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CIGNA ANNUAL REPORT 2008
Making the path to health,
well-being and security easier.

Table of contents

  • Page 1
    CIGNA ANNUAL REPORT 2008 Making the path to health, well-being and security easier.

  • Page 2
    TABLE OF CONTENTS Letter to our Shareholders 2 2008 Milestones and Accomplishments 10 CIGNA in Perspective 12 Corporate and Board of Directors Information 14

  • Page 3
    ... and help businesses both large and small to prosper and thrive. That is why we made improving health the core of our purpose. And why we'll keep working until every individual and every business we serve reaches their full health potential. Because now, more than ever, it's time to feel better. And...

  • Page 4
    ... rates. The run-off reinsurance results, while significant, were manageable from a capital perspective and our operating subsidiaries continue to be capitalized well in excess of regulatory requirements. Despite the circumstances, our ongoing businesses - CIGNA HealthCare, CIGNA Group Insurance...

  • Page 5
    ... and the broad impact of the economic recession. At the same time, our health care specialty businesses - behavioral, dental and pharmacy - continue to add value as key components of our health service value proposition. The fact When times are hard, our customers need us more than ever. 3

  • Page 6
    ... design personalized health care programs that are specific to the needs of every individual - programs that improve health and wellness and give people a real sense of security. This is a significant competitive advantage for us. CIGNA Group Insurance - our disability, life and accident insurance...

  • Page 7
    ...cost-effective health care is critically important to a productive, competitive work force. In fact, concerns about the state of our nation's economic health relate specifically to staying healthy at a personal level. Various studies show that a disturbingly high number of people are short-changing...

  • Page 8
    ...-based health care system that makes access to care universal, fosters and rewards quality, and makes care more affordable through evidence-based information that supports better decision-making. Delivering Value, One Person at a Time Put another way, value-based health care means removing the cost...

  • Page 9
    ... and security easier by helping people better manage and maintain their own health. We can help reduce the cost of care for them and their employers, help employees be more productive, and help make the health care delivery system more effective and cost-efficient. CIGNA's businesses work together...

  • Page 10
    ...help we can offer is more critical than ever. CIGNA's businesses work together, strategically and operationally, to support the whole person. We integrate a full slate of high-quality health and wellness offerings - including disease and disability management and lifestyle behavior change programs...

  • Page 11
    ...in an environment of health care reform. The market for small groups - small businesses with fewer than 250 employees - and for benefits sold to individuals, represents such an opportunity. In 2008, we made strong progress in integrating the operations of Great-West Healthcare - a company with deep...

  • Page 12
    ... a national "it's time to feel better" (itstimetofeelbetter.com) campaign to support its health service mission. Product Innovation and Service CIGNA was named the best managed care organization and has the best employee assistance program (EAP) according to the 2008 Business Insurance Readers...

  • Page 13
    ...ed corporate social responsibility program to extend our mission to improve the health, well-being and security for all those we serve. The CIGNA Foundation provided funds to sponsor The Ph.D. Project, supporting the development of management educators and future business leaders within the African...

  • Page 14
    ... return-to-work rates and lower medical and disability costs. In addition, all group products come with access to free will preparation services and CIGNA's Healthy Rewards® program, which offers a variety of discounts on health and wellness products and services. Life 49% Disability 39% Accident...

  • Page 15
    ... life insurance, and credit protection Expatriate benefits: medical, dental, behavioral, vision, pharmacy, personal accident, disability, business travel and life insurance; and wellness programs for expatriate employees Health care: medical and related products provided through employer group...

  • Page 16
    ... & Associates LLC, a strategic advisory consulting firm WILLIAM D. ZOLLARS Chairman, President and Chief Executive Officer YRC Worldwide Inc., a holding company whose subsidiaries provide regional, national and international transportation and related services Standing Board Committees Executive...

  • Page 17
    ... Executive Vice President and Chief Information Officer CIGNA Corporation WILLIAM L. ATWELL President CIGNA International KAREN S. ROHAN President CIGNA Group Insurance, Dental and Vision Care Other Officers ANNMARIE T. HAGAN Vice President, Chief Accounting Officer and Controller CIGNA Corporation...

  • Page 18
    ... 303A.12(a) of the New York Stock Exchange Listed Company Manual. CIGNA has also filed, as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2008, the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley...

  • Page 19
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K _____ (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ...

  • Page 20
    ... Description of Business...B. Financial Information about Business Segments...C. Health Care...D. Disability and Life...E. International ...F. Run-off Reinsurance ...G. Other Operations ...H. Investments and Investment Income ...I. Regulation ...J. Ratings...K. Miscellaneous...Item 1A. Risk Factors...

  • Page 21
    ...from premiums, fees, mail order pharmacy, other revenues and investment income. The financial results of CIGNA's businesses are reported in the following segments Health Care; Disability and Life; International; Run-off Reinsurance; and Other Operations. Available Information Our annual, quarterly...

  • Page 22
    ..., Network POS Open Access and Open Access Plus plans cover health care services provided by participating ("innetwork"), and non-participating ("out-of-network") health care providers. Preferred Provider ("PPO") Plans. CIGNA HealthCare also offers a PPO product line that features a broader national...

  • Page 23
    ... makes shared administration products available to self-insured Taft-Hartley trusts and other groups. CIGNA HealthCare provides these self-insured plans access to its national provider network and provides claim re-pricing and other services (e.g. utilization management). • • Specialty Health...

  • Page 24
    ... through its network of participating behavioral health care providers, offers behavioral health care management services, employee assistance programs, and work/life programs to employer sponsored benefit plans, HMOs, governmental entities and disability insurers. CIGNA Behavioral Health focuses on...

  • Page 25
    ...D prescription drug program, CIGNA Medicare Rx ®, provides a number of plan options as well as service and information support to Medicare-eligible members aged 65 and over. CIGNA Medicare Rx is available in all 50 states and the District of Columbia. Retail Pharmacies. CIGNA HealthCare operates 19...

  • Page 26
    ... management; pharmacy benefit management; behavioral health care management services (through its provider networks); or any combination of the services. The employer/plan sponsor is responsible for self-funding all claims, but may purchase stop-loss insurance from CIGNA HealthCare or other insurers...

  • Page 27
    ...claims, health care inflation (unit cost, location of delivery of care and utilization), effective medical cost management, expenses, credit risk, enrollment mix, investment returns, and profit margins. Claim and expense assumptions may be based in whole or in part on prior experience of the account...

  • Page 28
    ... to claims and expenses. For medical and dental products, profitability reflects the accuracy of cost projections for health care (unit costs and utilization), the adequacy of fees charged for administration and risk assumption and effective medical cost and utilization management. CIGNA HealthCare...

  • Page 29
    .... CIGNA HealthCare also employs representatives to sell utilization review services, managed behavioral health care and employee assistance services directly to insurance companies, HMOs, third party administrators and employer groups. As of December 31, 2008, the field sales force for the products...

  • Page 30
    • national managed pharmacy, behavioral health and utilization review services companies. 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 ...

  • Page 31
    ... disability. Group disability coverage is typically employer-paid or a combination of employer and employee-paid. CIGNA Disability and Life also provides case management and related services to workers' compensation insurers and employers who self-fund workers' compensation and disability benefits...

  • Page 32
    ..., student accident medical and disability insurance to professional associations, financial institutions, schools and participant organizations. Voluntary benefits are those paid by the employee and are offered at the employer's worksite. CIGNA Disability and Life plans provide, among other services...

  • Page 33
    ...31, 2008, CIGNA is one of the top providers of group disability, life and accident insurance, based on premiums. Industry Developments and Strategic Initiatives The group insurance market remains highly competitive as the rising cost of providing medical coverage to employees has forced companies to...

  • Page 34
    ... insurance coverage, with some offerings having managed care or administrative service aspects. These products generally provide an alternative or supplement to government programs. Pricing, Reserves and Reinsurance Premiums for CIGNA International's life, accident and supplemental health insurance...

  • Page 35
    ...'s life, accident and supplemental health operations and expatriate benefits business include product and distribution innovation and differentiation, efficient management of direct marketing processes, commission levels paid to distribution partners, and quality of claims and customer services...

  • Page 36
    ... (workers' compensation, personal accident, and catastrophe coverages); and health policies. The products and services related to these operations were offered by subsidiaries of CIGNA Corporation. In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance businesses...

  • Page 37
    Markets and Distribution These products under CIGNA's Run-off Reinsurance segment were sold principally in North America and Europe through a small sales force and through intermediaries. Prior to 2000, CIGNA also purchased reinsurance to reduce the risk of losses on contracts that it had written. ...

  • Page 38
    ...insurance business are issuance and administration of the insurance policies (e.g., maintenance of records regarding cash values and death benefits, claims processing, etc.) as well as oversight of the investment management for separate account assets that support the variable universal life product...

  • Page 39
    ... Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified minimum credit or claims paying rating, these reinsurers are required to fully secure the outstanding balance. S&P has assigned both of these reinsurers a rating of AA. CIGNA's sale of its retirement business...

  • Page 40
    ... Settlement Annuities business is premium deficient, meaning initial premiums were not sufficient to cover all claims and profit. Liabilities are estimates of the present value of benefits to be paid less the present value of investment income generated by the assets supporting the product including...

  • Page 41
    ..., real estate and short-term investments. CIGNA's Invested Assets are managed primarily by CIGNA subsidiaries and external managers with whom CIGNA's subsidiaries contract. The Invested Assets comprise a majority of the combined assets of the Health Care, Disability and Life, Run-off Reinsurance and...

  • Page 42
    ... CIGNA's Disability and Life segment are also structured to emphasize investment income, and provide necessary liquidity to meet cash flow requirements. Invested Assets supporting longer-term group disability insurance benefits and group life waiver of premium benefits are generally managed...

  • Page 43
    ... related benefit cash flows. As of December 31, 2008, the duration of assets that supported these liabilities was approximately 12.2 years. Invested Assets supporting interestsensitive life insurance products are primarily fixed income investments and policy loans. Fixed income investments emphasize...

  • Page 44
    ... their business operations, including, but not limited to the form and content of customer contracts including benefit mandates (including special requirements for small groups, generally under 50 employees); premium rates; the content of agreements with participating providers of covered services...

  • Page 45
    ... Compensation 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. Products offering limited benefits, such...

  • Page 46
    ...the federal government requires Medicare and Medicaid providers to file detailed cost reports for health care services provided. These reports may be audited in subsequent years. CIGNA HMOs that contract to provide community-rated coverage to participants in the federal Employees Health Benefit Plan...

  • Page 47
    ... care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the federal Departments of Labor and Justice, as well as the courts. In the growing area of consumer-driven plans, health savings accounts and health reimbursement...

  • Page 48
    ... payment of claims, while companies at the bottom end of the range have the weakest capacity. Insurance ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. The principal agencies that rate CIGNA...

  • Page 49
    ... to support financial strength ratings that meet customers' expectations, and to improving the earnings of the health care business. Lower ratings at the parent company level increase the cost to borrow funds. Lower ratings of CG Life and LINA could adversely affect new sales and retention...

  • Page 50
    ... a few customers. No customer accounted for 10% or more of CIGNA's consolidated revenues in 2008. CIGNA and its principal subsidiaries are not dependent on business from one or a few brokers or agents. In addition, CIGNA's insurance businesses are generally not committed to accept a fixed portion of...

  • Page 51
    ... retention of customers by providing appropriate levels of support and service for CIGNA's products, as well as avoiding service and health coaching related errors; attraction and retention of sufficient numbers of qualified employees; the negotiation of favorable provider contracts; development and...

  • Page 52
    ...health care coverage as an employee benefit or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs. In addition, the economic downturn could negatively impact the Company's employer group renewal prospects and our ability to increase premiums...

  • Page 53
    .... As part of its run-off reinsurance business, CIGNA reinsured a guaranteed minimum death benefit under certain variable annuities issued by other insurance companies. CIGNA maintains a hedge program to reduce equity market risks related to these contracts by selling domestic and foreign-denominated...

  • Page 54
    ... pay out for the guaranteed minimum income benefit business increases resulting in increased net liabilities. Significant changes in market interest rates affect the value of CIGNA's financial instruments that promise a fixed return or benefit. As an insurer, CIGNA has substantial investment assets...

  • Page 55
    ... and insuring employee benefit programs. Such legal matters include benefit claims, breach of contract actions, tort claims, and disputes regarding reinsurance arrangements. In addition, CIGNA incurs and likely will continue to incur liability for claims related to its health care business, such...

  • Page 56
    ... and provide products and services to customers. CIGNA faces competitive pressure, particularly price competition, which could result in premiums which are insufficient to cover the cost of the healthcare services delivered to its members and inadequate medical claims reserves. While health plans...

  • Page 57
    ... providing comprehensive health benefits could materially reduce the number of private sector members and exacerbate existing competitive and economic pressures. While private healthcare plans may be solicited to provide administrative services to an expanded national public plan, this business...

  • Page 58
    ... resources. In addition, provider or member fraud that is not prevented or detected could impact its medical costs or those of its self-insured customers. Further during an economic downturn, CIGNA's businesses, HealthCare, Group and Disability and International, may see increased fraudulent claims...

  • Page 59
    Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES CIGNA's headquarters, including staff support operations, along with CIGNA Disability and Life Insurance, the domestic office of CIGNA International, and portions of CIGNA HealthCare, are located in approximately 450,000 square feet of ...

  • Page 60
    ... Group Insurance beginning November 2005; President of CIGNA Dental & Vision Care beginning April 2004; President of CIGNA Specialty Companies from November 2004 until November 2005; and Chief Underwriting Officer, CIGNA HealthCare from January 2003 until April 2004. MICHAEL WOELLER, 56, Executive...

  • Page 61
    ... table provides information about CIGNA's share repurchase activity for the quarter ended December 31, 2008: Period Total # of shares purchased (1) 1,195,344 0 3,380 1,198,724 Issuer Purchases of Equity Securities Average price Total # of shares purchased paid per share as part of publicly announced...

  • Page 62
    ... in Corporate related to the CIGNA pension plan. See Note 22 to the Consolidated Financial Statements for additional information. Effective January 1, 2007, CIGNA changed its presentation to report the results of the Run-off Retirement business within Other Operations. Prior period results have...

  • Page 63
    ... Results of Operations Critical Accounting Estimates Segment Reporting Health Care Disability and Life International Run-off Reinsurance Other Operations Corporate Discontinued Operations Industry Developments and Other Matters Liquidity and Capital Resources Investment Assets Market Risk Cautionary...

  • Page 64
    ...-West Healthcare primarily sells medical plans on a self-funded basis with stop-loss coverage to select and regional employer groups. Great-West Healthcare's offerings also include the following specialty products: stop-loss, life, disability, medical, dental, vision, prescription drug coverage, and...

  • Page 65
    ...customers and to reduce costs. In 2008, the Company conducted a comprehensive review of its ongoing businesses with an emphasis on reducing operating expenses in the Health Care segment. As a result of the review, during the fourth quarter of 2008, the Company committed to a plan to reduce operating...

  • Page 66
    ... OPERATIONS (In millions) Financial Summary Premiums and fees Net investment income Mail order pharmacy revenues Other revenues Realized investment gains (losses) Total revenues Benefits and expenses Income from continuing operations before taxes Income taxes Income from continuing operations Income...

  • Page 67
    ... of the GMDB business will be approximately break-even for full-year 2009. This assumption reflects management's view that the long-term reserve assumptions are appropriate and that equity market conditions and volatility will return to more normal levels in 2009. The Company's outlook is subject...

  • Page 68
    ... Health Care segment average invested assets resulting from: • • a shift in business from guaranteed cost products to administrative services only (ASO) products; and pre-funding of Medicare Part D claims. Mail Order Pharmacy Revenues Mail order pharmacy revenues increased 8% in 2008, compared...

  • Page 69
    ...a material effect on the Company's consolidated results of operations or financial condition. Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Company's Board of Directors and the Audit Committee has reviewed the disclosures...

  • Page 70
    ... favorable prior year development on net income was $7 million for the year ended December 31, 2008. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company's net income. 50

  • Page 71
    ... of medical claims, and medical cost trends, which are impacted by actual or expected changes in the utilization of medical services and unit costs. Effect if Different Assumptions Used Accounts payable, accrued expenses and other liabilities, and Other assets Guaranteed minimum income benefits...

  • Page 72
    ... to shareholders' equity of approximately $120 million as of December 31, 2008. See Note 10 to the Consolidated Financial Statements for additional information. If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2009...

  • Page 73
    ...value of equity securities during 2008 has resulted in an accumulated unrecognized actuarial loss of $1.5 billion at December 31, 2008. The actuarial loss is adjusted for unrecognized changes in market-related asset values and amortized over the remaining service life of pension plan participants if...

  • Page 74
    ... of specialty products to core medical customers; changes in operating expenses per member; and medical expense as a percentage of premiums (medical cost ratio) in the guaranteed cost business. Results of Operations (In millions) Financial Summary Premiums and fees Net investment income Mail order...

  • Page 75
    ...business as well as lower net investment income due to lower average assets and lower yields. Revenues The table below shows premiums and fees for the Health Care segment: (In millions) Medical: Commercial HMO (1) Open access/Other guaranteed cost (2) Voluntary/limited benefits Total guaranteed cost...

  • Page 76
    ...; and aggregate medical membership growth, including the voluntary/limited benefits business. In addition, premiums and fees in 2007 reflect a change in the mix of products to more service-only products from guaranteed cost products. Net investment income decreased by 1% in 2008 compared with 2007...

  • Page 77
    ... funding portion of minimum premium revenue is recorded in fees. Also, includes certain non-participating cases for which special customer level reporting of experience is required. (3) Represents members associated with the acquisition of Great-West Healthcare effective April 1, 2008. Operational...

  • Page 78
    ... member service that keeps pace with the emerging consumer-directed market trends; ensuring competitive provider networks; maintaining a strong clinical quality in medical, specialty health care and disability management; and increasing specialty penetration. The Company is also focused on segment...

  • Page 79
    ... development, the delivery of member service and health advocacy and related technology. Disability and Life Segment Segment Description The Disability and Life segment includes group disability, life, accident and specialty insurance and case management for disability and workers' compensation...

  • Page 80
    ...group universal life and specialty businesses; a lower expense ratio driven by effective operating expense management; and strong earned premium growth. Revenues Premiums and fees increased 8% in 2008 and 13% in 2007 reflecting new sales growth in the disability, life and accident lines of business...

  • Page 81
    ... the prior year's comparable period exchange rates. Revenues Premiums and fees. The increase in premiums and fees of 4% in 2008, compared with 2007, and 18% in 2007 compared with 2006, was primarily attributable to new sales growth in the life, accident and supplemental health insurance operations...

  • Page 82
    ...U.S. individual life, group life and accidental death reinsurance business in 2000. This segment is predominantly comprised of guaranteed minimum death benefit (GMDB, also known as VADBe), guaranteed minimum income benefit (GMIB), workers' compensation and personal accident reinsurance products. The...

  • Page 83
    ... related asset do not represent what management believes will ultimately be required as this business runs off. However, the significant decline in financial markets during 2008 has had an unfavorable impact on the GMIB business. Significant declines in mutual fund values that underlie the contracts...

  • Page 84
    ...GMDB and GMIB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and policyholder behavior. For workers' compensation and personal accident, the claim payments relate to accidents and injuries. Any of these claim payments can extend many years into the...

  • Page 85
    ... an indemnity reinsurance structure and took ownership of the trust assets. Results of Operations (In millions) Financial Summary Premiums and fees Net investment income Other revenues Segment revenues Benefits and expenses Income before taxes Income taxes Segment earnings Realized investment gains...

  • Page 86
    ... items recorded in 2006. DISCONTINUED OPERATIONS Description Discontinued operations represent results associated with certain investments or businesses that have been sold or are held for sale. (In millions) Financial Summary Income before income (taxes) benefits Income (taxes) benefits Income from...

  • Page 87
    ... on the Company's consolidated results of operations. See Note 22 to the Consolidated Financial Statements for further information. LIQUIDITY AND CAPITAL RESOURCES (In millions) Financial Summary Short-term investments Cash and cash equivalents Short-term debt Long-term debt Shareholders' equity...

  • Page 88
    ...of the GMDB equity hedge program (which did not affect net income), cash flows from operating activities decreased by $51 million. This decrease in 2008 primarily reflects higher payments for certain prepaid expenses in 2008. Investing activities The Company used net cash of $1.3 billion to fund the...

  • Page 89
    ...; and return capital to investors through share repurchase. The availability of capital resources will be impacted by equity and credit market conditions. Extreme volatility in credit or equity market conditions may reduce the Company's ability to issue debt or equity securities. Significant...

  • Page 90
    ...Financial Statements, as management does not expect this matter to be resolved in 2009. Future years' contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates, and funding targets. The availability of resources at the parent company...

  • Page 91
    ... 31, 2008, are estimated to be as follows: Less (In millions, on an undiscounted basis) On-Balance Sheet: Insurance liabilities: Contractholder deposit funds Future policy benefits Health Care medical claims payable Unpaid claims and claims expenses Short-term debt Long-term debt Non-recourse...

  • Page 92
    ... 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...

  • Page 93
    .... Additional information regarding the Company's investment assets and related accounting policies is included in Notes 2, 11, 12, 13 and 16 to the Consolidated Financial Statements. Fixed Maturities Investments in fixed maturities (bonds) include publicly traded and privately placed debt securities...

  • Page 94
    ... yields on publicly offered debt with comparable credit risk. The fair value of private placement investments was $4.4 billion as of December 31, 2008 and 2007. The Company maintains controls on its participation in private placement investments. In particular, the Company performs a credit analysis...

  • Page 95
    ... in 2008. Summary The Company recorded after-tax realized investment losses for investment asset write-downs and changes in valuation reserves as follows: (In millions) Credit-Related Other (1) Total $ $ 2008 44 97 141 $ $ 2007 12 14 26 $ $ 2006 11 18 29 (1) Other primarily represents the...

  • Page 96
    .... MARKET RISK Financial Instruments The Company's assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. The Company's primary market risk exposures are Interest-rate risk on fixed-rate, domestic, medium-term...

  • Page 97
    ...have been excluded because their primary risks are insurance rather than market risk; changes in the fair values of investments recorded using the equity method of accounting and liabilities for pension and other postretirement and postemployment benefit plans (and related assets) have been excluded...

  • Page 98
    ... and medical membership results, (iv) delivering quality member and provider service using effective technology solutions, (v) lowering administrative costs and (vi) transitioning to an integrated operating company model, including operating efficiencies related to the transition; risks associated...

  • Page 99
    ... proposals related to health care issues, which could increase cost and affect the market for the Company's health care products and services; and amendments to income tax laws, which could affect the taxation of employer provided benefits, and pension legislation, which could increase pension cost...

  • Page 100
    ... financial reporting. The Company's internal controls were designed to provide reasonable assurance to the Company's Management and Board of Directors that the Company's consolidated published financial statements for external purposes were prepared in accordance with generally accepted accounting...

  • Page 101
    Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained under the caption "Market Risk" in the MD&A section of this Form 10-K is incorporated by reference. 81

  • Page 102
    ... fees Net investment income Mail order pharmacy revenues Other revenues Realized investment gains (losses) Total revenues Benefits and Expenses Health Care medical claims expense Other benefit expenses Mail order pharmacy cost of goods sold Guaranteed minimum income benefits expense Other operating...

  • Page 103
    ... assets Liabilities Contractholder deposit funds Future policy benefits Unpaid claims and claim expenses Health Care medical claims payable Unearned premiums and fees Total insurance and contractholder liabilities Accounts payable, accrued expenses and other liabilities Short-term debt Long-term...

  • Page 104
    ... Capital, beginning of year Effect of issuance of stock for stock split Effect of issuance of stock for employee benefit plans Additional Paid-In Capital, end of year Accumulated Other Comprehensive Income (Loss), beginning of year prior to implementation effect Implementation effect of SFAS No. 155...

  • Page 105
    ... Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: (Income) loss from discontinued operations Insurance liabilities Reinsurance recoverables Deferred policy acquisition costs Premiums, accounts and notes receivable Other assets Accounts...

  • Page 106
    ... the workplace, including health care products and services such as medical coverages, pharmacy, behavioral health, dental benefits, and disease management; group disability, life and accident insurance; and disability and workers' compensation case management and related services. In addition, the...

  • Page 107
    ... for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in...

  • Page 108
    ... of that position is reported to tax authorities. The cumulative effect of implementing the interpretation for unrecognized tax benefits decreased opening retained earnings by $29 million. See Note 18 for additional information. Certain financial instruments. Effective January 1, 2007, the Company...

  • Page 109
    ... the normal course of business, the Company enters into transactions involving various types of financial instruments. These financial instruments may include various investments (such as fixed maturities, commercial mortgage loans and equity securities); short- and long-term debt; and off-balance...

  • Page 110
    ... financial instruments with comparable terms and credit quality. Management estimates the fair value of the liabilities for contractholder deposit funds using the amount payable on demand. D. Investments The Company's accounting policies for investment assets are discussed below: Fixed maturities...

  • Page 111
    ..., other long-term investments include interest rate and foreign currency swaps carried at fair value. See Note 12(F) for information on the Company's accounting policies for these derivative financial instruments. Short-term investments. Investments with maturities of less than one year from time of...

  • Page 112
    ...For group health indemnity products, management estimates the sum of future expected claims and related costs less unearned premiums and anticipated net investment income. If management's estimates are less than the deferred costs, the Company reduces deferred policy acquisition costs and records an...

  • Page 113
    ... liabilities related to group long-term disability and workers' compensation. Discount rate assumptions are based on projected investment returns for the asset portfolios that support these liabilities and range from 2.1% to 6.5%. When estimates change, the Company records the adjustment in benefits...

  • Page 114
    ... expected claim payment patterns and other relevant operational considerations. Medical cost trend is impacted by several key factors including medical service utilization and unit costs and the Company's ability to manage these factors through benefit design, underwriting, provider contracting and...

  • Page 115
    ... for life, accident and health insurance and managed care coverages are recognized as revenue on a pro rata basis over the contract period. Benefits and expenses are recognized when incurred. Premiums for individual life insurance and individual and group annuity products, excluding universal life...

  • Page 116
    ...-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional employer groups. Great-West Healthcare's offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and...

  • Page 117
    ... reinsurance and administrative service arrangements, the Company is responsible to pay claims for the group medical and long-term disability business of Great-West Healthcare and collect related amounts due from their third party reinsurers. Any such amounts not collected will represent additional...

  • Page 118
    ...Chilean insurance operations, which were held for sale, were reported in other assets and accounts payable, accrued expenses and other liabilities. C. Sale of Retirement Benefits Business In 2004, the Company sold its retirement benefits business, excluding the corporate life insurance business, for...

  • Page 119
    ... policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist. See Note 8 for additional information on reinsurance. For the year ended December 31, 2008, actual experience...

  • Page 120
    ... impact of prior year development on net income was $7 million in 2008 and $8 million in 2007. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company's net income recognized...

  • Page 121
    ... rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company's long-term assumption for mean investment performance generating $14 million of the pre-tax charge ($9 million after-tax). • • Management estimates...

  • Page 122
    ... on annual election rates that vary from 0-24% depending on the net amount at risk for each policy and whether surrender charges apply. The mean investment performance assumption is 5% considering the Company's GMDB equity hedge program using futures contracts. This is reduced by fund fees ranging...

  • Page 123
    ...of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 11 for further information. Note 8 ― Reinsurance The Company's insurance subsidiaries enter into...

  • Page 124
    ..., workers' compensation, and personal accident business. The Company's Run-off Reinsurance operations also purchased retrocessional coverage to reduce the risk of loss on these contracts. Liabilities related to GMDB, workers' compensation and personal accident are included in future policy benefits...

  • Page 125
    ... the Company's consolidated income statements, premiums and fees were net of ceded premiums, and benefits and expenses were net of reinsurance recoveries, in the following amounts: (In millions) Premiums and Fees Short-duration contracts: Direct Assumed Ceded Long-duration contracts: Direct Assumed...

  • Page 126
    ... provide pension, health care and life insurance defined benefits to eligible retired employees, spouses and other eligible dependents through various plans. Effective December 31, 2008, the Company split its domestic qualified pension plan, with no change in benefits for any plan participant...

  • Page 127
    ... million in 2007 and had related accumulated benefit obligations of $4.1 billion as of December 31, 2008 and $4.0 billion as of December 31, 2007. The Company funds its qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA) and...

  • Page 128
    ...to asset returns, discount rates, and funding targets. Components of net pension cost, for the years ended December 31 were as follows: (In millions) Service cost Interest cost Expected long-term return on plan assets Amortization of: Net loss from past experience Prior service cost Net pension cost...

  • Page 129
    ...) and Life Insurance Company of North America, which are subsidiaries of the Company. Most of these separate accounts are reinsured and managed by the buyer of the retirement benefits business. The assets related to other postretirement benefit plans are invested in fixed income investments in the...

  • Page 130
    ... employer match was frozen in 1999. Participants in the active plan may invest in a fund that invests in the Company's common stock, several diversified stock funds, a bond fund and a fixed-income fund. The Company may elect to increase its matching contributions if the Company's annual performance...

  • Page 131
    ... to adjust future policy benefits for run-off settlement annuity business including $111 million of appreciation for securities classified in Level 3. (2) The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of...

  • Page 132
    ... or similar securities are assessed when available, and the Company may also review published research as well as the issuer's financial statements in its evaluation. Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and...

  • Page 133
    ... assumptions related to model, expense and non-performance risk in calculating the GMIB liability. The approach for these assumptions, including market-observable reference points, is consistent with that used to estimate the fair values of these contracts at January 1, 2008. The Company regularly...

  • Page 134
    ... 3 are classified in Level 2 as market data on the securities becomes more readily available. The Company provided reinsurance for other insurance companies that offer a guaranteed minimum income benefit, and then retroceded a portion of the risk to other insurance companies. These arrangements with...

  • Page 135
    ...is available to support such adjustments. Evidence may include market data as well as changes in the financial results and condition of the investment. The following table summarizes the change in separate account assets reported in Level 3 for the year ended December 31, 2008. (In millions) Balance...

  • Page 136
    ..., 2008, the Company had no outstanding commitments to purchase fixed maturities. Review of declines in fair value. Management reviews fixed maturities and equity securities for impairment based on criteria that include length of time and severity of decline; financial health and specific near term...

  • Page 137
    ... were no equity securities with a material decline in fair value from cost as of December 31, 2008. See Note 13(B) for discussion of impairments included in realized investment gains and losses. B. Commercial Mortgage Loans and Real Estate Mortgage loans held by the Company are made exclusively to...

  • Page 138
    ... and money market funds of $147 million at December 31, 2008. The Company's short-term investments and cash equivalents at December 31, 2007 included corporate securities of $1.5 billion, federal government securities of $192 million and money market funds of $66 million. E. Concentration of Risk As...

  • Page 139
    ...net income. The Company accounts for derivative instruments as follows Derivatives are reported on the balance sheet at fair value with changes in fair values reported in net income or accumulated other comprehensive income. Changes in the fair value of derivatives that hedge market risk related to...

  • Page 140
    ... on changes in account values and interest rates when account holders first elect to receive minimum income payments. The Company pays a fee and may receive or pay cash, based on the difference between the amortized cost and fair values of underlying invested assets at the time of policyholder...

  • Page 141
    ... policy benefits for run-off settlement annuity business. (In millions) Fixed maturities Equity securities Commercial mortgage loans Real estate Other investments, including derivatives Realized investment gains (losses) from continuing operations, before income taxes Less income taxes (benefits...

  • Page 142
    ...: (In millions) Separate accounts Investment gains required to adjust future policy benefits for run-off settlement annuity business $ $ 2008 (146) 8 $ $ 2007 652 18 $ $ 2006 207 11 Sales information for available-for-sale fixed maturities and equity securities, for the years ended December 31 were...

  • Page 143
    ... The Company maintains a share repurchase program, which was authorized by its Board of Directors. Decisions to repurchase shares depend on market conditions and alternative uses of capital. The Company has, and may continue from time to time, to repurchase shares on the open market through a Rule...

  • Page 144
    ... from past experience and prior service costs Net change arising from assumption/plan changes and experience Net postretirement benefits liability adjustment $ $ 21 (1,134) (1,113) $ $ Tax (Expense) (In millions) 2007 Net unrealized depreciation, securities: Implementation effect of SFAS No. 155...

  • Page 145
    ... As of December 31, 2008, the Company's life insurance and HMO subsidiaries had $395 million of investments on deposit with state departments of insurance. The Company's life insurance and HMO subsidiaries are also subject to regulatory restrictions that limit the amount of annual dividends or other...

  • Page 146
    ...for years prior to 2001 is expected. Deferred income tax assets and liabilities as of December 31 are shown below. (In millions) Deferred tax assets Employee and retiree benefit plans Investments, net Other insurance and contractholder liabilities Deferred gain on sale of business Policy acquisition...

  • Page 147
    ... allowance reflects management's assessment that certain deferred tax assets may not be realizable. As was the case at December 31, 2007, the valuation allowance at December 31, 2008 relates primarily to operating losses, and other deferred tax benefits, of the run-off reinsurance operations. It is...

  • Page 148
    ... for several years. The Company issues shares from Treasury stock for option exercises, awards of restricted stock and payment of deferred and restricted stock units. Compensation cost and related tax benefits for these awards were as follows: (In millions) Compensation cost Tax benefits $ $ 2008 41...

  • Page 149
    ... the following assumptions: 2008 Dividend yield Expected volatility Risk-free interest rate Expected option life 0.1% 35.0% 2.2% 4 years 2007 0.1% 35.0% 4.7% 4 years 2006 0.1% 35.0% 4.6% 4.5 years The expected volatility reflects the Company's past daily stock price volatility. The Company does not...

  • Page 150
    ...health care products and services including those offered to expatriate employees of multinational corporations. Run-off Reinsurance includes accident, workers' compensation, international life and health, guaranteed minimum death benefit and guaranteed minimum income benefit reinsurance businesses...

  • Page 151
    ...) Health Care Premiums and fees: Medical: Commercial HMO (1) Open access/Other guaranteed cost (2) Voluntary/limited benefits Total guaranteed cost (1) Experience-rated medical (3) Dental Medicare Medicare Part D Acquired business - medical Other medical (4) Total medical Life and other non-medical...

  • Page 152
    ... Care Life, Accident and Health Total Other revenues Net investment income Segment revenues Income taxes Equity in income of investees Segment earnings Run-off Reinsurance Premiums and fees and other revenues Net investment income Segment revenues Income tax benefits Segment loss Other Operations...

  • Page 153
    ... investment objectives. The Company records separate account liabilities equal to separate account assets. In certain cases, primarily associated with the sold retirement benefits business (which was sold in April 2004), the Company guarantees a minimum level of benefits for retirement and insurance...

  • Page 154
    ... will have a material adverse effect on the Company's consolidated results of operations, liquidity or financial condition. D. Regulatory and Industry Developments Employee benefits regulation. The business of administering and insuring employee benefit programs, particularly health care programs...

  • Page 155
    ... state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for the Company's health care products and services; and pension legislation, which could increase pension cost; changes in Employee Retirement Income...

  • Page 156
    ... non-profit company that will compile and provide the data currently provided by Ingenix. In addition, on March 28, 2008, the Company received a voluntary request for production of documents from the Connecticut Attorney General's office seeking certain out-of-network claim payment information. The...

  • Page 157
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was...

  • Page 158
    ... operations before income taxes Net income Net income per share: Basic Diluted Stock and Dividend Data 2008 Price range of common stock - high - low Dividends declared per common share 2007 Price range of common stock - high - low Dividends declared per common share (1) (2) (3) (4) Three Months...

  • Page 159
    ... supervision and with the participation of CIGNA's management, CIGNA's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, CIGNA's disclosure controls and procedures are effective to ensure that information required to be disclosed...

  • Page 160
    ...Form 10-K." C. Code of Ethics and Other Corporate Governance Disclosures CIGNA's Code of Ethics is the Company's code of business conduct and ethics, and applies to CIGNA's directors, officers (including the chief executive officer, chief financial officer and chief accounting officer) and employees...

  • Page 161
    ... plan provided for CIGNA stock option grants to replace prior Healthsource stock option grants as well as new incentive compensation grants to Healthsource employees after the acquisition. The plan had terms similar to those included in other CIGNA equity compensation plans existing at the time but...

  • Page 162
    (3) The exhibits are listed in the Index to Exhibits beginning on page E-1. 142

  • Page 163
    ...* Chairman, Chief Executive Officer and a Director Directors:* Robert H. Campbell Isaiah Harris, Jr. Jane E. Henney, M.D. Peter N. Larson Roman Martinez IV John M. Partridge James E. Rogers Carol Cox Wait Eric C. Wiseman Donna F. Zarcone William D. Zollars Principal Accounting Officer: /s/ Annmarie...

  • Page 164
    ... Public Accounting Firm on Financial Statement Schedules...Schedules I Summary of Investments--Other Than Investments in Related Parties as of December 31, 2008 ...II Condensed Financial Information of CIGNA Corporation (Registrant)...III Supplementary Insurance Information ...IV Reinsurance...

  • Page 165
    ... of Independent Registered Public Accounting Firm on Financial Statement Schedules To the Board of Directors of CIGNA Corporation: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 26...

  • Page 166
    CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2008 (in millions) Amount at which shown in Fair Type of Investment Cost Value the Consolidated Balance Sheet Fixed maturities: Bonds: United States government and government ...

  • Page 167
    ... CIGNA CORPORATION (REGISTRANT) STATEMENTS OF INCOME (in millions) For the year ended December 31, 2008 2007 2006 Other revenues Total revenues Operating expenses: Interest Intercompany interest Other Total operating expenses Loss before income taxes Income tax benefit Loss of parent company Equity...

  • Page 168
    ... FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) BALANCE SHEETS (in millions) As of December 31, 2008 Assets: Cash and cash equivalents Investments in subsidiaries Other assets Total assets $ $ 1 12,275 723 12,999 $ $ 12,581 293 12,874 2007 Liabilities: Intercompany Short-term debt Long...

  • Page 169
    ... CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) STATEMENTS OF CASH FLOWS (in millions) For the year ended December 31, 2007 2008 Cash Flows from Operating Activities: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of...

  • Page 170
    ... and interest payments on the Notes being redeemed discounted at the applicable Treasury Rate plus 40 basis points. On March 14, 2008, the Company entered into a new commercial paper program ("the Program"). Under the Program, the Company is authorized to sell from time to time short-term unsecured...

  • Page 171
    ... the insurer for claim liabilities that fall within deductible amounts for policy years dating back to 1994. The Company also provides solvency guarantees aggregating $34 million under state and federal regulations in support of its indirect wholly owned medical HMOs in several states. The Company...

  • Page 172
    ...) Deferred policy acquisition Segment Year Ended December 31, 2008: Health Care Disability and Life International Run-off Reinsurance Other Operations Corporate Total $ costs Future policy benefits and contractholder deposit funds Medical claims payable and unpaid claims Unearned premiums and fees...

  • Page 173
    ...net investment income is based upon the investment year method, the identification of certain portfolios with specific segments, or a combination of both. Benefit expenses include Health Care medical claims expense and other benefit expenses. Other operating expenses include mail order pharmacy cost...

  • Page 174
    CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE IV REINSURANCE (in millions) Percentage Gross amount Year Ended December 31, 2008: Life insurance in force Premiums and fees: Life insurance and annuities Accident and health insurance Total Year Ended December 31, 2007: Life insurance in force Premiums ...

  • Page 175
    ... Charged (Credited) Balance at beginning Description 2008: Investment asset valuation reserves: Commercial mortgage loans Allowance for doubtful accounts: Premiums, accounts and notes receivable Deferred tax asset valuation allowance Reinsurance recoverables 2007: Investment asset valuation reserves...

  • Page 176
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  • Page 177
    ... restated effective January 1, 2008 CIGNA Corporation Non-Employee Director Compensation Program amended and restated effective January 1, 2008 (a) CIGNA Corporation Stock Plan, as amended and restated through July 2000 CIGNA Stock Unit Plan, as amended and restated effective July 22, 2008 Filed as...

  • Page 178
    ...2000 to the CIGNA Supplemental Pension 10.15 CIGNA Supplemental Pension Plan of 2005 effective as of January 1, 2005 10.16 Description of CIGNA Corporation Financial Services Program 10.17 Description of Mandatory Deferral of NonDeductible Executive Compensation Arrangement Form of Non-Compete...

  • Page 179
    .... Hanway, Bell and Murabito and Form of Amended Deferred Stock Unit Agreement Agreement and Release dated June 6, 2008 with Mr. Hartley Form of CIGNA Long-Term Incentive Plan: Nonqualified Stock Option and Grant Letter Filed herewith. 10.21 10.22 Filed herewith. Filed as Exhibit 10.22 to the...

  • Page 180
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  • Page 181
    ... in millions) Year Ended December 31, Income from continuing operations before income taxes Adjustments: Loss (income) from equity investee Income before income taxes, as adjusted Fixed charges included in income: Interest expense Interest portion of rental expense $ 146 45 191 Interest credited to...

  • Page 182
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  • Page 183
    ..." of CIGNA Corporation, as that term is defined in Rule 1-02(w) of Regulation S-X. CIGNA Holdings, Inc. (Delaware) I. Connecticut General Corporation (Connecticut) A. Arbor Reinsurance Company Limited (Bermuda) B. Benefits Management Corporation (Montana) (1) Allegiance Life & Health Company, Inc...

  • Page 184
    ...Inc. (Utah) (x) CIGNA Insurance Group, Inc. (New Hampshire) (y) CIGNA Insurance Services Company (South Carolina) (z) Temple Insurance Company Limited (Bermuda) F. CIGNA HealthCare Holdings, Inc. (Colorado) (1) CIGNA HealthCare - Pacific (California) (2) CIGNA HealthCare - Centennial State (Colorado...

  • Page 185
    ... No. 333-147994) of CIGNA Corporation of our report dated February 26, 2009 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also...

  • Page 186
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  • Page 187
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 188
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 189
    ... 32.1 Certification of Chief Executive Officer of CIGNA Corporation pursuant to 18 U.S.C. Section 1350 I certify that, to the best of my knowledge and belief, the Annual Report on Form 10-K of CIGNA Corporation for the fiscal period ending December 31, 2008 (the "Report"): (1) (2) complies with the...

  • Page 190
    ...Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIGNA Corporation. /s/ Michael W. Bell Michael W. Bell Chief Financial Officer February 26, 2009

  • Page 191

  • Page 192
    ... in the United States and throughout the world. Its subsidiaries are major providers of employee benefits offered through the workplace, with products and services including health care; group life, accident and disability insurance; dental; vision; behavioral health; and pharmacy. "CIGNA" and the...