate any significant revenues and earnings;

the need to provide sufficient levels of technical support in different locations;

political instability or acts of war, terrorism, natural disasters or pandemics in locations where we operate; and

general economic and political conditions.

These factors may increase in significance as we continue to expand globally, and any one of these challenges could negatively affect our operations or long-term growth. For example, currently, South Korea is the single largest geographic market in our Global Supplemental Benefits segment. Due to the concentration of business in South Korea, the Global Supplemental Benefits segment is exposed to potential losses resulting from economic, regulatory and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, that could have a significant impact on the segment's results and our consolidated financial results.

International operations also require us to devote significant resources to implement controls and systems in new markets to comply with U.S. and foreign laws prohibiting bribery, corruption, money laundering and similar crimes. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or employees, restrictions or outright prohibitions on the conduct of our business, and significant reputational harm. We must regularly reassess the size, capability and location of our global infrastructure and make appropriate changes, and must have effective change management processes and internal controls in place to address changes in our business and operations. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties, and the failure to do so could have a material adverse effect on our business, results of operations, financial condition, liquidity and long-term growth.


There are various risks associated with participating in government-sponsored programs such as Medicare, including dependence upon government funding, changes occurring as a result of Health Care Reform, compliance with government contracts and increased regulatory oversight.

Through our Cigna-HealthSpring business, we contract with CMS and various state governmental agencies to provide managed health care services, including Medicare Advantage plans and Medicare-approved prescription drug plans. Revenues from the Medicare programs are dependent, in whole or in part, upon annual funding from the federal government through CMS and/or applicable state or local governments. Funding for these programs is dependent on many factors outside our control, including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal or applicable state or local level and general political issues and priorities. These entities generally have the right to not renew or cancel their contracts with us on short notice without cause or if funds are not available. Unanticipated changes in funding by the federal or state governments could substantially reduce our revenues and profitability.

The Medicare program has been the subject of recent regulatory reform initiatives, including Health Care Reform. The premium rates paid to Medicare Advantage plans are established by contract, although the rates differ depending on a combination of factors, many of which are outside our control. Effective in 2012, Health Care Reform ties a portion of each Medicare Advantage plan's reimbursement to the plan's "star rating" by CMS, with those plans receiving a rating of three or more stars eligible for quality-based bonus payments. The star rating system considers various measures adopted by CMS, including, among other things, quality of care, preventative services, chronic illness management and customer satisfaction. Beginning in 2015, plans must have a star rating of four or higher to qualify for bonus payments. Our Medicare Advantage plans' operating results, premium revenue and benefit offerings are likely to continue to be significantly determined by their star ratings. If we do not maintain or continue to improve our star ratings, our plans may not be eligible for full-level quality bonuses, which could adversely affect the benefits that our plans can offer, reduce our customer base and/or reduce margins.

Contracts with CMS and the various state governmental agencies contain certain provisions regarding data submission, provider network maintenance, quality measures, claims payment, continuity of care, call center performance and other requirements. If we fail to comply with these requirements, we may be subject to fines or penalties that could impact our profitability.

In addition, any failure to comply with various state and federal health care laws and regulations, including those directed at preventing fraud and abuse in government funded programs, could result in

20    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1A. Risk Factors

investigations or litigation, with the imposition of fines, limitations on our ability to expand, restrictions or exclusions from program participation or other agreements with a federal or state governmental agency that could adversely impact our business, cash flows, financial condition and results of operations.

In addition, our Medicare Advantage and Medicare prescription drug businesses face a number of others risks including potential uncollectible receivables resulting from processing and/or verifying enrollment, inadequate underwriting assumptions, inability to receive and process correct information, increased medical or pharmaceutical costs. Actual results may be materially different than our assumptions and estimates regarding these complex and wide-ranging programs, which could have a material adverse effect on our business, financial condition and results of operations.

Finally, our Cigna-HealthSpring business may underperform, relative to our expectations, which could have a material adverse impact on our financial condition and results of operations. For example, if our existing contracts are not renewed, or if we are not awarded new contracts as a result of this competitive procurement process, this could have a material adverse effect on our business, cash flows, financial condition and results of operations.


If we fail to develop and maintain satisfactory relationships with physicians, hospitals and other health care providers, our business and results of operations may be adversely affected.

We contract with physicians, hospitals and other health care providers for services rendered to our customers. Our results of operations are substantially dependent on our ability to contract for these services at competitive prices. In any particular market, physicians, hospitals and health care providers could refuse to contract, demand higher payments or take other actions that could result in higher medical costs or less desirable products for our customers. In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant or controlling market positions that could result in a diminished bargaining position for us. If providers refuse to contract with us, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected.

Our ability to develop and maintain satisfactory relationships with health care providers also may be negatively impacted by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement levels, increasing revenue and other pressures on health care providers and consolidation activity among hospitals, physician groups and health care providers. For example, ongoing reductions by CMS and state governments in amounts payable to providers, particularly hospitals, for services provided to Medicare and Medicaid enrollees may pressure the financial condition of certain providers and, in turn, adversely impact our ability to maintain or develop new cost-effective health care provider contracts or result in a loss of revenues or customers.

Recent and continuing consolidation among physicians, hospitals and other health care providers, development of accountable care organizations and other changes in the organizational structures that physicians, hospitals and health care providers choose may change the way these providers interact with us and may change the competitive landscape in which we operate. In some instances, these organizations may compete directly with us, potentially affecting the way that we price our products or causing us to incur increased costs if we change our operations to be more competitive. Our focus on developing collaborative accountable care organizations and independent practice associations or similar business arrangements with physicians and other health care providers may not achieve intended benefits, which could adversely affect our strategy or prospects.

Out-of-network providers do not have a pre-established understanding with us about the amount of compensation due for their services. Some states define by law or regulation the amounts due, but in most instances it is not defined or is established by a standard that is not clearly translatable into dollar terms. In such instances, providers may believe that they were underpaid and may litigate or arbitrate their dispute with us or try to recover from our customers the difference between what we have paid them and the amount they charged us. The outcome of disputes where we do not have a provider contract may cause us to pay higher medical or other benefit costs than we projected.


We are dependent on the success of our relationships with third parties for various services and functions, including pharmacy benefit management services.

To improve operating costs, productivity and efficiencies, we outsource to, or enter into partnership arrangements with, third parties for selected services and functions. These third parties include Catamaran Corporation for pharmacy benefit management services and various other service providers in areas such as information technology, independent practice associations, medical management services, call centers and claim services. Our operations may be vulnerable if these third parties fail to satisfy their obligations to us or if the arrangement is terminated for any reason. Even though contracts are intended to provide certain protections, we have limited control over the actions of third parties. For example, noncompliance with any privacy or security laws and regulations or any security breach involving one of our third-party vendors could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation. In addition, with respect to outsourced services or functions to third parties in foreign jurisdictions, we also are exposed to risks inherent in conducting business outside of the United States.

Outsourcing also may require us to change our existing operations, adopt new processes for managing these providers and/or redistribute responsibilities to realize the potential productivity and operational efficiencies. If there are delays or difficulties in changing business processes or our third party vendors do not perform as expected, we may not realize, or realize on a timely basis, the anticipated economic and other benefits of these relationships that could result in substantial costs or regulatory compliance issues, divert management's attention from other strategic activities, negatively affect employee

CIGNA CORPORATION - 2013 Form 10-K    21



Back to Contents

PART I
ITEM 1A. Risk Factors

morale or create other operational or financial problems for us. Terminating or transitioning arrangements with key vendors could result in additional costs or penalties, risks of operational delays or potential errors and control issues during the termination or transition phase. We may not be able to find an alternative partner in a timely manner or on acceptable financial terms. If there is an interruption in business or loss of access to data resulting from a termination or transition, we may not be able to meet the demands of our customers and, in turn, our business and results of operations could be unfavorably impacted.


Acquisitions, joint ventures and other transactions involve risks and we may not realize the expected benefits because of integration difficulties, underperformance relative to our expectations and other challenges.

As part of our growth strategy, we regularly consider and enter into strategic transactions, including mergers, acquisitions, joint ventures, licenses and other partnerships (collectively referred to as "transactions"), with the expectation that these transactions will result in various benefits. Our ability to achieve the anticipated benefits of these transactions is subject to numerous uncertainties and risks, including our ability to integrate operations, resources and systems in an efficient and effective manner; the failure to achieve expected revenues, earnings or cash flow, business opportunities, efficiencies, growth prospects or other anticipated benefits; challenges in implementing business plans; changes in laws and regulations or conditions imposed by regulators applicable to the business; retaining key employees; and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in expected revenues, earnings or cash flow, and goodwill or other intangible asset impairment charges. Further, we may finance transactions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of our shareholders, or by incurring additional debt that could impact our ability to access capital in the future.

In addition, effective internal controls are necessary to provide reliable and accurate financial reports and to mitigate the risk of fraud. The integration of businesses is likely to result in our systems and internal controls becoming increasingly complex and more difficult to manage. Any difficulties in the assimilation of businesses into our control system could cause us to fail to meet our financial reporting obligations. Ineffective internal controls also could cause investors to lose confidence in our reported financial information, which could negatively impact the trading price of our stock and our access to capital.


Our business depends on our ability to properly maintain the integrity of our data and the uninterrupted operation of our systems and business functions, including information technology and other business systems.

Our business is highly dependent on maintaining both effective information systems and the integrity and timeliness of the data we use to serve our customers and health care professionals and to operate our business. If our data were found to be inaccurate or unreliable due to fraud or other error, or if we (or the third-party service parties we utilize) were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our customers and health care professionals and hinder our ability to establish appropriate pricing for products and services, retain and attract customers, establish reserves and report financial results timely and accurately and maintain regulatory compliance, among other things.

In addition, our business is highly dependent upon our ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as: claims processing and payment; internet support and customer call centers; and the processing of new and renewal business. A power outage, cyber-attack or other failure of one or more of information technology or other systems could cause slower response times, resulting in claims not being processed as quickly as clients or customers desire, decreased levels of client or customer service and satisfaction, and harm to our reputation. Because our information technology and other systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such a business interruption, systems failure or service denial could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Like other companies in our industry, we have been and may in the future be the subject of cyber-security breaches. Computer systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. If a cyber-security breach of our systems or the systems of a third-party service provider occurs, it could also interrupt our operations and damage our reputation. We also could be subject to liability if sensitive customer information is misappropriated. Any compromise of security could result in additional government regulations, the loss of existing customers, impaired ability to secure new customers, increased operating expenses, financial losses, and additional litigation or other claims that could have a material adverse effect on our business, results of operations, financial condition and liquidity.


Effective investment in and execution of improvements to our information technology infrastructure and functionality are important to our strategy and failure to do so may impede our ability to deliver cost-effective services necessary to compete in the market.

Our information technology strategy and execution are critical to our continued success. Increasing regulatory and legislative mandated changes will place additional demands on our information technology infrastructure that could have a direct impact on available resources for projects more directly tied to strategic initiatives. We must continue to invest in long-term solutions that will enable us to anticipate customer needs and expectations, enhance the customer experience and act as a differentiator in the market. Our success is

22    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1A. Risk Factors

dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. We also must develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and customer needs. Failure to do so may impede our ability to deliver services at a competitive cost. Further, system development projects are long-term in nature, may be more costly than expected to complete and may not deliver the expected benefits upon completion.


Effective prevention, detection and control systems are critical to maintain regulatory compliance and prevent fraud and failure of these systems could adversely affect us.

Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights. The regulations and contractual requirements applicable to us are complex and subject to change. In addition, ongoing vigorous law enforcement, a highly technical regulatory scheme and the Dodd-Frank legislation and related regulations being adopted to enhance regulators' enforcement powers and whistleblower incentives and protections mean that our compliance efforts in this area will continue to require significant resources. Failure of our prevention, detection or control systems related to regulatory compliance or the failure of employees to comply with our internal policies, including data systems security or unethical conduct by managers and employees, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and penalties.

In addition, provider or customer fraud that is not prevented or detected could impact our medical costs or those of our self-insured customers. Further, during an economic downturn, we may experience increased fraudulent claims volume that may lead to additional costs due to an increase in disputed claims and litigation.


Our pharmacy benefit management business and related operations are subject to a number of risks and uncertainties that are in addition to those we face in our health care business.

Notwithstanding our agreement with Catamaran, we remain responsible to regulators and members for the delivery of pharmacy benefit management services. This business is subject to federal and state regulation, including federal and state anti-remuneration laws, ERISA, HIPAA and laws related to the operation of Internet and mail-service pharmacies. In addition, certain of our subsidiaries are pharmacies subject to state licensing and U.S. Drug Enforcement Agency registration requirements and laws concerning labeling, packaging, advertising and adulteration of prescription drugs and dispensing of controlled substances. Noncompliance with such regulations by us or Catamaran could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation.

Our pharmacy benefit management business also would be adversely affected by an inability to contract on favorable terms with pharmaceutical manufacturers and we could suffer claims and reputational harm in connection with purported errors by mail order or retail pharmacy businesses.


In operating onsite clinics and other types of medical facilities, we may be subject to additional liability that could result in significant time and expense.

In addition to contracting with physicians and other health care providers for services, we employ physicians and other health care professionals at onsite low acuity and primary care clinics that we operate for our customers (as well as certain clinics for our employees). In addition, our Cigna-HealthSpring business operates LivingWell health centers and we own and operate multispecialty health care centers, low acuity clinics and other types of centers in the Phoenix, Arizona metropolitan area that employ physicians and other health care professionals. As a direct employer of health care professionals and as an owner or operator of medical facilities, we are subject to liability for negligent acts, omissions, or injuries occurring at one of these clinics or caused by one of our employees. Even if any claims brought against us were unsuccessful or without merit, we would have to defend against such claims. The defense of any actions may result in significant expenses that could have a material adverse effect on our business, results of operations, financial condition and liquidity.


We face price competition and other pressures that could result in premiums that are insufficient to cover the cost of the health care services delivered to our members and inadequate medical claims reserves.

While health plans compete on the basis of many service and quality-related factors, we expect that price will continue to be a significant basis of competition. Our customer contracts are subject to negotiation as customers seek to contain their costs, including by electing to reduce benefits. Alternatively, our customers may purchase different types of products that are less profitable, or move to a competitor to obtain more favorable premiums. Each of these events would likely negatively impact our financial results.

Further, federal and state regulatory agencies may restrict our ability to implement changes in premium rates. For example, Health Care Reform includes an annual rate review requirement to prohibit unreasonable rate increases. Fiscal concerns regarding the continued viability of programs such as Medicare may cause decreasing reimbursement rates, delays in premium payments or insufficient increases in reimbursement rates for government-sponsored programs in which we participate. Any limitation on our ability to maintain or increase our premium or reimbursement levels, or a significant loss of membership resulting from our need to increase or maintain premium or reimbursement levels, could adversely affect our business, cash flows, financial condition and results of operations.

CIGNA CORPORATION - 2013 Form 10-K    23



Back to Contents

PART I
ITEM 1A. Risk Factors

In addition, factors such as business consolidations, strategic alliances, legislation and marketing practices will likely continue to create pressure to contain or otherwise restrict premium price increases, despite increasing medical costs. For example, the Gramm-Leach-Bliley Act gives banks and other financial institutions the ability to be affiliated with insurance companies. This may lead to new competitors with significant financial resources. Our product margins and growth depend, in part, on our ability to compete effectively in our markets, set rates appropriately in highly competitive markets to keep or increase our market share, increase membership as planned, and avoid losing accounts with favorable medical cost experience while retaining or increasing membership in accounts with unfavorable medical cost experience.

Premiums in the health care business are generally set for one-year periods, based on our estimate of future health care costs over such period. Actual costs may exceed what we estimated and charged in premiums due to factors such as medical cost inflation, higher than expected utilization of medical services, the introduction of new or costly treatments and technology, and membership mix. Our profitability depends, in part, on our ability to accurately predict and control future health care costs through underwriting criteria, provider contracting, utilization management and product design.

We record medical claims reserves on our balance sheet for estimated future payments. While we continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make adjustments to our reserves, the actual health care costs may exceed the reserves we have recorded.


Significant stock market or interest rate declines could result in additional unfunded pension obligations, resulting in the need for additional plan funding by us and increased pension expenses.

We currently have unfunded obligations in our frozen pension plans. A significant decline in the value of the plan's equity and fixed income investments or unfavorable changes in applicable laws or regulations could materially increase our expenses and change the timing and amount of required plan funding that could reduce the cash available to us, including our subsidiaries. We also are exposed to interest rate and equity risk associated with our pension and other post-retirement obligations. Sustained declines in interest rates could have an adverse impact on the funded status of our pension plans and our reinvestment yield on new investments. See Note 9 to our Consolidated Financial Statements for more information on our obligations under the pension plan.


Significant changes in market interest rates affect the value of our financial instruments that promise a fixed return or benefit and the value of particular assets and liabilities.

As an insurer, we have substantial investment assets that support insurance and contract holder deposit liabilities. Generally low levels of interest rates on investments, such as those experienced in U.S. and foreign financial markets during recent years, have negatively impacted our level of investment income earned in recent periods.

Substantially all of our investment assets are in fixed interest-yielding debt securities of varying maturities, fixed redeemable preferred securities and commercial mortgage loans. The value of these investment assets can fluctuate significantly with changes in market conditions. A rise in interest rates would likely reduce the value of our investment portfolio and increase interest expense if we were to access our available lines of credit.


A downgrade in the financial strength ratings of our insurance subsidiaries could adversely affect new sales and retention of current business, and a downgrade in our debt ratings would increase the cost of borrowed funds and negatively affect our ability to access capital.

Financial strength, claims paying ability and debt ratings by recognized rating organizations are each important factors in establishing the competitive position of insurance and health benefits companies. Ratings information by nationally recognized ratings agencies is broadly disseminated and generally used throughout the industry. We believe that the claims paying ability and financial strength ratings of our principal insurance subsidiaries are an important factor in marketing our products to certain customers. Our debt ratings impact both the cost and availability of future borrowings, and accordingly, our cost of capital. Each of the rating agencies reviews ratings periodically and there can be no assurance that current ratings will be maintained in the future. A downgrade of these ratings in the future could make it more difficult to market our products successfully and/or raise capital to support business growth within our insurance subsidiaries.


Global market, economic and geopolitical conditions may cause fluctuations in equity market prices, interest rates and credit spreads that could impact our ability to raise or deploy capital and affect our overall liquidity.

If the equity markets and credit market experience extreme volatility and disruption, there could be downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers' underlying financial strength. Extreme disruption in the credit markets could adversely impact our availability and cost of credit in the future. In addition, unpredictable or unstable market conditions or continued pressure in the global or U.S. economy, such as the sovereign debt crisis in the European Union and uncertainty regarding the U.S. fiscal position, including the federal debt ceiling, could result in reduced opportunities to find suitable opportunities to raise capital.

As of December 31, 2013, our outstanding long-term debt totaled $5.0 billion. Our debt obligations could make us more vulnerable to general adverse economic and industry conditions and require us to dedicate increased cash flow from operations to the payment of principal and interest on its debt, thereby reducing the funds we have available for other purposes, such as investments in ongoing businesses, acquisitions, dividends and stock repurchases. In these circumstances, our ability to execute our strategy may be limited, our flexibility in planning for or reacting to changes in business and

24    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
ITEM 1A. Risk Factors

market conditions may be reduced, or our access to capital markets may be limited such that additional capital may not be available or may only be available on unfavorable terms.


Unfavorable developments in economic conditions may adversely affect our business, results of operations and financial condition.

The economic conditions in the United States and globally continue to be challenging. Continued concerns about slow economic growth, high unemployment rates, the sovereign debt crisis in the European Union and uncertainty regarding the U.S. fiscal position, geopolitical issues, the availability and cost of credit and other capital, consumer spending and other factors continue to negatively impact expectations for the U.S. and global economy. Our results of operations could be materially and adversely affected by the impact of unfavorable economic conditions on our customers (both employers and individuals), health care providers and third-party vendors. For example:

Employers may take action to reduce their operating costs by modifying, delaying or canceling plans to purchase our products or making changes in the mix of products purchased that are unfavorable to us.

Higher unemployment rates and workforce reductions could result in lower enrollment in our employer-based plans (including an increase in the number of employees who opt out of employer-based plans) or our individual plans.

Because of unfavorable economic conditions or Health Care Reform, employers may stop offering health care coverage to employees or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs.

Our historical disability claim experience and industry data indicate that submitted disability claims rise under adverse economic conditions.

If customers are not successful in generating sufficient profits or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us.

Our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business.

A prolonged unfavorable economic environment could adversely impact the financial position of hospitals and other health care providers, potentially increasing our medical costs as these providers attempt to maintain revenue levels in their efforts to adjust to their own economic challenges.

Our third-party vendors could significantly and quickly increase their prices or reduce their output to reduce their operating costs. Our business depends on our ability to perform necessary business functions in an efficient and uninterrupted fashion.

These factors could lead to a decrease in our customer base, revenues or margins and/or an increase in our operating costs.

In addition, during a prolonged unfavorable economic environment, state and federal budgets could be materially and adversely affected, resulting in reduced reimbursements or payments in state and federal government programs, such as Medicare and Social Security. These state and federal budgetary pressures also could cause the government to impose new or a higher level of taxes or assessments on us, such as premium taxes on insurance companies and HMOs and surcharges or fees on select fee-for-service and capitated medical claims. Although we could attempt to mitigate or cover our exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover all of such costs, which may have a material adverse effect on our business, results of operations, financial condition and liquidity.


We are subject to the credit risk of our reinsurers.

We enter into reinsurance arrangements with other insurance companies, primarily to limit losses from large exposures or to permit recovery of a portion of direct losses. We also may enter into reinsurance arrangements in connection with acquisition or divestiture transactions when the underwriting company is not being acquired or sold.

Under all reinsurance arrangements, reinsurers assume insured losses, subject to certain limitations or exceptions that may include a loss limit. These arrangements also subject us to various obligations, representations and warranties with the reinsurers. Reinsurance does not relieve us of liability as the originating insurer. We remain liable to the underlying policyholders if a reinsurer defaults on obligations under the reinsurance arrangement. Although we regularly evaluate the financial condition of reinsurers to minimize exposure to significant losses from reinsurer insolvencies, reinsurers may become financially unsound. If a reinsurer fails to meet its obligations under the reinsurance contract or if the liabilities exceed any applicable loss limit, we will be forced to cover the claims on the reinsured policies.

The collectability of amounts due from reinsurers is subject to uncertainty arising from a number of factors, including whether the insured losses meet the qualifying conditions of the reinsurance contract, whether reinsurers or their affiliates have the financial capacity and willingness to make payments under the terms of the reinsurance contract, and the magnitude and type of collateral supporting our reinsurance recoverable, such as by holding sufficient qualifying assets in trusts or letters of credit issued. Although a portion of our reinsurance exposures are secured, the inability to collect a material recovery from a reinsurer could have a material adverse effect on our results of operations, financial condition and liquidity.

CIGNA CORPORATION - 2013 Form 10-K    25



Back to Contents

PART I
ITEM 1B. Unresolved Staff Comments

ITEM 1B.  Unresolved Staff Comments

None.

ITEM 2.  Properties

Our global real estate portfolio consists of approximately 7.9 million square feet of owned and leased properties. Our domestic portfolio has approximately 6.0 million square feet in 38 states, the District of Columbia, Puerto Rico and The Virgin Islands. Our International properties contain approximately 1.9 million square feet located throughout the following countries: Belgium, Canada, China, France, Hong Kong, India, Indonesia, Italy, Malaysia, Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom.

Our principal, domestic office locations, including various support operations, along with Group Disability and Life Insurance, Health Services, Core Medical and Service Operations and the domestic office of our Global Supplemental Benefits business are the Wilde Building located at 900 Cottage Grove Road in Bloomfield, Connecticut (our corporate headquarters) and Two Liberty Place located at 1601 Chestnut Street in Philadelphia, Pennsylvania. The Wilde Building measures approximately 833,000 square feet and is owned, while Two Liberty Place measures approximately 462,000 square feet and is leased office space.

We believe our properties are adequate and suitable for our business as presently conducted. The foregoing does not include information on investment properties.

ITEM 3.  Legal Proceedings

The information contained under "Litigation Matters" in Note 23 to our Financial Statements beginning on page 110 of this Form 10-K, is incorporated herein by reference.

ITEM 4.  Mine Safety Disclosures

Not applicable.

26    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART I
EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed below.

LISA R. BACUS, 49, Executive Vice President and Global Chief Marketing Officer of Cigna beginning May 2013; Executive Vice President and Chief Marketer at American Family Insurance from February 2008 until May 2013.

MARK L. BOXER, 55, Executive Vice President and Global Chief Information Officer of Cigna beginning April 2011; Deputy Chief Information Officer, Xerox Corporation; and Group President, Government Health Care, for Xerox Corporation/Affiliated Computer Services from March 2009 until April 2011.

DAVID M. CORDANI, 48, Chief Executive Officer of Cigna beginning December 2009; Director since October 2009; President beginning June 2008; and Chief Operating Officer from June 2008 until December 2009.

HERBERT A. FRITCH, 63, President, Cigna HealthSpring beginning January 2012; and Chairman of the Board and Chief Executive Officer of HealthSpring and its predecessor, NewQuest, LLC, from commencement of operations in September 2000 until HealthSpring was acquired by Cigna in January 2012.

DAVID D. GUILMETTE, 52, President, Global Employer Segment beginning July 2012; President, National, Pharmacy and Product from November 2011 until July 2012; President, National Segment from February 2010 until November 2011; and Managing Director of Towers Perrin Global Health & Welfare from January 2005 until January 2010.

NICOLE S. JONES, 43, Executive Vice President and General Counsel of Cigna beginning June 2011; Senior Vice President and General Counsel of Lincoln Financial Group from May 2010 until June 2011; Vice President and Deputy General Counsel of Cigna from April 2008 until May 2010; and Corporate Secretary of Cigna from September 2006 until April 2010.

THOMAS A. McCARTHY, 57, Executive Vice President and Chief Financial Officer of Cigna beginning July 2013; Vice President of Finance with responsibility for treasury, tax, strategy and corporate development, and management of run-off reinsurance from February 2003 until July 2013; Acting Chief Financial Officer from September 2010 until June 2011, and Treasurer from July 2008 until June 2011.

MATTHEW G. MANDERS, 52, President, Regional and Operations beginning November 2011; President, U.S. Service, Clinical and Specialty from January 2010 until November 2011; President of Cigna HealthCare, Total Health, Productivity, Network & Middle Market from June 2009 until January 2010; and President, of Cigna's Customer Segments from July 2006 until June 2009.

JOHN M. MURABITO, 55, Executive Vice President, Human Resources and Services of Cigna beginning August 2003.

JASON D. SADLER, 45, President, Global Individual Health, Life and Accident beginning July 2010, and Managing Director Insurance Business Hong Kong, HSBC Insurance Asia Limited from January 2007 until July 2010.

CIGNA CORPORATION - 2013 Form 10-K    27



Back to Contents

PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities




PART II

ITEM 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information under the caption "Quarterly Financial Data – Stock and Dividend Data" appears on page 114 and the number of shareholders of record as of December 31, 2013 appears under the caption "Highlights" on page 30 of this Form 10-K. Cigna's common stock is listed with, and trades on, the New York Stock Exchange under the symbol "CI".

Issuer Purchases of Equity Securities


The following table provides information about Cigna's share repurchase activity for the quarter ended December 31, 2013:

Period
  Total # of shares
purchased (1)

  Average price paid per share
  Total # of shares purchased as part of
publicly announced program (2)

  Approximate dollar value of shares
that may yet be purchased as part of publicly announced program (3)

 

October 1-31, 2013

  1,793,791   $78.17   1,792,625   $311,869,667

November 1-30, 2013

  22,465   $79.68     $311,869,667

December 1-31, 2013

  1,241   $87.11     $811,869,667
 

Total

  1,817,497   $78.20   1,792,625   N/A
 

(1)

Includes shares tendered by employees as payment of taxes withheld on the exercise of stock options and the vesting of restricted stock granted under the Company's equity compensation plans. Employees tendered 1,166 shares in October, 22,465 in November and 1,241 shares in December 2013.

(2)

Cigna has had a repurchase program for many years, and has had varying levels of repurchase authority and activity under this program. The program has no expiration date. Cigna suspends activity under this program from time to time and also removes such suspensions, generally without public announcement. In 2013, the Company repurchased 13.6 million shares for approximately $1.0 billion. Remaining authorization under the program was approximately $812 million as of December 31, 2013. The Company's Board of Directors increased share repurchase authority by $500 million on February 26, 2014. From January 1, 2014 through February 26, 2014, the Company repurchased 5.0 million shares for approximately $411 million. Remaining authorization under the program was approximately $901 million as of February 26, 2014.

(3)

Approximate dollar value of shares is as of the last date of the applicable month.

28    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Five Year Cumulative Total Shareholder Return*
December 31, 2008 – December 31, 2013

GRAPHIC

 
  12/31/08
  12/31/09
  12/31/10
  12/30/11
  12/31/12
  12/31/13
 
   

Cigna

    $    100     $    210     $    218     $    250     $    319     $    522  

 

 

S&P 500 Index

    $    100     $    126     $    146     $    149     $    172     $    228  

 

 

S&P Managed Health Care, Life & Health Ins. Indexes**

    $    100     $    125     $    140     $    169     $    181     $    273  
   

*

Assumes that the value of the investment in Cigna common stock and each index was $100 on December 31, 2008 and that all dividends were reinvested.

**

Weighted average of S&P Managed Health Care (75%) and Life and Health Insurance (25%) Indexes.

CIGNA CORPORATION - 2013 Form 10-K    29



Back to Contents

PART II
ITEM 6. Selected Financial Data

ITEM 6.  Selected Financial Data

The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.

Highlights


(Dollars in millions, except per share amounts)
 

2013

  2012
  2011
  2010
  2009
 
   
Revenues  
 
 
 
                       
Premiums and fees and other revenues  
$
29,176
 
$ 26,308   $ 19,210   $ 18,528   $ 16,018  
Net investment income  
 
1,164
 
  1,144     1,146     1,105     1,014  
Mail order pharmacy revenues  
 
1,827
 
  1,623     1,447     1,420     1,282  
Realized investment gains (losses)  
 
213
 
  44     62     75     (43)  
   
TOTAL REVENUES  
$
32,380
 
$ 29,119   $ 21,865   $ 21,128   $ 18,271  
   
Results of Operations:  
 
 
 
                       
Global Health Care  
$
1,517
 
$ 1,418   $ 1,105   $ 940   $ 775  
Global Supplemental Benefits  
 
175
 
  142     97     84     107  
Group Disability and Life  
 
259
 
  279     295     305     306  
Run-off Reinsurance  
 
(488)
 
      (183)     26     185  
Other Operations  
 
94
 
  82     89     85     86  
Corporate  
 
(222)
 
  (329)     (184)     (211)     (142)  
Realized investment gains (losses), net of taxes and noncontrolling interest  
 
141
 
  31     41     50     (26)  
   
Shareholders' income from continuing operations  
 
1,476
 
  1,623     1,260     1,279     1,291  
Income from continuing operations attributable to noncontrolling interests  
 
2
 
  1     1     4     3  
   
Income from continuing operations  
 
1,478
 
  1,624     1,261     1,283     1,294  
Income from discontinued operations, net of taxes  
 
 
              1  
   
NET INCOME  
$
1,478
 
$ 1,624   $ 1,261   $ 1,283   $ 1,295  
   
Shareholders' net income per share:  
 
 
 
                       

Basic

 
$
5.28
 
$ 5.70   $ 4.65   $ 4.69   $ 4.71  

Diluted

 
$
5.18
 
$ 5.61   $ 4.59   $ 4.65   $ 4.69  
Common dividends declared per share  
$
0.04
 
$ 0.04   $ 0.04   $ 0.04   $ 0.04  
Total assets  
$
54,336
 
$ 53,734   $ 50,697   $ 45,393   $ 42,794  
Long-term debt  
$
5,014
 
$ 4,986   $ 4,990   $ 2,288   $ 2,436  
Shareholders' equity  
$
10,567
 
$ 9,769   $ 7,994   $ 6,356   $ 5,198  

Per share

 
$
38.35
 
$ 34.18   $ 28.00   $ 23.38   $ 18.95  
Common shares outstanding (in thousands)  
 
275,526
 
  285,829     285,533     271,880     274,257  
Shareholders of record  
 
7,535
 
  7,885     8,178     8,568     8,888  
Employees  
 
36,500
 
  35,800     31,400     30,600     29,300  
   

30    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Index

Overview

  31

Consolidated Results of Operations

  35

Liquidity and Capital Resources

  36

Critical Accounting Estimates

  40

Segment Reporting

  43

Global Health Care

  44

Global Supplemental Benefits

  47

Group Disability and Life

  49

Run-off Reinsurance

  50

Other Operations

  52

Corporate

  53

Investment Assets

  54

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and the "Risk Factors" contained in Part I Item 1A of this Annual Report on Form 10-K.

Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's significant accounting policies. We measure the financial results of our segments using "segment earnings (loss)", defined as shareholders' net income (loss) before after-tax realized investment results. In this MD&A, we also present information using adjusted income from operations. Adjusted income (loss) from operations is another measure of profitability used by our management because it presents the underlying results of operations of our businesses and permits analysis of trends in underlying revenue, expenses and shareholders' net income. Adjusted income (loss) from operations is defined as segment earnings (loss) excluding special items (described in the table on page 35 of this Form 10-K) and results of the GMIB business. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure that is shareholders' net income. We exclude special items because management does not believe they are representative of our underlying results of operations. We also exclude the results of the GMIB business because, prior to February 4, 2013, the changes in the fair value of GMIB assets and liabilities were volatile and unpredictable.

Overview


We are a global health services organization with a mission to help our customers improve their health, well-being and sense of security. Our insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations). We also offer Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets. In addition to our ongoing operations described above, we also have certain run-off operations, including a Run-off Reinsurance segment.


Our Strategy

To execute on our mission, we have focused our efforts over the past several years on serving the emerging needs of our customers around the world through our "Go Deep, Go Global, Go Individual" strategy, as follows:

GO DEEP: We seek to increase our presence and brand strength in key "go deep" geographic areas, grow in targeted segments or capabilities, and deepen our relationships with current customers through cross-selling.

GO GLOBAL: We seek to deliver a range of differentiated products and superior service to meet the distinct needs of a growing global middle class and a globally mobile workforce through expansion in existing international markets and extension of our business model to new geographic areas.

GO INDIVIDUAL: We strive to establish a deep understanding of our customers' unique needs and to be a highly customer-centric organization. To do this, we are seeking to further simplify the buying process by providing choice, transparency of information, and a personalized customer experience. Our goal is to build

CIGNA CORPORATION - 2013 Form 10-K    31



Back to Contents

PART II
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

long-term relationships with each of our customers and meet their needs throughout each stage of their lives regardless of the customer's plan type: employer-based, government-sponsored, or individual coverage.

As part of this strategy, we have focused our efforts on delivering innovative health and wellness solutions tailored to our employer and government customers, enhancing collaboration with physicians and hospitals to offer affordable, value-based high quality care to individuals and building deeper relationships with individual customers through the world. Through these efforts, we believe we can achieve better health outcomes for our global customers and improve employee productivity, all while lowering the costs of health care for all parties.

As of December 31, 2013, our consolidated shareholders' equity was $10.6 billion, assets were $54.3 billion and we reported revenues of $32.4 billion for the year then ended. Our revenues are derived principally from premiums on insured products, fees from self-insured products and services, mail-order pharmacy sales, and investment income.


Our Segments

We report the financial results of our businesses in five segments, the following three of which are the most significant:

 
    Segment         % of revenues         Description    
    Global Health Care         78%         Aggregates the Commercial and Government operating segments:    

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 
                       

  Encompasses both our U.S. commercial and certain international health care businesses.    
                       

  Serves employers and their employees, including globally mobile individuals, and other groups (e.g. governmental and non-governmental organizations, unions and associations). In addition, our U.S. commercial health care business also serves individuals.    
                       

  Offers our insured and self-insured customers medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated as part of a comprehensive global health care benefit program.    

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

 
                       

  Offers Medicare Advantage, Medicare Part D and Medicaid plans.    
    Global Supplemental Benefits         8%         This segment offers supplemental health, life and accident insurance products in selected international markets and the U.S.    
    Group Disability and Life         12%         This segment provides group long-term and short-term disability, group life, accident and specialty insurance products and related services.    

We also report in two other segments: Run-off Reinsurance and Other Operations, including Corporate-owned Life Insurance.


Recent Key Transactions

Over the past two years, we have entered into a number of transactions that have helped us to achieve our strategic goals by: (1) repositioning the portfolio for growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving our strategic and financial flexibility; and (3) pursuing additional opportunities in high growth markets with particular focus on individuals.

In 2013, we completed the following transactions:

Run-off Operations. Prior to February 4, 2013, our Run-off Reinsurance segment had significant exposures, primarily from our guaranteed minimum death benefits ("GMDB" also known as "VADBe") and guaranteed minimum income benefits ("GMIB") business. Effective February 4, 2013, we entered into an agreement with Berkshire to reinsure future exposures for this business, net of existing retrocessional arrangements, up to a specified limit, for a payment of $2.2 billion. See Note 7 to the Consolidated Financial Statements and the Run-off Reinsurance section of this MD&A for additional information. As a result of this transaction, we recorded an after-tax charge of $507 million in the first quarter of 2013 that is reported as a special item.

Pharmacy Benefit Management ("PBM") Services Agreement. In June 2013, we entered into a ten-year pharmacy benefit management services agreement with Catamaran Corporation ("Catamaran"). Under this agreement, we will utilize their technology and service platforms, prescription drug procurement and inventory management capabilities, and order fulfillment services to lower costs and enhance our home-delivery pharmacy, retail network contracting and claims processing services. In the second quarter of 2013, we recorded one-time transaction costs of $37 million pre-tax, primarily for advisory fees associated with this

32    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

agreement, resulting in an after-tax charge of $24 million that is reported as a special item. This agreement had an immaterial impact to adjusted income from operations in 2013, and is expected to produce a positive contribution to earnings beginning in 2014 through improved clinical management, purchasing and administrative efficiencies.

In 2012, we completed three significant transactions targeting the seniors, individual and global supplemental benefits markets:

HealthSpring, Inc. We acquired HealthSpring, a Medicare Advantage provider, to assist us in serving individuals across their life stages and deepen our presence in a number of geographic markets. This acquisition brought us industry-leading physician partnership capabilities, deepened our existing client and customer relationships, and facilitated a broader deployment of our range of health and wellness capabilities and product offerings.

Great American Supplemental Benefits. We acquired Great American Supplemental Benefits to both strengthen our capabilities in the individual market and facilitate our expansion into the Medicare supplemental business.

Finans-Emeklilik. We entered into a joint venture with Finansbank to expand our global footprint in Turkey.


Organizational Efficiency Plans

We are constantly evaluating ways to deliver our products and services more efficiently and at a lower cost. During 2013 and 2012, we adopted specific plans to increase our organizational efficiency as follows.

2013 plan. During the fourth quarter of 2013, we committed to a plan to increase our organizational efficiency and reduce costs through a series of actions that includes employee headcount reductions. As a result, we recognized charges in other operating expenses of $60 million pre-tax ($40 million after-tax) in the fourth quarter of 2013, consisting mostly of severance costs. The Global Health Care segment reported $47 million pre-tax ($31 million after-tax). The remainder was reported as follows: $11 million pre-tax ($8 million after-tax) in the Global Supplemental Benefits segment and $2 million pre-tax ($1 million after-tax) in Group Disability and Life. We expect most of the severance to be paid by the end of 2015. We expect to realize annualized after-tax savings of approximately $45 million. A substantial portion of these savings will be realized in 2014.

2012 plan. During the third quarter of 2012, we committed to a series of actions to further improve our organizational alignment, operational effectiveness, and efficiency. As a result, we recognized charges in other operating expenses of $77 million pre-tax ($50 million after-tax) in the third quarter of 2012 consisting primarily of severance costs that are expected to be mostly paid by the end of the first quarter of 2014. We realized annualized after-tax savings of approximately $60 million, the majority of which was reinvested in the business to enhance our ability to provide superior service and affordable products to our customers.


Our Results

During the past three years, we have generated significant increases in revenues, adjusted income from operations and medical customers. This growth is largely due to the continued execution on our strategy, including the acquisition of HealthSpring, and continued business growth in targeted markets of all of our ongoing segments.

Shareholders' net income declined 9% in 2013 compared with 2012 due primarily to the $507 million after-tax charge associated with the February 4, 2013 reinsurance agreement with Berkshire. However, shareholders' net income in 2013 increased 17% over 2011 including the 2013 charge. The reinsurance transaction in 2013 aligned with our strategy of increasing financial flexibility by accomplishing an effective exit from the run-off GMDB and GMIB businesses.

Cash flows from operating activities in 2013 declined by $1.6 billion compared with 2012 primarily due to payments totaling $2.2 billion made in 2013 to Berkshire in connection with the reinsurance transaction. See the Liquidity and Capital Resources section of this MD&A for additional information.

During 2013, our unfunded pension liability decreased by approximately $1.0 billion to $611 million, largely due to an increase of 100 basis points in the assumed discount rate, strong asset performance and Company contributions of $195 million. See Note 9 to the Consolidated Financial Statements for additional information.

In 2013, we repurchased 13.6 million shares for $1.0 billion. From January 1, 2014 through February 26, 2014 we repurchased 5.0 million shares for $411 million. On February 26, 2014, the Company's Board of Directors increased share repurchase authority by $500 million. Accordingly, the total remaining share repurchase authorization as of February 26, 2014 was $901 million. Shareholders' equity increased in 2013, reflecting strong shareholders' net income in 2013 and the favorable effects of the pension plan, partially offset by the effects of share repurchase and unrealized losses on fixed maturities driven by rising interest rates.

Our consolidated results of operations are discussed in detail on page 35 of this Form 10-K.


Industry Developments

Sequestration

On March 31, 2013, a sequestration order under the Budget Control Act of 2011 was issued that requires reductions in payments to Medicare Advantage ("MA") and Prescription Drug Program ("PDP") carriers. Effective April 1, 2013, payments to MA and PDP carriers were reduced by 2%, with the reduction scheduled to remain in place through 2023. The lower rates began impacting our revenue in the second quarter of 2013 and are expected to continue to reduce revenue into 2014 and beyond. The earnings impact is mitigated somewhat by reductions to medical cost reimbursements to health care professionals. Sequestration will continue to lower segment earnings in 2014 in the Global Health Care segment; however, the overall effect will depend on our ability to reduce medical cost reimbursements to health care professionals.

CIGNA CORPORATION - 2013 Form 10-K    33



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Medicare Advantage Reimbursement Rates

On April 1, 2013, the Centers for Medicare and Medicaid Services (CMS) issued the final Announcement of Calendar Year 2014 Medicare Advantage Benchmark Rates and Payment Policies. We submitted bids to CMS in the second quarter of 2013 that incorporated the 2014 rates and that continue to provide programs with attractive benefits to seniors. We expect 2014 earnings in our Government operating segment to be lower than prior years. The magnitude of this earnings impact will depend largely on our ability to manage medical costs.

On February 21, 2014, CMS issued its Advance Notice for Calendar Year 2015 (the "Notice"). The final terms are expected to be published on April 7, 2014. While the terms contained within the Notice are within the range of our expectations, there remain numerous open issues and substantial uncertainties regarding the final terms of the Notice. We expect that CMS will receive a significant number of comments from interested parties (including Cigna) prior to issuance of the final terms; however, there can be no assurance that CMS will amend its current positions. Given the uncertainty regarding the final terms of the Notice, we cannot reliably estimate the impact on our business, revenues or results of operations in 2015 and beyond; under certain circumstances, it is possible that the impact could be materially adverse. In addition, we expect to adjust our programs and services in response to the proposed 2015 terms.


Health Care Reform

For additional information regarding the specific provisions of Health Care Reform affecting us, see the "Regulation" section of this Form 10-K. Outlined below are the reported and expected future financial effects of various provisions of Health Care Reform.

Commercial minimum medical loss ratio ("MLR"). We record our rebate accrual based on estimated medical loss ratios calculated as prescribed by the U.S. Department of Health and Human Services ("HHS") using full-year premium and claim information by state and market segment for each legal entity that issues comprehensive medical coverage. In 2013, we accrued an estimated rebate of $12 million pre-tax ($8 million after-tax), compared with an accrual of $37 million pre-tax ($24 million after-tax) in 2012. We paid $15 million in 2013, lower than the estimated rebate accrual of $37 million, primarily due to refinements to the MLR rebate calculation, that also contributed to the lower 2013 rebate accrual when compared to 2012.

Health insurance industry fee. This fee, totaling $8 billion for the industry in 2014 and increasing to $13.9 billion by 2017, will not be tax deductible. Our effective tax rate is expected to increase beginning in 2014 as a result of this fee. Our share of this industry fee will be determined based on our proportion of premiums to the industry total. The amount of this fee is expected to be approximately $230 million in 2014: $130 million related to our commercial business and $100 million related to our Medicare business. For our commercial business, we anticipate recovering most of the industry fee through rate increases, resulting in an immaterial effect on shareholders' net income. For our Medicare business, although we expect to partially mitigate the effect of the fee through benefit changes and prices, we anticipate that the earnings impact will be more significant than it will be for our commercial business.

Reinsurance fee. Beginning in 2014, this fee will be a fixed dollar per customer levy on all commercial business, including ASO, and is tax deductible. It will be used to fund the reinsurance program for non-grandfathered individual business sold either on or off the public exchanges beginning in 2014. The amount of this fee is expected to be approximately $110 million in 2014. Because we anticipate recovering most of it through rate increases, the impact of this fee on shareholders' net income is not expected to be material.

Medicare Advantage and Medicare Part D requirements beginning in 2014. Under the rules proposed by HHS, if the MLR for a Medicare Advantage or Medicare Part D contract is less than the required 85% minimum, the contractor is required to pay a penalty to CMS and could be subject to additional sanctions if the MLR continues to be less than 85% for successive years. We currently expect that our Medicare Advantage and Medicare Part D plan offerings will meet these MLR requirements.

Public Health Exchanges. Beginning in 2014, we are offering coverage on five public health insurance exchanges (Arizona, Colorado, Florida, Tennessee, and Texas). The enrollment process began on October 1, 2013. Based on our preliminary enrollment data from the exchanges and the effect of the reinsurance, risk corridor and risk adjustment programs (see the "Regulation" section of this Form 10-K for additional information) we do not expect public exchange-based enrollments to have a material effect on our medical customer base, revenues, operating cash flows or results of operations in 2014.


Disability Claims Regulatory Matter

During the second quarter of 2013, we finalized an agreement with the Departments of Insurance for Maine, Massachusetts, Pennsylvania, Connecticut and California (together, the "monitoring states") related to our long-term disability claims handling practices. In connection with the terms of the agreement, the Company recorded a charge of $77 million before-tax ($51 million after-tax) in the first quarter of 2013. The charge is comprised of two elements: (1) $48 million of benefit costs and reserves from reassessed claims expected to be reopened, including $925,000 in fines, $750,000 in regulatory surcharges and $9.5 million in claims handling expenses; and (2) $29 million in additional costs for open claims as a result of the claims handling changes being implemented. This charge is reported in the Group Disability and Life segment. We will be subject to re-examination 24 months after the execution date of the agreement. If the monitoring states find material non-compliance with the terms of the agreement upon re-examination, we may be subject to additional fines or penalties. In addition to the monitoring states, most other jurisdictions have joined the agreement as participating, non-monitoring states.

34    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations


Summarized below are our results of operations on a GAAP basis.

 
  For the Years Ended December 31,
  Increase /(Decrease)
  Increase /(Decrease)
 
 
     
Financial Summary
(In millions)
 
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Premiums and fees  
$
28,976
 
$ 26,187   $ 18,966   $ 2,789     11%   $ 7,221     38%  
Net investment income  
 
1,164
 
  1,144     1,146     20     2     (2)      
Mail order pharmacy revenues  
 
1,827
 
  1,623     1,447     204     13     176     12  
Other revenues  
 
200
 
  121     244     79     65     (123)     (50)  
Realized investment gains  
 
213
 
  44     62     169     384     (18)     (29)  
   
Total revenues  
 
32,380
 
  29,119     21,865     3,261     11     7,254     33  
Benefits and expenses  
 
30,204
 
  26,642     19,989     3,562     13     6,653     33  
   
Income before income taxes  
 
2,176
 
  2,477     1,876     (301)     (12)     601     32  
Income taxes  
 
698
 
  853     615     (155)     (18)     238     39  
   
Net income  
 
1,478
 
  1,624     1,261     (146)     (9)     363     29  
Less: net income attributable to noncontrolling interests  
 
2
 
  1     1     1     100          
   
Shareholders' net income  
$
1,476
 
$ 1,623   $ 1,260   $ (147)     (9)%   $ 363     29%  
   

A reconciliation of shareholders' net income to adjusted income from operations follows:

 
  For the Years Ended December 31,
  Increase/(Decrease)
  Increase/(Decrease)
 
 
     
Financial Summary
(In millions)
 
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Shareholders' net income  
$
1,476
 
$ 1,623   $ 1,260   $ (147)     (9)%   $ 363     29%  
Less: realized investment gains, net of taxes  
 
141
 
  31     41     110     355     (10)     (24)  
   
Segment earnings  
 
1,335
 
  1,592     1,219     (257)     (16)     373     31  
Less: GMIB and special items (after-tax):  
 
 
 
                                   
Results of GMIB business  
 
25
 
  29     (135)     (4)           164        
Costs associated with PBM services agreement  
 
(24)
 
          (24)                  
Charge related to reinsurance transaction
(See Note 7 to the Consolidated Financial Statements)
 
 
(507)
 
          (507)                  
Charge for disability claims regulatory matter
(See Note 23 to the Consolidated Financial Statements)
 
 
(51)
 
          (51)                  
Charges for organizational efficiency plans
(See Note 6 to the Consolidated Financial Statements)
 
 
(40)
 
  (50)         10           (50)        
Charges associated with litigation matters
(See Note 23 to the Consolidated Financial Statements)
 
 
 
  (81)         81           (81)        
Costs associated with acquisitions
(See Note 3 to the Consolidated Financial Statements)
 
 
 
  (40)     (31)     40           (9)        
Completion of IRS examination (See Note 19
to the Consolidated Financial Statements)
 
 
 
      24               (24)        
   
ADJUSTED INCOME FROM OPERATIONS  
$
1,932
 
$ 1,734   $ 1,361   $ 198     11%   $ 373     27%  
   
Other Key Consolidated Financial Data  
 
 
 
                                   
Global medical customers (in thousands)  
 
14,217
 
  14,045     12,680     172     1%     1,365     11%  
Effective tax rate  
 
32.1%
 
  34.4%     32.8%     (2.3)%           1.6%        
   

CIGNA CORPORATION - 2013 Form 10-K    35



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Consolidated Results of Operations: 2013 Compared to 2012 and 2012 Compared to 2011

Revenues: The components of the revenue increases are discussed further below:

Premiums and Fees. The increase in 2013 compared with 2012 reflected continued customer growth in targeted markets of all of the ongoing segments, and, to a lesser extent, acquisitions in late 2012 in the Global Supplemental Benefits segment. In 2012, the increase over 2011 was largely due to contributions from the 2012 HealthSpring acquisition. Continued customer growth in the targeted market segments also contributed to the strong premium growth in 2012.

Net Investment Income. The increase in 2013, compared with 2012, primarily reflected higher yields driven in part by higher partnership income, partially offset by lower average investment assets primarily due to sales of assets to fund the reinsurance transaction with Berkshire. In 2012, net investment income remained flat compared with 2011, primarily reflecting higher average investment assets and improved results from partnership investments offset by lower reinvestment yields.

Mail Order Pharmacy Revenues. Increases in each of 2013 and 2012 compared with the prior year, primarily reflected higher prescription volume for specialty medications (injectibles).

Other Revenues. Prior to the February 4, 2013 reinsurance transaction with Berkshire, other revenues included the results of a hedge program in the Run-off Reinsurance segment related to the GMDB and GMIB businesses. Other revenues included pre-tax losses of $39 million in 2013, $119 million in 2012 and $4 million in 2011 associated with the hedge program. Excluding the impact of the hedge program, other revenues were flat in 2013, compared with 2012, and decreased 3% in 2012 compared with 2011.

Realized Investment Results. The significant increase in 2013, compared with 2012, primarily resulted from gains on the sales of real estate joint ventures and higher gains on sales of fixed maturities largely to fund the February 4, 2013 reinsurance transaction. In 2012 realized investment results were lower than in 2011, primarily due to the absence of gains on sales of real estate held in joint ventures reported in 2011. See Note 14 to the Consolidated Financial Statements for additional information

Benefits and expenses. The increase in 2013 compared with 2012 reflected continued business growth in the ongoing segments and the charge associated with the reinsurance transaction. In 2012, the increase compared with 2011 reflected the acquisition of HealthSpring and continued business growth in the ongoing segments.

Shareholders' net income. The decrease in 2013, compared with 2012 primarily reflects the $507 million after-tax charge associated with the February 4, 2013 reinsurance agreement with Berkshire, partially offset by an increase in adjusted income from operations. In 2012, the increase in shareholders' net income compared with 2011, resulted primarily from substantially higher adjusted income from operations.

Adjusted income from operations. The increase in 2013 compared with 2012 was largely attributable to earnings growth in all of our ongoing business segments (Global Health Care, Global Supplemental Benefits, and Group Disability and Life). See the segment discussions later in this MD&A for further information. In 2012, adjusted income from operations increased 27% compared with 2011, largely attributable to earnings contributions from HealthSpring, as well as overall revenue growth in the other ongoing operating segments and lower charges related to the GMDB business.

The consolidated effective tax rate decreased in 2013 compared with 2012, primarily driven by the favorable effect of the completion of the 2009-2010 tax audits in 2013 and recognizing tax benefits in certain foreign operations. In 2012, the effective tax rate increased reflecting the acquisition of HealthSpring and the absence of the favorable impact of the completion of 2007-2008 tax audits in 2011.

Global medical customers increased in 2013 compared with 2012 and in 2012 compared with 2011 primarily driven by continued growth in the regional, select, individual, and government market segments. In 2012, the HealthSpring acquisition contributed to the increase.

Liquidity and Capital Resources


Financial Summary
(In millions)
 

2013

  2012
  2011
 
   
Short-term investments  
$
631
 
$ 154   $ 225  
Cash and cash equivalents  
$
2,795
 
$ 2,978   $ 4,690  
Short-term debt  
$
233
 
$ 201   $ 104  
Long-term debt  
$
5,014
 
$ 4,986   $ 4,990  
Shareholders' equity  
$
10,567
 
$ 9,769   $ 7,994  
   

The increase in short-term investments in 2013 compared with 2012 was driven by investment of increased cash levels in liquid commercial paper and United States Government obligations.


Liquidity

We maintain liquidity at two levels: the subsidiary level and the parent company level.

36    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

Our 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 the 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 company 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 years ended December 31, were as follows:

(In millions)
 

2013

  2012
  2011
 
   
Net cash provided by operating activities  
$
719
 
$ 2,350   $ 1,491  
Net cash provided by (used in) investing activities  
$
15
 
$ (3,857)   $ (1,270)  
Net cash provided by (used in) financing activities  
$
(930)
 
$ (228)   $ 2,867  
   

Cash flows from operating activities consist of cash receipts and disbursements for premiums and fees, mail order pharmacy, other revenues, investment income, taxes, benefits and expenses, and, prior to February 4, 2013, gains and losses recognized in connection with our GMDB and GMIB equity hedge programs. Because certain income and expense transactions do not generate cash, and because cash transactions related to revenues 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 including 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 and withdrawals to and from investment contract liabilities (that include universal life insurance liabilities) because such liabilities are considered financing activities with policyholders.


Operating activities

Cash provided by operating activities declined by $1.6 billion in 2013 compared with 2012 primarily due to payments totaling $2.2 billion made in 2013 to Berkshire in connection with the reinsurance transaction. Cash provided by operating activities in 2012 increased by $0.9 billion compared with 2011, primarily as a result of strong earnings growth in our ongoing business segments and the absence of claim run-out from the Medicare IPFFS business exited in 2011.


Investing activities

Cash flows from investing activities increased by $3.9 billion in 2013 compared with 2012 primarily driven by the absence of the 2012 payment to acquire HealthSpring. Excluding that acquisition, cash flows from investing activities in 2012 increased by $0.6 billion compared with 2011 primarily due to lower net purchases of fixed maturity investments.


Financing activities

Cash used in financing activities in 2013 increased by $0.7 billion compared with 2012 primarily due to higher repurchases of common stock. Cash provided by financing activities in 2011 was $2.9 billion, primarily consisting of net proceeds from long-term debt that was issued to finance the 2012 HealthSpring acquisition.


Share repurchase

We maintain a share repurchase program that was authorized by our Board of Directors. The decision to repurchase shares depends on market conditions and alternate uses of capital. We have, and may continue from time to time, to repurchase shares on the open market through a Rule 10b5-1 plan that permits a company to repurchase its shares at times when it otherwise might be precluded from doing so under insider trading laws or because of self-imposed trading blackout periods. We suspend activity under this program from time to time and also remove such suspensions, generally without public announcement.

In 2013 we repurchased 13.6 million shares for $1.0 billion. From January 1, 2014 through February 26, 2014 we repurchased 5.0 million shares for $411 million. On February 26, 2014, the Company's Board of Directors increased share repurchase authority by $500 million. Accordingly, the total remaining share repurchase authorization as of February 26, 2014 was $901 million. In 2012 the Company repurchased 4.4 million shares for $208 million and in 2011 repurchased 5.3 million shares for $225 million.

CIGNA CORPORATION - 2013 Form 10-K    37



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Interest Expense

Interest expense on long-term debt, short-term debt and capital leases was as follows:

(In millions)
  2013
  2012
  2011
 
   
Interest expense   $ 270   $ 268   $ 202  
   

The increase in interest expense in 2012 was primarily due to the issuance of $2.1 billion of long-term debt in the fourth quarter of 2011 to fund the acquisition of HealthSpring, partially offset by a lower weighted average interest rate reflecting the more favorable rates of this debt issued. The weighted average interest rate for outstanding short-term debt (primarily commercial paper) was 0.41% at December 31, 2013 and .47% at 2012.


Liquidity and Capital Resources Outlook

At December 31, 2013, there was approximately $760 million in cash and short-term investments available at the parent company level. In 2014, the parent company's combined cash obligations are expected to be approximately $480 million for commercial paper maturities, interest and pension contributions.

We expect, based on the parent company's current cash position, current projections for subsidiary dividends, and the ability to refinance its commercial paper borrowing, to have sufficient liquidity to meet the obligations discussed above.

However, our cash projections may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings, or we experience material adverse effects from one or more risks or uncertainties described more fully in the Risk Factors section of this Form 10-K. In those cases, we expect to have the flexibility to satisfy liquidity needs through a variety of measures, including intercompany borrowings and sales of liquid investments. The parent company may borrow up to $1.2 billion from its insurance subsidiaries without prior state approval. As of December 31, 2013, the parent company had no net intercompany loan balance with its insurance subsidiaries. Alternatively, to satisfy parent company liquidity requirements we may use short-term borrowings, such as the commercial paper program, the committed revolving credit and letter of credit agreement of up to $1.5 billion subject to the maximum debt leverage covenant in its line of credit agreement. As of December 31, 2013, we had $1.5 billion of borrowing capacity under the credit agreement. Within the maximum debt leverage covenant in the line of credit agreement, we have an additional $6.0 billion of borrowing capacity in addition to the $5.2 billion of debt outstanding.

Though we believe we have adequate sources of liquidity, continued significant disruption or volatility in the capital and credit markets could affect our ability to access those markets for additional borrowings or increase costs associated with borrowing funds.

We maintain a capital management strategy to indefinitely reinvest the earnings of certain of our foreign operations overseas. Indefinitely reinvested earnings are generally deployed in these countries, and other foreign jurisdictions in support of the liquidity and capital needs of our foreign operations, where possible. As of December 31, 2013 indefinitely reinvested earnings were approximately $1.1 billion. Approximately $176 million of cash and cash equivalents held in these countries would, if repatriated, be subject to a charge representing the difference between the U.S. and foreign tax rates. This strategy does not materially limit our ability to meet our liquidity and capital needs in the United States. Cash and cash equivalents in foreign operations are held primarily to meet local liquidity and surplus needs with excess funds generally invested in longer duration high quality securities.

Unfunded Pension Plan Liability.    As of December 31, 2013, our unfunded pension liability was $611 million, a decrease of approximately $1.0 billion from December 31, 2012, reflecting an increase in the assumed discount rate of 100 basis points, strong asset returns, and pension contributions of $195 million in 2013. We expect to make pension contributions in 2014 required under the Pension Protection Act of 2006 of approximately $100 million. As a result of the improved funding position, we do not expect to make voluntary contributions in 2014. In addition, during 2013, we increased our asset allocation to fixed income investments and reduced our allocation to domestic stocks in order to reduce the investment risk in the pension plan.

Solvency II.    Our businesses in the European Union will be subject to the directive on insurance regulation, solvency and governance requirements known as Solvency II. This directive will impose economic risk-based solvency and governance requirements and supervisory rules and becomes effective in 2016, although certain EU country regulators are requiring companies to demonstrate technical capability and comply with increased capital levels in advance of their effective date. Our European insurance companies are capitalized at levels consistent with projected Solvency II requirements and in compliance with anticipated governance and technical capability requirements.

38    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Guarantees and Contractual Obligations

We are contingently liable for various contractual obligations entered into in the ordinary course of business. The maturities of our primary contractual cash obligations, as of December 31, 2013, are estimated to be as follows:

(In millions, on an undiscounted basis)
  Total
  Less than
1 year

  1-3
years

  4-5
years

  After 5
years

 
   
On-Balance Sheet:                                
Insurance liabilities:                                

Contractholder deposit funds

  $ 7,080   $ 713   $ 971   $ 802   $ 4,594  

Future policy benefits

    11,815     364     917     1,013     9,521  

Global Health Care medical claims payable

    2,064     1,995     26     11     32  

Unpaid claims and claims expenses

    4,745     1,448     914     624     1,759  
Short-term debt     234     234              
Long-term debt     8,732     263     1,192     852     6,425  
Other long-term liabilities     831     275     120     87     349  
Off-Balance Sheet:                                
Purchase obligations     878     525     218     97     38  
Operating leases     641     131     232     134     144  
   
TOTAL   $ 37,020   $ 5,948   $ 4,590   $ 3,620   $ 22,862  
   

The expected future cash flows for GMDB and GMIB contracts included in the table above (within future policy benefits and other long-term liabilities) do not consider any of the related reinsurance arrangements.


On-Balance Sheet:

Insurance liabilities.  Contractual cash obligations for insurance liabilities, excluding unearned premiums and fees, represent estimated net benefit payments for health, life and disability insurance policies and annuity contracts. Recorded contractholder deposit funds reflect current fund balances primarily from universal life customers. Contractual cash obligations for these universal life contracts are estimated by projecting future payments using assumptions for lapse, withdrawal and mortality. These projected future payments include estimated future interest crediting on current fund balances based on current investment yields less the estimated cost of insurance charges and mortality and administrative fees. Actual obligations in any single year will vary based on actual morbidity, mortality, lapse, withdrawal, investment and premium experience. The sum of the obligations presented above exceeds the corresponding insurance and contractholder liabilities of $19 billion recorded on the balance sheet because the recorded insurance liabilities reflect discounting for interest and the recorded contractholder liabilities exclude future interest crediting, charges and fees. We manage our investment portfolios to generate cash flows needed to satisfy contractual obligations. Any shortfall from expected investment yields could result in increases to recorded reserves and adversely impact results of operations. The amounts associated with the sold retirement benefits and individual life insurance and annuity businesses, as well as the reinsured workers' compensation, personal accident and supplemental benefits businesses, are excluded from the table above as net cash flows associated with them are not expected to impact us. The total amount of these reinsured reserves excluded is approximately $6 billion.
  

Short-term debt represents commercial paper, current maturities of long-term debt, and current obligations under capital leases.

Long-term debt includes scheduled interest payments. Capital leases are included in long-term debt and represent obligations for IT network storage, servers and equipment.

Other long-term liabilities.  These items are presented in accounts payable, accrued expenses and other liabilities in our Consolidated Balance Sheets. This table includes estimated payments for GMIB contracts, pension and other postretirement and postemployment benefit obligations, supplemental and deferred compensation plans, interest rate and foreign currency swap contracts, and certain tax and reinsurance liabilities.

Estimated payments of $82 million for deferred compensation, non-qualified and international pension plans and other postretirement and postemployment benefit plans are expected to be paid in less than one year. Our best estimate is that contributions to the qualified domestic pension plans during 2014 will be approximately $100 million. We expect to make payments subsequent to 2014 for these obligations, however subsequent payments have been excluded from the table as their timing is based on plan assumptions that may materially differ from actual activities. See Note 9 to the Consolidated Financial Statements for further information on pension and other postretirement benefit obligations.

The above table also does not contain $17 million of liabilities for uncertain tax positions because we cannot reasonably estimate the timing of their resolution with the respective taxing authorities. See Note 19 to the Consolidated Financial Statements for the year ended December 31, 2013 for further information.

CIGNA CORPORATION - 2013 Form 10-K    39



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Off-Balance Sheet:

Purchase obligations.  As of December 31, 2013, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:

(In millions)
   
 
   
Fixed maturities   $ 56  
Commercial mortgage loans     7  
Real estate     3  
Limited liability entities (other long-term investments)     643  
   
Total investment commitments     709  
Future service commitments     169  
   
TOTAL PURCHASE OBLIGATIONS   $ 878  
   

We had commitments to invest in limited liability entities that hold real estate, loans to real estate entities or securities. See Note 11(D) to the Consolidated Financial Statements for additional information.

Our estimated future service commitments primarily represent contracts for certain outsourced business processes and IT maintenance and support. We generally have the ability to terminate these agreements, but do not anticipate doing so at this time. Purchase obligations exclude contracts that are cancelable without penalty and those that do not specify minimum levels of goods or services to be purchased.

Operating leases.  For additional information, see Note 21 to the Consolidated Financial Statements.


Guarantees

We are contingently liable for various financial and other guarantees provided in the ordinary course of business. See Note 23 to the Consolidated Financial Statements for additional information on guarantees.

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 our consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented below.

In addition to the estimates presented in the following table, there are other accounting estimates used in the preparation of our Consolidated Financial Statements, including estimates of liabilities for future policy benefits, as well as estimates with respect to unpaid claims and claim expenses, postemployment and postretirement benefits other than pensions, certain compensation accruals, and income taxes.

Management believes the current assumptions used to estimate amounts reflected in our Consolidated Financial Statements are appropriate. However, if actual experience differs from the assumptions used in estimating amounts reflected in our Consolidated Financial Statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our liquidity and financial condition.

See Note 2 to the Consolidated Financial Statements for further information on significant accounting policies.

40    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Balance Sheet Caption / Nature of Critical Accounting Estimate
  Effect if Different Assumptions Used
 

Goodwill

At the acquisition date, goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets.

We completed our annual evaluations of goodwill for impairment during the third quarter of 2013. These evaluations were performed at the reporting unit level, based on discounted cash flow analyses. The evaluations indicated that no impairment was required.

Consistent with prior years, fair value of a reporting unit was estimated using models and assumptions that we believe a hypothetical market participant would use to determine a current transaction price. The significant assumptions and estimates used in determining fair value include the discount rate and future cash flows. A range of discount rates was used, corresponding with the reporting unit's weighted average cost of capital, consistent with that used for investment decisions considering the specific and detailed operating plans and strategies within the reporting units. Projections of future cash flows were consistent with our annual planning process for revenues, claims, operating expenses, taxes, capital levels and long-term growth rates.

  If we do not achieve our earnings objectives or the cost of capital rises significantly, the assumptions and estimates underlying these impairment evaluations could be adversely affected and result in future impairment charges that would negatively impact our operating results.

The fair value estimate of our Government reporting unit could decrease by approximately 30% before an indication of impairment of goodwill occurs. Future changes in the funding for our Medicare programs by the federal government could substantially reduce Cigna-HealthSpring's revenues and profitability and have a significant impact on the fair value of the Government operating segment.

The fair value estimates of our remaining reporting units could decrease by approximately 25% to 85% before an indication of impairment of goodwill occurs. These outcomes were derived by determining the magnitude of changes to certain assumptions and estimates necessary for the estimated fair value of reporting units to approach their carrying values.


Our Cigna-HealthSpring business (reported in the Government operating segment that is also the reporting unit) contracts with CMS and various state governmental agencies to provide managed health care services, including Medicare Advantage plans and Medicare-approved prescription drug plans. Estimated future cash flows for this business incorporated the potential effects of sequestration and the Medicare Advantage reimbursement rates for 2014 and beyond as discussed in the "Overview" section of this MD&A. Revenues from the Medicare programs are dependent, in whole or in part, upon annual funding from the federal government through CMS. Funding for these programs is dependent on many factors including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal level and general political issues and priorities.

Goodwill as of December 31 was as follows (in millions):

2013 – $6,029

2012 – $6,001

See Notes 2(H) and 8 to the Consolidated Financial Statements for additional discussion of our goodwill.


 

 

CIGNA CORPORATION - 2013 Form 10-K    41



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Balance Sheet Caption / Nature of Critical Accounting Estimate
  Effect if Different Assumptions Used
 

Accounts payable, accrued expenses and other liabilities – pension liabilities

These liabilities are estimates of the present value of the qualified and nonqualified pension benefits to be paid (attributed to employee service to date) net of the fair value of plan assets. The accrued pension benefit liability as of December 31 was as follows (in millions):

2013 – $611

2012 – $1,602

See Note 9 to the Consolidated Financial Statements for assumptions and methods used to estimate pension liabilities.

  Using past experience, we expect that it is reasonably possible that a favorable or unfavorable change in assumptions for the discount rate or expected return on plan assets of 50 basis points could occur. An unfavorable change is a decrease in these key assumptions with resulting impacts as discussed below.

If discount rates for the qualified and nonqualified pension plans decreased by 50 basis points:

the accrued pension benefit liability would increase by approximately $185 million as of December 31, 2013 resulting in an after-tax decrease to shareholders' equity of approximately $120 million as of December 31, 2013.

annual pension costs for 2014 would decrease by approximately $5 million, after-tax; and

If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2014 would increase by approximately $10 million after-tax.

If we used the market value of assets to measure pension costs as opposed to the market-related value, annual pension cost for 2013 would decrease by approximately $20 million after-tax.

If the December 31, 2013 fair values of domestic qualified plan assets decreased by 10%, the accrued pension benefit liability would increase by approximately $405 million as of December 31, 2013 resulting in an after-tax decrease to shareholders' equity of approximately $265 million.

An increase in these key assumptions would result in impacts to annual pension costs, the accrued pension liability and shareholders' equity in an opposite direction, but similar amounts.


 
 
Global Health Care medical claims payable

Medical claims payable for the Global Health Care segment include both reported claims and estimates for losses incurred but not yet reported.

Liabilities for medical claims payable as of December 31 were as follows (in millions):

2013 – gross $2,050; net $1,856

2012 – gross $1,856; net $1,614

These liabilities are presented above both gross and net of reinsurance and other recoverables and generally exclude amounts for administrative services only business.

See Notes 2 and 5 to the Consolidated Financial Statements for additional information regarding assumptions and methods used to estimate this liability.

 

In 2013, actual experience differed from our key assumptions as of December 31, 2012, resulting in $182 million of favorable incurred claims related to prior years' medical claims payable or 1.3% of the current year incurred claims as reported in 2012. In 2012, actual experience differed from our key assumptions as of December 31, 2011, resulting in $200 million of favorable incurred claims related to prior years' medical claims, or 2.2% of the current year incurred claims reported in 2011. Specifically, the favorable impact is due to faster than expected completion factors and lower than expected medical cost trends, both of which included an assumption for moderately adverse experience.

The impact of this favorable prior year development was an increase to shareholders' net income of $77 million after-tax ($119 million pre-tax) in 2013. 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 shareholders' net income as explained in Note 5 to the Consolidated Financial Statements.

42    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Balance Sheet Caption / Nature of Critical Accounting Estimate
  Effect if Different Assumptions Used
 
Valuation of fixed maturity investments

Most fixed maturities are classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within shareholders' equity.

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.

Determining fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select, based on an understanding of the issuer, the structure of the security and overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. Approximately two-thirds of our fixed maturities are public securities, and one-third are private placement securities.

See Note 10 to the Consolidated Financial Statements for a discussion of our fair value measurements and the procedures performed by management to determine that the amounts represent appropriate estimates.

  Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows from the instrument. 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.

If the spreads used to calculate fair value increased by 100 basis points, the fair value of the total fixed maturity portfolio of $16.5 billion would decrease by approximately $900 million.


 
 

Assessment of "other-than-temporary" impairments of fixed maturities

To determine whether a fixed maturity's decline in fair value below its amortized cost is other than temporary, we must evaluate the expected recovery in value and its intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery. To make this determination, we consider a number of general and specific factors including the regulatory, economic and market environments, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer.

See Notes 2 (C) and 11 to the Consolidated Financial Statements for additional discussion of our review of declines in fair value, including information regarding our accounting policies for fixed maturities.


 

For all fixed maturities with cost in excess of their fair value, if this excess was determined to be other-than-temporary, shareholders' net income for the year ended December 31, 2013 would have decreased by approximately $65 million after-tax.

Segment Reporting


The following section of this MD&A discusses the results of each of our reporting segments. We measure the financial results of our segments using "segment earnings (loss)", defined as shareholders' net income (loss) before after-tax realized investment results. In the following segment discussions, we also present information using "adjusted income (loss) from operations", defined as segment earnings (loss) excluding special items and results of the GMIB business. Adjusted income (loss) from operations is another measure of profitability used by our management because it presents the underlying results of operations of our businesses and permits analysis of trends in underlying revenue, expenses and shareholders' net income. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure that is shareholders' net income. We exclude special items because management does not believe they are representative of our underlying results of operations. We also exclude

CIGNA CORPORATION - 2013 Form 10-K    43



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

the results of the GMIB business because, prior to the reinsurance transaction with Berkshire on February 4, 2013, the changes in the fair value of GMIB assets and liabilities were volatile and unpredictable.

The tables presented below summarize results from operations by segment.

 
  For the Years Ended December 31,
  Increase/(Decrease)
  Increase/(Decrease)
 
 
     
Shareholders' Net Income
(In millions)
 
 

2013

  2012
  2011
  2013 vs 2012
  2012 vs 2011
 
   
Segment earnings (loss)  
 
 
 
                                   
Global Health Care  
$
1,517
 
$ 1,418   $ 1,105   $ 99     7%   $ 313     28%  
Global Supplemental Benefits  
 
175
 
  142     97     33     23     45     46  
Group Disability and Life  
 
259
 
  279     295     (20)     (7)     (16)     (5)  
Run-off Reinsurance  
 
(488)
 
      (183)     (488)         183     100  
Other Operations  
 
94
 
  82     89     12     15     (7)     (8)  
Corporate  
 
(222)
 
  (329)     (184)     107     33     (145)     (79)  
   
Total  
 
1,335
 
  1,592     1,219     (257)     (16)     373     31  
Net realized investment gains, net of taxes  
 
141
 
  31     41     110     355     (10)     (24)  
   
Shareholders' net income  
$
1,476
 
$ 1,623   $ 1,260   $ (147)     (9)%   $ 363     29%  
   

 
  For the Years Ended December 31,
  Increase/(Decrease)
  Increase/(Decrease)
 
 
     
Adjusted Income (Loss) From Operations
(In millions)
 
 

2013

  2012
  2011
  2013 vs 2012
  2012 vs 2011
 
   
Global Health Care  
$
1,572
 
$ 1,480   $ 1,104   $ 92     6%   $ 376     34%  
Global Supplemental Benefits  
 
183
 
  148     100     35     24     48     48  
Group Disability and Life  
 
311
 
  281     290     30     11     (9)     (3)  
Run-off Reinsurance  
 
(6)
 
  (29)     (48)     23     79     19     40  
Other Operations  
 
94
 
  82     85     12     15     (3)     (4)  
Corporate  
 
(222)
 
  (228)     (170)     6     3     (58)     (34)  
   
Total  
$
1,932
 
$ 1,734   $ 1,361   $ 198     11%   $ 373     27%  
   


Global Health Care Segment

We measure the operating effectiveness of the Global Health Care segment using the following key factors:

segment earnings and adjusted income from operations;

customer growth;

sales of specialty products;

operating expense as a percentage of segment revenues (operating expense ratio); and

medical expense as a percentage of premiums (medical care ratio or "MCR") in the guaranteed cost and Medicare businesses.

44    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Results of Operations

 
  For the Years Ended December 31,
  Increase/(Decrease)
  Increase/(Decrease)
 
 
     
Financial Summary
(In millions)
 
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Premiums and fees  
$
22,933
 
$ 20,973   $ 14,443   $ 1,960     9%   $ 6,530     45%  
Net investment income  
 
325
 
  259     263     66     25     (4)     (2)  
Mail order pharmacy revenues  
 
1,827
 
  1,623     1,447     204     13     176     12  
Other revenues  
 
211
 
  225     236     (14)     (6)     (11)     (5)  
   
Segment revenues  
 
25,296
 
  23,080     16,389     2,216     10     6,691     41  
Mail order pharmacy cost of goods sold  
 
1,509
 
  1,328     1,203     181     14     125     10  
Benefits and other expenses  
 
21,448
 
  19,541     13,465     1,907     10     6,076     45  
   
Benefits and expenses  
 
22,957
 
  20,869     14,668     2,088     10     6,201     42  
   
Income before taxes  
 
2,339
 
  2,211     1,721     128     6     490     28  
Income taxes  
 
822
 
  793     616     29     4     177     29  
   
SEGMENT EARNINGS  
 
1,517
 
  1,418     1,105     99     7     313     28  
   
Less: special items (after-tax) included in segment earnings:  
 
 
 
                                 
Charge for organizational efficiency plan (See Note 6 to the Consolidated Financial Statements)  
 
(31)
 
  (42)         11           (42)        
Costs associated with PBM services agreement  
 
(24)
 
          (24)                  
Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements)  
 
 
  (7)         7           (7)        
Charge related to litigation matter (See Note 23 to the Consolidated Financial Statements)  
 
 
  (13)         13           (13)        
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)  
 
 
      1               (1)        
   
ADJUSTED INCOME FROM OPERATIONS  
$
1,572
 
$ 1,480   $ 1,104   $ 92     6%   $ 376     34%  
   
Realized investment gains, net of taxes  
$
73
 
$ 9   $ 23   $ 64     –%   $ (14)     (61)%  
   
Effective tax rate  
 
35.1%
 
  35.9%     35.8%     (0.8)%           0.1%        
   


Earnings Discussion: 2013 compared to 2012

The increase in Global Health Care's segment earnings and adjusted income from operations in 2013, as compared with 2012, reflected revenue growth from a higher customer base and rate increases consistent with underlying medical cost trends. In 2013, both measures also benefited from increased specialty contributions and higher net investment income.

These favorable effects were partially offset by a higher MCR in Medicare Advantage in 2013 driven by lower per member government reimbursements and higher inpatient and outpatient medical costs. In 2013, results also included higher operating expenses associated with customer growth and enhancements to our capabilities, partially offset by operating cost efficiencies.


Earnings Discussion: 2012 compared to 2011

Global Health Care's segment earnings and adjusted income from operations increased significantly in 2012, as compared with 2011. This increase reflected the timing of the HealthSpring acquisition in 2012 and Commercial revenue growth driven by a higher ASO customer base.

CIGNA CORPORATION - 2013 Form 10-K    45



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Revenues

The table below shows premiums and fees for the Global Health Care segment:

(In millions)
 

2013

  2012
  2011
 
   

Medical:

 
 
 
 
           

Guaranteed cost

 
$
4,463
 
$ 4,256   $ 4,176  

Experience-rated

 
 
2,292
 
  2,022     1,934  

Stop loss

 
 
1,907
 
  1,672     1,451  

International health care

 
 
1,752
 
  1,648     1,344  

Dental

 
 
1,139
 
  1,005     894  

Medicare

 
 
5,639
 
  4,969     489  

Medicaid

 
 
317
 
  207      

Medicare Part D

 
 
1,387
 
  1,421     685  

Other

 
 
730
 
  677     600  

 

 

Total medical

 
 
19,626
 
  17,877     11,573  

Fees

 
 
3,307
 
  3,096     2,870  

 

 

TOTAL PREMIUMS AND FEES

 
$
22,933
 
$ 20,973   $ 14,443  
   

Premiums and fees increased in 2013, compared with 2012, in U.S. Commercial due to customer growth and rate increases consistent with underlying medical cost trends. In addition, Medicare Advantage premiums were higher due to timing of the HealthSpring acquisition and customer growth.

Premiums and fees increased in 2012 compared with 2011, primarily reflecting the HealthSpring acquisition. U.S. Commercial growth was driven by rate increases consistent with underlying medical cost trends, and ASO customer growth. International health care premiums increased primarily due to the conversion of Vanbreda business from service to risk.

Net investment income increased in 2013, compared with 2012, reflecting higher assets and higher income from partnership investments. In 2012, net investment income decreased compared with 2011 reflecting lower yields, partially offset by the impact of the HealthSpring acquisition and higher income from partnership investments.

Mail order pharmacy revenues increased in each of 2013 and 2012, compared with each prior year, primarily reflecting higher prescription volume for specialty medications (injectibles).


Benefits and Expenses

Global Health Care segment benefits and expenses consist of the following:

(In millions)
 

2013

  2012
  2011
 
   

Mail order pharmacy cost of goods sold

 
$
1,509
 
$ 1,328   $ 1,203  
   

Medical claims expense

 
 
15,867
 
  14,228     9,125  

Operating expenses, excluding special items

 
 
5,497
 
  5,217     4,340  

Special items

 
 
84
 
  96      
   

Total benefits and other expenses

 
 
21,448
 
  19,541     13,465  
   

TOTAL BENEFITS AND EXPENSES

 
$
22,957
 
$ 20,869   $ 14,668  
   

Selected ratios

 
 
 
 
           
   

Guaranteed cost medical care ratio

 
 
81.5%
 
  80.2%     79.7%  

Medicare Advantage medical care ratio

 
 
84.8%
 
  80.9%     89.6%  

Medicare Part D medical care ratio

 
 
82.3%
 
  81.2%     83.4%  

Operating expense ratio – including special items

 
 
22.1%
 
  23.0%     26.5%  

Operating expense ratio – excluding special items

 
 
21.7%
 
  22.6%     26.5%  
   

46    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Medical claims expense increased 12% in 2013 compared with 2012, primarily due to medical cost inflation, the timing of the HealthSpring acquisition, and customer growth. Higher Medicare Advantage inpatient and outpatient medical costs also contributed to the increase.

Medical claims expense increased 56% in 2012 compared with 2011, primarily reflecting the acquisition of HealthSpring, conversion of Vanbreda business from service to risk, and medical cost inflation.

Operating expenses increased 5% in 2013 compared with 2012, primarily reflecting customer growth, increased investments, including costs associated with our new PBM arrangement, and the timing of the HealthSpring acquisition, partially offset by operating cost efficiencies. Operating expenses increased in 2012 compared with 2011 driven by the acquisition of HealthSpring.

The operating expense ratio, calculated as total operating expenses divided by segment revenues, is one measure of the segment's overall operating efficiency.

The operating expense ratio decreased in both 2013 and in 2012, compared with the prior year. These decreases were primarily driven by revenue growth and operating cost efficiencies partially offset by higher investments, including 2013 costs associated with our new PBM arrangement. The 2012 operating expense ratio, compared with 2011, benefited from additional HealthSpring business. Because the HealthSpring business is fully insured, it has a substantially lower operating expense ratio compared to our commercial business as approximately 80% of our commercial medical customers are in ASO arrangements.

Effective tax rate. The slight decline in the effective tax rate in 2013 compared with 2012 primarily reflected the recognition of tax benefits in certain of the segment's foreign operations. In 2012, the segment's effective tax rate was essentially flat compared with 2011.


Other Items Affecting Health Care Results

Global Health Care Medical Claims Payable

Medical claims payable increased 10% in 2013 compared with 2012, primarily driven by growth in the stop loss and HealthSpring books of business. Medical claims payable increased 42% in 2012 compared with 2011, primarily reflecting the acquisition of HealthSpring.


Medical Customers

A medical customer is defined as a person meeting any one of the following criteria:

is covered under an insurance policy or service agreement issued by the Company;

has access to the Company's provider network for covered services under their medical plan; or

has medical claims that are administered by the Company.

As of December 31, estimated medical customers were as follows:

(In thousands)
 

2013

  2012
  2011
 
   
Commercial Risk:  
 
 
 
           

U.S. Guaranteed cost

 
 
1,099
 
  1,135     1,091  

U.S. Experience-rated

 
 
794
 
  786     798  

International health care – Risk

 
 
742
 
  744     582  
   
Total commercial risk  
 
2,635
 
  2,665     2,471  

Medicare

 
 
467
 
  426     44  

Medicaid

 
 
25
 
  23      
   
Total government  
 
492
 
  449     44  
   
Total risk  
 
3,127
 
  3,114     2,515  
Service, including international health care  
 
11,090
 
  10,931     10,165  
   
TOTAL MEDICAL CUSTOMERS  
 
14,217
 
  14,045     12,680  
Less: voluntary / limited benefits customers  
 
139
 
  189     213  
   
Total medical customers excluding voluntary / limited benefits customers  
 
14,078
 
  13,856     12,467  
   

Medical customers increased 1% in 2013 compared to 2012, primarily reflecting continued ASO customer growth due to strong retention and sales in targeted market segments.

Medical customers increased 11% in 2012 compared to 2011, primarily reflecting ASO customer growth driven by strong retention and sales in targeted market segments, the impact of the HealthSpring acquisition, and growth in the international health care business.


Global Supplemental Benefits Segment

Segment Description

The key factors affecting segment earnings and adjusted income from operations for this segment are:

premium growth, including new business and customer retention;

CIGNA CORPORATION - 2013 Form 10-K    47



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

benefits expense as a percentage of earned premium (loss ratio);

operating expense as a percentage of earned premium (expense ratio); and

the impact of foreign currency movements.

Throughout this discussion, prior period currency adjusted income from operations, revenues, and benefits and expenses are being calculated by applying the current period's exchange rates to reported results in the prior period. A strengthening U.S. Dollar against foreign currencies will decrease segment earnings, while a weakening U.S. Dollar produces the opposite effect.

As described in Note 3 to the Consolidated Financial Statements, the Global Supplemental Benefits segment acquired two businesses during the second half of 2012: Great American Supplemental Benefits and Finans Emeklilik (also referred to as the "Turkey JV"). Collectively, throughout this discussion these two transactions are referred to as "the acquisitions".


Results of Operations

 
  For the Years Ended December 31,   Increase/(Decrease)   Increase/(Decrease)  
Financial Summary
(In millions)
 
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Premiums and fees  
$
2,513
 
$ 1,984   $ 1,528   $ 529     27%   $ 456     30%  
Net investment income  
 
100
 
  90     83     10     11     7     8  
Other revenues  
 
26
 
  21     15     5     24     6     40  
   
Segment revenues  
 
2,639
 
  2,095     1,626     544     26     469     29  
Benefits and expenses  
 
2,412
 
  1,916     1,492     496     26     424     28  
   
Income before taxes  
 
227
 
  179     134     48     27     45     34  
Income taxes  
 
50
 
  36     36     14     39          
Income attributable to redeemable noncontrolling interest  
 
2
 
  1         1     100     1        
Income attributable to other noncontrolling interest  
 
 
      1               (1)     (100)  
   
SEGMENT EARNINGS  
 
175
 
  142     97     33     23     45     46  
   
Less: special items (after-tax) included in segment earnings:  
 
 
 
                                   
Charges for organizational efficiency plans (See Note 6 to the Consolidated Financial Statements)  
 
(8)
 
  (6)         (2)           (6)        
Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements)  
 
 
      (3)               3        
   
ADJUSTED INCOME FROM OPERATIONS  
$
183
 
$ 148   $ 100   $ 35     24%   $ 48     48%  
   
Adjusted income from operations, using actual 2013 currency exchange rates  
$
183
 
$ 152   $ 101   $ 31     20%   $ 51     50%  
   
Realized investment gains, net of taxes  
$
5
 
$ 1   $ 1   $ 4     400%   $     –%  
   
Effective tax rate  
 
22.0%
 
  20.1%     26.9%     1.9%           (6.8)%        
   


Earnings Discussion: 2013 compared to 2012

The increase in segment earnings (as well as the increase in adjusted income from operations) was primarily driven by business growth, primarily in South Korea, lower acquisition costs in Europe reflecting a decision to cease selling activities in certain markets, and earnings of the acquisitions during the second half of 2012, partially offset by higher acquisition and benefits expenses.


Earnings Discussion: 2012 compared to 2011

The increase in segment earnings (as well as the increase in adjusted income from operations) was primarily driven by strong revenue growth, primarily in South Korea and, to a lesser extent, margin improvement largely attributable to disciplined management of solicitation spending.


Revenues

Premiums and fees increased in both 2013 and 2012 compared with the comparable prior year. When applying actual 2013 currency exchange rates to 2012 and 2011 results, premiums and fees increased by 25% in 2013 and 32% in 2012. These increases are primarily attributable to the acquisitions, and to a lesser extent, strong persistency, and new sales growth, particularly in South Korea.

Net investment income increased in 2013 compared with 2012, primarily due to the acquisitions in the second half of 2012. In 2012, net investment income increased compared with 2011, primarily due to asset growth in South Korea.


Benefits and Expenses

Benefits and expenses increased in each of 2013 and 2012, compared with the comparable prior year. Excluding the organizational efficiency plan charges from 2013 and 2012 and applying actual 2013 currency exchange rates to 2012 results, benefits and expenses increased by 25%. These increases were primarily due to the acquisitions and business growth. Excluding the special items in the table above and applying actual 2013 currency exchange rates to results, benefits and expenses increased 30% in 2012, compared with 2011, primarily due to the acquisitions and business growth.

48    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Loss ratios increased in 2013 and 2012 compared with each prior year, reflecting the inherently higher loss ratios of the acquisitions.

Policy acquisition expenses increased in 2013 and 2012, compared with the prior year, reflecting the acquisitions and business growth, partially offset by lower acquisition costs in Europe reflecting a decision to cease selling activities in certain markets during 2012.

Excluding the realignment and efficiency charges from 2013 and 2012, expense ratios decreased in 2013 compared with 2012. The decrease was primarily driven by the impact of the lower expense ratios associated with the Great American Supplemental Benefits business, partially offset by strategically planned investment spending to support future business growth. Excluding special items, expense ratios increased in 2012 compared with 2011 primarily driven by the impact of higher expense ratios associated with FirstAssist.

The increase in the effective tax rate in 2013 compared with 2012 and the decrease in 2012 compared with 2011 are largely due to implementing a capital management strategy in 2013 and 2012. Excluding those effects, the Global Supplemental Benefits segment's effective tax rate was 24.0% in 2013, 24.6% in 2012, and 27.3% in 2011. The continued decline in these rates reflects the favorable effects of our capital management strategy.


Other Items Affecting Global Supplemental Benefits Results

For our Global Supplemental Benefits segment, South Korea is the single largest geographic market, generating 51% of segment revenues and 87% of the segment earnings in 2013. Due to the concentration of business in South Korea, the Global Supplemental Benefits segment is exposed to potential losses resulting from economic, regulatory and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, that could have a significant impact on the segment's results and our consolidated financial results. In 2013, our operations in South Korea represented 4% of Cigna's total consolidated revenues and 10% of shareholders' net income.


Group Disability and Life Segment

Key factors for this segment are:

premium 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

 
  For the Years Ended December 31,    
   
   
   
 
 
  Increase/(Decrease)   Increase/(Decrease)  
Financial Summary
(In millions)
 
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Premiums and fees  
$
3,425
 
$ 3,109   $ 2,857   $ 316     10%   $ 252     9%  
Net investment income  
 
321
 
  300     291     21     7     9     3  
Other revenues  
 
1
 
          1              
   
Segment revenues  
 
3,747
 
  3,409     3,148     338     10     261     8  
Benefits and expenses  
 
3,387
 
  3,014     2,740     373     12     274     10  
   
Income before taxes  
 
360
 
  395     408     (35)     (9)     (13)     (3)  
Income taxes  
 
101
 
  116     113     (15)     (13)     3     3  
   
SEGMENT EARNINGS  
 
259
 
  279     295     (20)     (7)     (16)     (5)  
   
Less: special items (after-tax) included in segment earnings:  
 
 
 
                                   
Charge for disability claims regulatory matter (See Note 23 to the Consolidated Financial Statements)  
 
(51)
 
          (51)                  
Charge for organizational efficiency plans (See Note 6 to the Consolidated Financial Statements)  
 
(1)
 
  (2)         1           (2)        
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)  
 
 
      5               (5)        
   
ADJUSTED INCOME FROM OPERATIONS  
$
311
 
$ 281   $ 290   $ 30     11%   $ (9)     (3)%  
   
Realized investment gains, net of taxes  
$
40
 
$ 18   $ 7   $ 22     122%   $ 11     157%  
   
Effective tax rate  
 
28.1%
 
  29.4%     27.7%     (1.3)%           1.7%        
   


Earnings Discussion: 2013 compared to 2012

The decrease in segment earnings was primarily due to a charge associated with a disability claims regulatory matter discussed further in the Overview section of this MD&A. Adjusted income from operations increased in 2013, reflecting a lower disability loss ratio, higher net investment income and a lower expense ratio, partially offset by a higher life loss ratio. Results in 2013 include the favorable after-tax effect of reserve reviews of $60 million. Results in 2013 also include the $29 million favorable after-tax effect of a higher discount rate on claims incurred during 2013 as a result of reallocating higher yielding assets to the disability and life portfolio. Results in 2012 include the $43 million after-tax favorable impact of reserve reviews. The favorable impact of the reserve reviews continues to reflect strong operational performance by the disability claims management operation as well as reserve assumptions consistent with current business and economic conditions.

CIGNA CORPORATION - 2013 Form 10-K    49



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



Earnings Discussion: 2012 compared to 2011

Segment earnings and adjusted income from operations decreased, primarily attributable to a higher disability loss ratio and higher expense ratio, partially offset by a lower life loss ratio and higher net investment income. Results in 2012 include the $43 million after-tax favorable impact of reserve reviews. Results in 2011 include the $39 million after-tax favorable impact of reserve reviews offset by a $7 million after-tax litigation accrual.


Revenues

Premiums and fees. The increases in both 2013 and in 2012 reflect strong disability and life new sales, in-force growth and continued strong persistency.

Net investment income. The increases in both 2013 and in 2012 are primarily due to higher assets and higher partnership investment income.


Benefits and Expenses

The increase in 2013, compared with 2012, resulted from the $77 million before-tax impact of the disability claims regulatory matter, premium growth in the disability and life business and a higher loss ratio in the life business, partially offset by a lower disability loss ratio and lower operating expense ratio. The higher life loss ratio reflected higher new claim sizes. The lower disability loss ratio is driven by reserve reviews and discount rate changes. The lower expense ratio was driven by lower overhead. Benefits and expenses in 2013 included the before-tax favorable impact of reserve reviews of $84 million compared with $60 million in 2012. Benefits and expenses in 2013 also included the before-tax favorable effect of $40 million related to an increase in the discount rate for 2013 incurred claims as a result of the reallocation of higher yielding assets to the disability and life portfolio.

The 2012 increase, compared with 2011, resulted from premium growth in the disability and life business, a higher loss ratio in the disability business and a higher operating expense ratio, partially offset by a lower loss ratio in the life business. The higher disability loss ratio reflected less favorable claim experience primarily as a result of higher new claims. The higher operating expense ratio was driven by higher commissions and strategic information technology and claim office investments. The lower life loss ratio primarily reflected lower new claims. Benefits and expenses included the favorable impact of reserve studies of $60 million in 2012 as compared with the $59 million favorable impact of reserve studies offset by a $10 million litigation accrual in 2011.


Effective Tax Rate

In this segment, the effective tax rate is generally lower than the federal tax rate of 35%, primarily due to tax-exempt interest income on bonds. The decline in the effective tax rate in 2013 compared with 2012 is due to the tax benefit reported in 2013 related to the completion of the 2009-2010 tax audits. The increase in the effective tax rate in 2012 compared with 2011 reflects the absence of the tax benefit reported in 2011 related to the completion of the 2007-2008 tax audits.


Run-off Reinsurance Segment

Segment Description

Our reinsurance operations are an inactive business in run-off mode.

On February 4, 2013, we effectively exited our Run-off GMDB and GMIB business by entering into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire") to reinsure 100% of our future exposures for these businesses, net of existing retrocession arrangements, up to a specified limit. See Note 7 to the Consolidated Financial Statements and the Introduction section of this MD&A for additional information.

We exclude the results of the GMIB business from adjusted income (loss) from operations because the fair value of GMIB assets and liabilities is recalculated each quarter using updated capital market assumptions. Prior to the reinsurance transaction with Berkshire, the resulting changes in fair value that were reported in shareholders' net income were volatile and unpredictable. Beginning on February 4, 2013, changes in GMIB fair value due to non-performance risk are reflected in realized investment gains or losses. Other net changes in GMIB fair values are expected to be minimal.

50    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Results of Operations

Financial Summary
  For the Years Ended December 31,   Increase/(Decrease)   Increase/(Decrease)  
(In millions)
 

2013

  2012
  2011
  2013 vs. 2012
  2012 vs. 2011
 
   
Premiums and fees  
$
1
 
$ 21   $ 24   $ (20)     (95)%   $ (3)     (13)%  
Net investment income  
 
19
 
  102     103     (83)     (81)     (1)     (1)  
Other revenues  
 
(39)
 
  (119)     (4)     80     67     (115)      
   
Segment revenues  
 
(19)
 
  4     123     (23)         (119)     (97)  
Benefits and expenses  
 
731
 
  4     405     727         (401)     (99)  
   
Loss before income tax benefits  
 
(750)
 
      (282)     (750)         282     100  
Income tax benefits  
 
(262)
 
      (99)     (262)         99     100  
   
Segment loss  
 
(488)
 
      (183)     (488)         183     100  
Less: results of GMIB business  
 
25
 
  29     (135)     (4)     (14)     164     121  
Less: special items (after-tax) included in segment earnings:  
 
 
 
                                   
Charge related to reinsurance transaction  
 
(507)
 
          (507)                  
   
Adjusted loss from operations  
$
(6)
 
$ (29)   $ (48)   $ 23     79%   $ 19     40%  
   
Realized investment gains, net of taxes  
$
12
 
$ 1   $ 4   $ 11     —%   $ (3)     (75)%  
   
Effective tax rate  
 
34.9%
 
  – %     35.1%     34.9%           (35.1)%        
   

Segment results for 2013 were significantly lower than 2012, primarily due to the after-tax charge of $507 million related to the reinsurance transaction with Berkshire. See Note 7 to the Consolidated Financial Statements for further information around the loss on reinsurance.

Segment results improved in 2012 compared to 2011 due to significantly more favorable results for the GMIB business and lower reserve strengthening for GMDB.

See the Benefits and Expenses section for further discussion of the results of the GMIB and GMDB business, including the impact of the February 4, 2013 reinsurance transaction.


Net Investment Income

Net investment income decreased substantially in 2013 compared with 2012, primarily attributable to selling or reallocating investment assets as a result of the reinsurance transaction with Berkshire.


Other Revenues

Other revenues consisted of gains and (losses) from futures and swap contracts used in the GMDB and GMIB equity and interest rate hedge programs that were discontinued beginning February 4, 2013. The components were as follows:

(In millions)
 

2013

  2012
  2011
 
   
GMDB – Equity Hedge Program  
$
(28)
 
$ (110)   $ (45)  
GMDB – Growth Interest Rate Hedge Program  
 
(4)
 
  5     31  
GMIB – Equity Hedge Program  
 
(6)
 
  (16)     4  
GMIB – Growth Interest Rate Hedge Program  
 
(1)
 
  2     6  
   
Total Other Revenues  
$
(39)
 
$ (119)   $ (4)  
   

These hedging programs generally produced losses when equity markets and interest rates were rising and gains when equity markets and interest rates were falling. Amounts reflecting related changes in liabilities for GMDB contracts were included in benefits and expenses consistent with GAAP for a premium deficient book of business, resulting in no effect on shareholders' net income (see below "Other Benefits and Expenses"). Changes in liabilities for GMIB contracts, including the portion covered by the hedges, were recorded in GMIB fair value (gain) loss.


Benefits and Expenses

Benefits and expenses were comprised of the following:

(In millions)
 

2013

  2012
  2011
 
   
GMIB fair value (gain) loss  
$
 
$ (41)   $ 234  
Other benefits and expenses  
 
731
 
  45     171  
   
Benefits and expenses  
$
731
 
$ 4   $ 405  
   

GMIB fair value (gain) loss. GMIB fair value results in 2013 reflected gains through February 4, 2013 from increases in underlying account values and interest rates fully offset by the charge related to the February 4, 2013 reinsurance transaction.

CIGNA CORPORATION - 2013 Form 10-K    51



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

GMIB fair value gains of $41 million for 2012 were primarily due to the effect of increases in underlying account values, updates in the claim exposure calculation, and a reduction in annuitization rates, partially offset by a reduction in lapse rates and general declines in interest rates.

GMIB fair value losses of $234 million for 2011 were primarily due to a decline in both the interest rate used for projecting claim exposure (7-year Treasury rates) and the rate used for projecting market returns and discounting (LIBOR swap curve).

Other Benefits and Expenses are comprised of the following:

(In millions)
 

2013

  2012
  2011
 
   
Results of GMDB equity and growth interest rate hedging programs  
$
(32)
 
$ (105)   $ (14)  
GMDB reserve strengthening  
 
727
 
  43     70  
Other GMDB, primarily accretion of discount  
 
4
 
  79     82  
   
GMDB benefit expense  
 
699
 
  17     138  
Other, including operating expenses  
 
32
 
  28     33  
   
Other benefits and expenses  
$
731
 
$ 45   $ 171  
   

Results of GMDB hedging programs. Results in 2013 and 2012 reflected favorable equity market performance. The result in 2011 was due to turbulent conditions in an overall declining equity market. Results for 2013 are limited to market activity prior to the hedge program's discontinuance resulting from the reinsurance transaction with Berkshire.

As explained in Other revenues above, these changes did not affect shareholders' net income because they were offset by gains or losses on futures contracts used to hedge equity market and interest rate performance.

Reserve strengthening. The following highlights the impacts of GMDB reserve strengthening:

The 2013 reserve strengthening was driven by the reinsurance transaction of February 4, 2013.

The 2012 reserve strengthening was driven primarily by reductions to the lapse rate assumptions, an update to management's consideration of the anticipated impact of continued low short-term interest rates, and to a lesser extent, an increase to the volatility and correlation assumptions, partially offset by favorable equity market conditions.

The 2011 reserve strengthening was driven primarily by volatility-related impacts due to turbulent equity market conditions, an update to management's consideration of the anticipated impact of the continued low level of short-term interest rates, and the adverse impacts of overall market declines, including an increase in the provision for future partial surrenders and declines in the value of contractholders' non-equity investments such as bond funds, neither of which are included in the hedge program.

Other, including operating expenses increased in 2013 primarily due to expenses associated with the reinsurance transaction of February 4, 2013. The decrease in 2012 compared with 2011 was due to the favorable impact of reserve studies and lower operating expenses.


Other Operations Segment

Segment Description

Cigna's Other Operations segment includes the results of the following businesses:

corporate-owned life insurance ("COLI");

deferred gains recognized from the sale of the retirement benefits and individual life insurance and annuity businesses; and

run-off settlement annuity business.

COLI contributes the majority of earnings in Other Operations. The COLI regulatory environment continues to evolve, with various federal budget related proposals recommending changes in policyholder tax treatment. Although regulatory and legislative activity could adversely impact our business and policyholders, management does not expect the impact to materially affect our results of operations, financial condition or liquidity.

52    CIGNA CORPORATION - 2013 Form 10-K



Back to Contents

PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Results of Operations