Edgar Filing: CIGNA CORP

CIGNA CORPORATION - FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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

for the transition period from ______________ to ______________

Commission file number 1-08323

CIGNA CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	06-1059331
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
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)

NOT APPLICABLE

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

Indicate by check mark			YES	NO
• 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.
• 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).
• 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	Accelerated filer	Non-accelerated filer	Smaller Reporting Company
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

As of April 16, 2012, 288,321,052 shares of the issuer’s common stock were outstanding.

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Cigna Corporation

Index

Page

PART I

FINANCIAL INFORMATION

ITEM 1

Financial Statements

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statement of Changes in Total Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

ITEM 4

Controls and Procedures

PART II

OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

ITEM 6

Exhibits

Signature

Index to Exhibits

E-1

As used herein, “Cigna” for the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.

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PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

Cigna Corporation

Consolidated Statements of Income

(In millions, except per share amounts)	Unaudited Three Months Ended March 31,
(In millions, except per share amounts)	2012		2011
Revenues
Premiums and fees	$	6,141	$	4,733
Net investment income		288		279
Mail order pharmacy revenues		386		339
Other revenues		(40)		34
Realized investment gains (losses):
Other-than-temporary impairments on fixed maturities, net		(3)		-
Other realized investment gains		16		26
Total realized investment gains		13		26
TOTAL REVENUES		6,788		5,411
Benefits and Expenses
Health Care medical claims expense		3,037		2,077
Other benefit expenses		1,104		994
Mail order pharmacy cost of goods sold		321		276
GMIB fair value (gain)		(67)		(16)
Other operating expenses		1,841		1,501
TOTAL BENEFITS AND EXPENSES		6,236		4,832
Income before Income Taxes		552		579
Income taxes:
Current		135		22
Deferred		46		143
TOTAL TAXES		181		165
Net Income		371		414
Less: Net Income Attributable to Noncontrolling Interest		-		1
Shareholders’ Net Income	$	371	$	413
Shareholders’ Net Income Per Share:
Basic	$	1.30	$	1.53
Diluted	$	1.28	$	1.51
Dividends Declared Per Share	$	0.04	$	0.04
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION – Form 10-Q – 1

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Cigna Corporation

Consolidated Statements of Comprehensive Income

(In millions, except per share amounts)	Unaudited Three Months Ended March 31,
(In millions, except per share amounts)	2012		2011
Shareholders’ net income	$	371	$	413
Shareholders’ Other Comprehensive Income (Loss):
Net unrealized appreciation (depreciation) on securities:
Fixed maturities		23		(8)
Equity securities		1		2
Net unrealized appreciation (depreciation) on securities		24		(6)
Net unrealized depreciation, derivatives		(5)		(5)
Net translation of foreign currencies		35		48
Postretirement benefits liability adjustment		11		4
Shareholders’ Other comprehensive income		65		41
Shareholders’ comprehensive income		436		454
Comprehensive income attributable to noncontrolling interest:
Net income attributable to noncontrolling interest		-		1
Total Comprehensive income	$	436	$	455
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION – Form 10-Q – 2

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Cigna Corporation

Consolidated Balance Sheets

(In millions, except per share amounts)	Unaudited As of March 31, 2012			As of December 31, 2011
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $15,170; $14,257)		$	17,049		$	16,217
Equity securities, at fair value (cost, $124; $124)			107			100
Commercial mortgage loans			3,259			3,301
Policy loans			1,488			1,502
Real estate			79			87
Other long-term investments			1,095			1,058
Short-term investments			187			225
Total investments			23,264			22,490
Cash and cash equivalents			2,111			4,690
Accrued investment income			291			252
Premiums, accounts and notes receivable, net			1,897			1,358
Reinsurance recoverables			6,187			6,256
Deferred policy acquisition costs			884			817
Property and equipment			1,083			1,024
Deferred income taxes, net			533			803
Goodwill			5,726			3,164
Other assets, including other intangibles			2,328			1,750
Separate account assets			8,481			8,093
TOTAL ASSETS		$	52,785		$	50,697
LIABILITIES
Contractholder deposit funds		$	8,566		$	8,553
Future policy benefits			8,404			8,593
Unpaid claims and claim expenses			4,176			4,146
Health Care medical claims payable			1,698			1,095
Unearned premiums and fees			1,050			502
Total insurance and contractholder liabilities			23,894			22,889
Accounts payable, accrued expenses and other liabilities			6,632			6,627
Short-term debt			227			104
Long-term debt			4,990			4,990
Separate account liabilities			8,481			8,093
TOTAL LIABILITIES			44,224			42,703
Contingencies — Note 17
SHAREHOLDERS’ EQUITY
Common stock (par value per share, $0.25; shares issued, 366; authorized, 600)			92			92
Additional paid-in capital			3,268			3,188
Net unrealized appreciation, fixed maturities		$	762		$	739
Net unrealized appreciation, equity securities			2			1
Net unrealized depreciation, derivatives			(28)			(23)
Net translation of foreign currencies			38			3
Postretirement benefits liability adjustment			(1,496)			(1,507)
Accumulated other comprehensive loss			(722)			(787)
Retained earnings			11,123			10,787
Less treasury stock, at cost			(5,200)			(5,286)
Total shareholders’ equity			8,561			7,994
Total liabilities and shareholders’ equity		$	52,785		$	50,697
SHAREHOLDERS’ EQUITY PER SHARE		$	29.69		$	28.00
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION – Form 10-Q – 3

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Cigna Corporation

Consolidated Statement of Changes in Total Equity

Unaudited
For the three months ended March 31, 2012
(In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Noncontrolling Interest		Total Equity
Balance at January 1, 2012, as retrospectively adjusted	$	92	$	3,188	$	(787)	$	10,787	$	(5,286)	$	7,994	$	-	$	7,994
Effect of issuing stock for employee benefit plans				80				(24)		86		142				142
Other comprehensive income						65						65				65
Net income								371				371		-		371
Common dividends declared (per share: $0.04)								(11)				(11)				(11)
BALANCE AT MARCH 31, 2012	$	92	$	3,268	$	(722)	$	11,123	$	(5,200)	$	8,561	$	-	$	8,561

For the three months ended March 31, 2011
(In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Noncontrolling Interest		Total Equity
Balance at January 1, 2011, as previously reported	$	88	$	2,534	$	(614)	$	9,879	$	(5,242)	$	6,645	$	18	$	6,663
Cumulative effect of amended accounting guidance for deferred policy acquisition costs								(289)				(289)				(289)
Balance at January 1, 2011, as retrospectively adjusted		88		2,534		(614)		9,590		(5,242)		6,356		18		6,374
Effect of issuing stock for employee benefit plans				9				(27)		93		75				75
Effect of acquiring noncontrolling interest				4								4		(19)		(15)
Other comprehensive income						41						41				41
Net income								413				413		1		414
Common dividends declared (per share: $0.04)								(11)				(11)				(11)
Repurchase of common stock										(163)		(163)				(163)
BALANCE AT MARCH 31, 2011	$	88	$	2,547	$	(573)	$	9,965	$	(5,312)	$	6,715	$	-	$	6,715
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION – Form 10-Q – 4

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Cigna Corporation

Consolidated Statements of Cash Flows

(In millions)	Unaudited
	Three Months Ended March 31,
	2012		2011
Cash Flows from Operating Activities
Net income	$	371	$	414
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		126		83
Realized investment gains		(13)		(26)
Deferred income taxes		46		143
Gains on sale of businesses (excluding discontinued operations)		(5)		(5)
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable		(215)		(129)
Reinsurance recoverables		(30)		(2)
Deferred policy acquisition costs		(47)		(48)
Other assets		155		41
Insurance liabilities		637		77
Accounts payable, accrued expenses and other liabilities		(166)		(366)
Current income taxes		105		(87)
Other, net		(23)		(44)
NET CASH PROVIDED BY OPERATING ACTIVITIES		941		51
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		221		155
Commercial mortgage loans		165		28
Other (primarily short-term and other long-term investments)		300		221
Investment maturities and repayments:
Fixed maturities		317		319
Commercial mortgage loans		36		75
Investments purchased:
Fixed maturities		(831)		(790)
Equity securities		-		(8)
Commercial mortgage loans		(180)		(18)
Other (primarily short-term and other long-term investments)		(167)		(213)
Property and equipment purchases		(81)		(73)
Acquisitions, net of cash acquired		(3,199)		(12)
NET CASH USED IN INVESTING ACTIVITIES		(3,419)		(316)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		261		321
Withdrawals and benefit payments from contractholder deposit funds		(231)		(303)
Change in cash overdraft position		22		6
Net change in short-term debt		123		(222)
Issuance of long-term debt		-		591
Repayment of long-term debt		(326)		(2)
Repurchase of common stock		-		(152)
Issuance of common stock		45		66
NET CASH (USED IN) / PROVIDED BY FINANCING ACTIVITIES		(106)		305
Effect of foreign currency rate changes on cash and cash equivalents		5		11
Net (decrease) / increase in cash and cash equivalents		(2,579)		51
Cash and cash equivalents, January 1,		4,690		1,605
Cash and cash equivalents, March 31,	$	2,111	$	1,656
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	22	$	106
Interest paid	$	54	$	27
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION – Form 10-Q – 5

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Cigna Corporation

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

Cigna Corporation is a holding company and is not an insurance company. Its subsidiaries conduct various businesses, that are described in its Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). As used in this document, “Cigna” or “the Company” may refer to Cigna Corporation itself, one or more of its subsidiaries, or Cigna Corporation and its consolidated subsidiaries. The Consolidated Financial Statements include the accounts of Cigna Corporation and its significant subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The Company is a global health services organization with insurance subsidiaries that are major providers of medical, dental, disability, life and accident insurance and related products and services. In the U.S., the majority of these products and services are offered through employers and other groups (e.g. unions and associations) and, in selected international markets, Cigna offers supplemental health, life and accident insurance products and international health care coverage and services to businesses, governmental and non governmental organizations and individuals. In addition to its ongoing operations described above, the Company also has certain run off operations, including a Run off Reinsurance segment.

The interim consolidated financial statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s 2011 Form 10-K.

The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the health care and related benefits business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations. Certain reclassifications have been made to prior period amounts to conform to the current presentation.

As explained further in Note 3, on January 31, 2012, the Company acquired HealthSpring, Inc. for approximately $3.8 billion.

NOTE 2 Recent Accounting Pronouncements

Deferred policy acquisition costs. Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance (ASU 2010-26) on accounting for costs to acquire or renew insurance contracts. This guidance requires certain sales compensation and telemarketing costs related to unsuccessful efforts and any indirect costs to be expensed as incurred. The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its International segment. This amended guidance was implemented through retrospective adjustment of comparative prior periods. As reported in the Consolidated Statement of Equity, the cumulative effect of adopting the amended accounting guidance as of January 1, 2011 was a reduction in Total Shareholders’ Equity of $289 million. Full-year 2011 shareholders’ net income on a retrospectively adjusted basis was reduced by $67 million, partially offset by increased foreign currency translation of $6 million, resulting in a cumulative impact on Total Shareholders’ Equity as of December 31, 2011 of $350 million. Summarized below are the effects of the amended guidance on previously reported amounts for the three months ended March 31, 2011.

CIGNA CORPORATION – Form 10-Q – 6

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Condensed Consolidated Statement of Income

Three Months Ended March 31, 2011

(in millions)	As previously reported		Effect of amended accounting guidance		As retrospectively adjusted
Revenues, excluding other revenues	$	5,377	$	-	$	5,377
Other revenues		36		(2)		34
Total Revenues		5,413		(2)		5,411
Benefits and expenses, excluding other operating expenses		3,331				3,331
Other operating expenses		1,482		19		1,501
Total benefits and expenses		4,813		19		4,832
Income before Income Taxes		600		(21)		579
Current income taxes		22				22
Deferred income taxes		148		(5)		143
Total taxes		170		(5)		165
Net income		430		(16)		414
Less: Net income attributable to Noncontrolling Interest		1		-		1
SHAREHOLDERS’ NET INCOME	$	429	$	(16)	$	413
Earnings per share:
Basic	$	1.59	$	(0.06)	$	1.53
Diluted	$	1.57	$	(0.06)	$	1.51

Condensed Consolidated Balance sheet

As of December 31, 2011

(in millions)	As previously reported		Effect of amended accounting guidance		As retrospectively adjusted
Deferred policy acquisition costs	$	1,312	$	(495)	$	817
Deferred income taxes, net		632		171		803
Other assets, including other intangibles		1,776		(26)		1,750
All other assets		47,327				47,327
TOTAL ASSETS	$	51,047	$	(350)	$	50,697
Net translation of foreign currencies	$	(3)	$	6	$	3
Retained earnings		11,143		(356)		10,787
Other shareholders’ equity		(2,796)				(2,796)
TOTAL SHAREHOLDERS’ EQUITY	$	8,344	$	(350)	$	7,994

CIGNA CORPORATION – Form 10-Q – 7

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Condensed Consolidated Statement of Cash Flows

Three Months Ended March 31, 2011

(in millions)	As previously reported		Effect of amended accounting guidance		As retrospectively adjusted
Net income	$	430	$	(16)	$	414
Deferred income taxes		148		(5)		143
Deferred policy acquisition expenses		(67)		19		(48)
Other assets		39		2		41

Note 16

Segment information: International

Three Months Ended March 31, 2011

(in millions)

As previously

reported

Effect of amended

accounting guidance

As retrospectively

adjusted

Premiums and fees and other revenues

706

(2)

704

Segment earnings

(16)

Presentation of Comprehensive Income. Effective January 1, 2012, the Company adopted the FASB’s amended guidance (ASU 2011-05) that requires presenting net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements. Neither measurement of comprehensive income nor disclosure requirements for reclassification adjustments between other comprehensive income and net income were affected by this amended guidance. The Company has elected to present a separate statement of comprehensive income following the statement of income and has retrospectively adjusted prior periods to conform to the new presentation, as required.

Amendments to Fair Value Measurement and Disclosure. Effective January 1, 2012, the Company adopted the FASB’s amended guidance on fair value measurement and disclosure (ASU 2011-04) on a prospective basis. A key objective was to achieve common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The amended guidance changes certain fair value measurement principles and expands required disclosures to include quantitative and qualitative information about unobservable inputs in Level 3 measurements and leveling for financial instruments not carried at fair value in the financial statements. Upon adoption, there were no effects on the Company’s fair value measurements. See Note 7 for expanded fair value disclosures.

CIGNA CORPORATION – Form 10-Q – 8

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NOTE 3 Acquisitions

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

A. Acquisition of HealthSpring, Inc.

On January 31, 2012 the Company acquired the outstanding shares of HealthSpring, Inc. (“HealthSpring”) for $55 per share in cash and Cigna stock awards, representing a cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 11 states and the District of Columbia, as well as a large, national stand-alone Medicare prescription drug business. The acquisition of HealthSpring strengthens the Company’s ability to serve individuals across their life stages as well as deepens its presence in a number of geographic markets. The addition of HealthSpring brings industry leading physician partnership capabilities and creates the opportunity to deepen the Company’s existing client and customer relationships, as well as facilitates a broader deployment of its range of health and wellness capabilities and product offerings. The Company funded the acquisition with internal cash resources.

Merger consideration: The estimated merger consideration of $3.8 billion was calculated as follows:

(In millions, except per share amounts)
HealthSpring, Inc. common shares outstanding at January 30, 2011 ⁽¹⁾		67.8
Less: common shares outstanding not settled in cash		(0.1)
Common shares settled in cash		67.7
Price per share	$	55
Cash consideration for outstanding shares ⁽¹⁾	$	3,726
Fair value of share-based compensation awards		65
Additional cash and equity consideration		21
TOTAL MERGER CONSIDERATION	$	3,812
(1) Includes 922,000 shares subject to appraisal that the Company has accrued for at $55 per share.

Fair value of share-based compensation awards. On the date of the acquisition, HealthSpring employees’ awards of options and restricted shares of HealthSpring stock were rolled over to Cigna stock options and restricted stock. Each holder of a HealthSpring stock option or restricted stock award received 1.24 Cigna stock options or restricted stock awards. The conversion ratio of 1.24 at the date of acquisition was determined by dividing the acquisition price of HealthSpring shares of $55 by the price of Cigna stock on January 31, 2012 of $44.43. The Cigna stock option exercise price was determined by using this same conversion ratio. Vesting periods and the remaining life of the options rolled over with the original HealthSpring awards.

Using fair value as of the acquisition date, the Company valued the restricted stock at Cigna’s stock price and stock options using a Black-Scholes pricing model. The assumptions used were generally consistent with those disclosed in Note 20 to the Company’s 2011 Consolidated Financial Statements included in the Form 10-K, except the expected life assumption of these options ranged from 1.8 to 4.8 years and the exercise price did not equal the market value at the grant date. Because the exercise price at the acquisition date for substantially all of the options was significantly below Cigna’s stock price, fair value of the new stock options approximated intrinsic value.

The fair value of these options and restricted stock was included in the purchase price to the extent that services had been provided prior to the acquisition based on the grant date of the original HealthSpring award and vesting period. The remaining fair value not included in the purchase price will be recorded as compensation expense in future periods over the remaining vesting periods. Most of the expense is expected to be recognized in 2012 and 2013.

CIGNA CORPORATION – Form 10-Q – 9

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The following table summarizes the effect of these rollover awards for former HealthSpring employees.

(awards in thousands, dollars in millions, except per share amounts)	Number of awards		Average exercise/ award price		Fair value of awards		Included in purchase price		Compensation expense post-acquisition
Vested options	589	$	14.04	$	18	$	18	$	-
Unvested options	1,336	$	16.21		37		28		9
Restricted stock	786	$	44.43		35		19		16
TOTAL	2,711			$	90	$	65	$	25

Purchase price allocation. In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. Goodwill, that is allocated to the Health Care segment, has not yet been allocated to a reporting unit as of March 31, 2012 and is not deductible for federal income tax purposes. During the three months ended March 31, 2012, the Company recorded $41 million pre-tax ($28 million after-tax) of acquisition-related costs in other operating expenses. The condensed balance sheet of HealthSpring at the acquisition date was as follows:

(In millions)
Investments	$	612
Cash and cash equivalents		492
Premiums, accounts and notes receivable		320
Goodwill		2,547
Intangible assets		795
Other		94
TOTAL ASSETS ACQUIRED		4,860
Insurance liabilities		514
Deferred income taxes		208
Debt		326
TOTAL LIABILITIES ACQUIRED		1,048
NET ASSETS ACQUIRED	$	3,812

In accordance with debt covenants, HealthSpring’s debt obligation was paid immediately following the acquisition. This repayment is reported as a financing activity in the statement of cash flows for the three months ended March 31, 2012.

The estimated fair values and useful lives for all intangible assets are as follows:

(Dollars in millions)		Estimated Fair Value	Estimated Useful Life (In Years)
Customer relationships	$	711	8
Other		84	3-10
TOTAL OTHER INTANGIBLE ASSETS	$	795

The fair value of the customer relationship and the amortization method were determined using an income approach that relies on projected future net cash flows including key assumptions for the customer attrition rate and discount rate. The estimated weighted average useful life reflects the time period and pattern of use that Cigna expects for over 90% of the projected benefits. Accordingly, amortization will be recorded on an accelerated basis in 2012 and decline in subsequent years.

The results of HealthSpring have been included in the Company’s Consolidated Financial Statements from the date of the acquisition. Revenues of HealthSpring included in the Company’s results for three months ended March 31, 2012 were approximately $1.0 billion. Net income for HealthSpring was determined to be immaterial.

CIGNA CORPORATION – Form 10-Q – 10

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Pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of HealthSpring had occurred as of January 1, 2011. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

(In millions, except per share amounts)	Unaudited Three Months Ended March 31,
(In millions, except per share amounts)	2012		2011
Total revenues	$	7,277	$	6,812
Shareholders’ net income	$	381	$	427
Earnings per share:
Basic	$	1.33	$	1.49
Diluted	$	1.32	$	1.46

B. Acquisition of FirstAssist

In November 2011, the Company acquired FirstAssist Group Holdings Limited (“FirstAssist”) for approximately $115 million, using available cash on hand. FirstAssist is based in the United Kingdom and provides travel and protection insurance services that the Company expects will enhance its individual business in the U.K. and around the world.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. During the first quarter of 2012, the Company updated its allocation of the purchase price based on additional information. Accordingly, the allocation to intangible assets was decreased by $18 million from $58 million reported at December 31, 2011 to $40 million. The allocation to goodwill was increased by $7 million from $56 million reported at December 31, 2011 to $63 million. Goodwill is reported in the International segment.

The results of FirstAssist are included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effects assuming the acquisition had occurred as of January 1, 2010 were not material to the Company’s total revenues, shareholders’ net income and earnings per share for the three months ended March 31, 2011.

CIGNA CORPORATION – Form 10-Q – 11

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NOTE 4 Earnings Per Share (“EPS”)

Basic and diluted earnings per share were computed as follows:

(Dollars in millions, except per share amounts)	Basic		Effect of Dilution		Diluted
Three Months Ended March 31,
2012
Shareholders’ net income	$	371			$	371
Shares (in thousands) :
Weighted average		285,159				285,159
Common stock equivalents				3,840		3,840
Total shares		285,159		3,840		288,999
EPS	$	1.30	$	(0.02)	$	1.28
2011
Shareholders’ net income	$	413			$	413
Shares (in thousands):
Weighted average		270,377				270,377
Common stock equivalents				3,496		3,496
Total shares		270,377		3,496		273,873
EPS	$	1.53	$	(0.02)	$	1.51

In 2012, the Company adopted, as required, amended accounting guidance for deferred acquisition costs by selecting retrospective adjustment of prior periods. See Note 2 for the effect of this new guidance on previously reported EPS amounts.

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

(In millions)

Three Months Ended

March 31,

2012

2011

Antidilutive options

3.8

4.1

The Company held 77,847,260 shares of common stock in Treasury as of March 31, 2012, and 80,240,471 shares as of March 31, 2011.

NOTE 5 Health Care Medical Claims Payable

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

(In millions)	March 31, 2012		December 31, 2011
Incurred but not yet reported	$	1,416	$	952
Reported claims in process		170		129
Physician Incentives and other medical expense payable		112		14
MEDICAL CLAIMS PAYABLE	$	1,698	$	1,095

CIGNA CORPORATION – Form 10-Q – 12

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Activity in medical claims payable was as follows:

(In millions)	For the period ended
(In millions)	March 31, 2012		December 31, 2011
Balance at January 1,	$	1,095	$	1,246
Less: Reinsurance and other amounts recoverable		194		236
Balance at January 1, net		901		1,010
Acquired HealthSpring balances, net		510		-
Incurred claims related to:
Current year		3,172		8,308
Prior years		(135)		(126)
Total incurred		3,037		8,182
Paid claims related to:
Current year		2,002		7,450
Prior years		950		841
Total paid		2,952		8,291
Ending Balance, net		1,496		901
Add: Reinsurance and other amounts recoverable		202		194
ENDING BALANCE	$	1,698	$	1,095

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist. See Note 11 for additional information on reinsurance. For the three months ended March 31, 2012, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $135 million, or 1.6% of the current year incurred claims as reported for the year ended December 31, 2011. Actual completion factors resulted in a reduction in medical claims payable of $60 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2011 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $75 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2011 for the insured book of business.

For the year ended December 31, 2011, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $126 million, or 1.5% of the current year incurred claims as reported for the year ended December 31, 2010. Actual completion factors resulted in a reduction of the medical claims payable of $87 million, or 1.0% of the current year incurred claims as reported for the year ended December 31, 2010 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $39 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2010 for the insured book of business.

The favorable impacts in 2012 and 2011 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, that is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was $38 million for the three months ended March 31, 2012 compared with $22 million for the three months ended March 31, 2011. The favorable effect of prior year development on net income in 2012 and 2011 primarily reflects continued low utilization of medical services. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:

CIGNA CORPORATION – Form 10-Q – 13

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

Second, as a result of the adoption of the commercial minimum medical loss ratio (MLR) provisions of the Patient Protection and Affordable Care Act in 2011, changes in medical claim estimates due to prior year development may be offset by a change in the MLR rebate accrual.

Third, changes in reserves for the Company’s retrospectively experience-rated business do not always impact shareholders’ net income. For the Company’s retrospectively experience-rated business only adjustments to medical claims payable on accounts in deficit affect shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue directly to the policyholder with no impact on the Company’s shareholders’ net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.

The determination of liabilities for Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2011 Form 10-K.

NOTE 6 Guaranteed Minimum Death Benefit Contracts

The Company had future policy benefit reserves for guaranteed minimum death benefit (“GMDB”) contracts of $1.1 billion as of March 31, 2012 and $1.2 billion as of December 31, 2011. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using an internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company tests for premium deficiency by reviewing its reserve each quarter using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.

See Note 9 for further information on the Company’s dynamic hedge programs that are used to reduce certain equity and interest rate exposures associated with this business.

During the first quarter of 2012, the Company’s normal review of reserves resulted in a charge to strengthen GMDB reserves of $18 million ($11 million after-tax) reported in other benefit expenses. The charge was due to the update of long-term assumptions described below, and primarily reflected the decrease in assumed lapses.

Since December 31, 2011, the Company has updated the following long-term assumptions for GMDB based on a review of experience:

•

The lapse assumption for the largest client of the business, that represents approximately 70% of the reserve, was updated. The lapse rate varies depending on contract type, policy duration, and the ratio of the net amount at risk to account value. As a result of this update, the overall range of lapses for the entire block of business changed from 0% to 24% at December 31, 2011 to 0% to 18% at March 31, 2012. The effect of this update was an increase in the reserve.

CIGNA CORPORATION – Form 10-Q – 14

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•

The reserves include an estimate for partial surrenders, that essentially lock in the death benefit for a particular policy based on annual election rates, depending on the net amount at risk for each policy and whether surrender charges apply. The election rates were updated from 0%-15% at December 31, 2011 to 0%-13% at March 31, 2012. The effect of this update was a decrease in the reserve.

•

The volatility assumption was updated to use a review of historical weekly returns for each index (e.g. S&P 500) for a 20-year period. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The volatility assumption for equity fund types has been updated from 16%-25% at December 31, 2011 to 18% - 24% at March 31, 2012; for bond funds from 4% - 10% at December 31, 2011 to 5% - 7% at March 31, 2012; and for money market funds from 2% at December 31, 2011 to 0% - 1% at March 31, 2012. The degree of correlation between asset classes was also updated. The effect of these updates was an increase in the reserve.

During 2011, the Company completed its normal review of reserves (including assumptions) and recorded additional other benefit expenses of $70 million ($45 million after-tax) to strengthen GMDB reserves. The reserve strengthening was driven primarily by an adverse impact of $34 million ($22 million after-tax) due to volatile equity market conditions, adverse interest rate impacts of $22 million ($15 million after-tax) reflecting management’s consideration of the anticipated impact of continuing low current short-term interest rates and adverse impacts of overall market declines in the third quarter of $13 million ($8 million after-tax), that included an increase in the provision for expected future partial surrenders and declines in the value of contractholders’ non-equity investments.

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

(In millions)	For the period ended
(In millions)	March 31, 2012		December 31, 2011
Balance at January 1	$	1,170	$	1,138
Add: Unpaid Claims		40		37
Less: Reinsurance and other amounts recoverable		53		51
Balance at January 1, net		1,157		1,124
Add: Incurred benefits		(50)		138
Less: Paid benefits		32		105
Ending balance, net		1,075		1,157
Less: Unpaid Claims		38		40
Add: Reinsurance and other amounts recoverable		44		53
ENDING BALANCE	$	1,081	$	1,170

Benefits paid and incurred are net of ceded amounts. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include the charges discussed above.

The aggregate value of the underlying mutual fund investments was $14.5 billion as of March 31, 2012 and $13.8 billion as of December 31, 2011. The death benefit coverage in force was $4.3 billion as of March 31, 2012 and $5.4 billion as of December 31, 2011. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 470,000 as of March 31, 2012 and 480,000 as of December 31, 2011).

The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits (“GMIB”). All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 7 for further information.

CIGNA CORPORATION – Form 10-Q – 15

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NOTE 7 Fair Value Measurements

The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, such as when impaired.

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

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

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

The prices the Company uses to value its investment assets are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the fair value hierarchy. The Company performs ongoing analyses of prices used to value the Company’s invested assets to determine that they represent appropriate estimates of fair value. This process involves quantitative and qualitative analysis that is overseen by the Company’s investment professionals, including reviews of pricing methodologies, judgments of valuation inputs, the significance of any unobservable inputs, pricing statistics and trends. These reviews are also designed to ensure prices do not become stale, have reasonable explanations as to why they have changed from prior valuations, or require additional review for other anomalies. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. Exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations.

Financial Assets and Financial Liabilities Carried at Fair Value

The following tables provide information as of March 31, 2012 and December 31, 2011 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, that are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.

CIGNA CORPORATION – Form 10-Q – 16

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March 31, 2012 (In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	141	$	705	$	2	$	848
State and local government		-		2,524		-		2,524
Foreign government		-		1,254		21		1,275
Corporate		-		10,770		438		11,208
Federal agency mortgage-backed		-		158		-		158
Other mortgage-backed		-		88		1		89
Other asset-backed		-		368		579		947
Total fixed maturities ⁽¹⁾		141		15,867		1,041		17,049
Equity securities		4		72		31		107
Subtotal		145		15,939		1,072		17,156
Short-term investments		-		187		-		187
GMIB assets ⁽²⁾		-		-		617		617
Other derivative assets ⁽³⁾		-		37		-		37
TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS	$	145	$	16,163	$	1,689	$	17,997
Financial liabilities at fair value:
GMIB liabilities	$	-	$	-	$	1,162	$	1,162
Other derivative liabilities ⁽³⁾		-		31		-		31
Total financial liabilities at fair value	$	-	$	31	$	1,162	$	1,193
(1) Fixed maturities included $712 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $101 million of appreciation for securities classified in Level 3. (2) The GMIB assets represent retrocessional contracts in place from two external reinsurers that cover 55% of the exposures on these contracts. (3) Other derivative assets included $8 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $29 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 9 for additional information.

December 31, 2011 (In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	217	$	738	$	3	$	958
State and local government		-		2,456		-		2,456
Foreign government		-		1,251		23		1,274
Corporate		-		10,132		381		10,513
Federal agency mortgage-backed		-		9		-		9
Other mortgage-backed		-		79		1		80
Other asset-backed		-		363		564		927
Total fixed maturities ⁽¹⁾		217		15,028		972		16,217
Equity securities		3		67		30		100
Subtotal		220		15,095		1,002		16,317
Short-term investments		-		225		-		225
GMIB assets ⁽²⁾		-		-		712		712
Other derivative assets ⁽³⁾		-		45		-		45
TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS	$	220	$	15,365	$	1,714	$	17,299
Financial liabilities at fair value:
GMIB liabilities	$	-	$	-	$	1,333	$	1,333
Other derivative liabilities ⁽³⁾		-		30		-		30
Total financial liabilities at fair value	$	-	$	30	$	1,333	$	1,363
(1) Fixed maturities included $826 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $115 million of appreciation for securities classified in Level 3. (2) The GMIB assets represent retrocessional contracts in place from two external reinsurers that cover 55% of the exposures on these contracts. (3) Other derivative assets included $10 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $35 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 9 for additional information.

CIGNA CORPORATION – Form 10-Q – 17

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Level 1 Financial Assets

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

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

Level 2 Financial Assets and Financial Liabilities

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

Fixed maturities and equity securities. Approximately 93% of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Because many fixed maturities and preferred stocks do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.

Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued, consistent with local market practice, using a single unadjusted market-observable input derived by averaging multiple broker-dealer quotes.

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

Other derivatives classified in Level 2 represent over-the-counter instruments such as interest rate and foreign currency swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties, and determined that no adjustment for credit risk was required as of March 31, 2012 or December 31, 2011. The nature and use of these other derivatives are described in Note 9.

Level 3 Financial Assets and Financial Liabilities

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

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

CIGNA CORPORATION – Form 10-Q – 18

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Fixed maturities and equity securities. Approximately 6% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:

(In millions)	March 31, 2012		December 31, 2011
Other asset and mortgage-backed securities - valued using pricing models	$	580	$	565
Corporate and government bonds - valued using pricing models		384		335
Corporate bonds - valued at transaction price		77		72
Equity securities - valued at transaction price		31		30
TOTAL	$	1,072	$	1,002

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

The following table summarizes the fair value and significant unobservable inputs used in pricing Level 3 securities that were developed directly by the Company as of March 31, 2012. The range and weighted average basis point amounts reflect the Company’s best estimates of the unobservable adjustments a market participant would make to the market observable spreads (adjustment to discount rates) used to calculate the fair values in a discounted cash flow analysis.

Other asset and mortgage-backed securities. The significant unobservable inputs used to value the following other asset and mortgage-backed securities are liquidity and weighting of credit spreads. An adjustment for liquidity is made when there is limited trading activity for the security, as of the measurement date, that considers current market conditions, issuer circumstances and complexity of the security structure. An adjustment to weight credit spreads is needed to value a more complex bond structure with multiple underlying collateral with no standard market valuation technique. The weighting of credit spreads is primarily based on the underlying collateral’s characteristics and their proportional cash flows supporting the bond obligations. The resulting wide range of unobservable adjustments in the table below is due to the varying liquidity and quality of the underlying collateral, ranging from high credit quality to below investment grade.

Corporate and government bonds. The significant unobservable input used to value the following corporate and government bonds is an adjustment for liquidity.

Significant increases in any of these inputs would result in a lower fair value measurement while decreases in these inputs would result in a higher fair value measurement.

As of March 31, 2012 (In millions except basis points)	Fair Value		Unobservable Input	Unobservable Adjustment to Discount Rates Range (Weighted Average) *in Basis Points*
Other asset and mortgage-backed securities	$	577	Liquidity	60-680 (80)
			Weighting of credit spreads	60-5,200 (465)
Corporate and government bonds	$	242	Liquidity	10-475 (235)

Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and interest rates but are without significant life insurance risk and are settled in lump sum payments, the Company reports these liabilities and assets as derivatives at fair value. The Company estimates the fair value of the assets and liabilities for GMIB contracts using assumptions regarding capital markets (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments), future annuitant behavior (including mortality, lapse, and annuity election rates), and non- performance risk, as well as risk and profit charges. As certain assumptions used to estimate fair values for these contracts are largely unobservable (primarily related to future annuitant behavior), the Company classifies GMIB assets and liabilities in Level 3. The Company considered the following in determining the view of a hypothetical market participant:

CIGNA CORPORATION – Form 10-Q – 19

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•

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

•

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

These GMIB assets and liabilities are estimated with an internal model using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants’ accounts at the time of annuitization. Generally, market return, interest rate and volatility assumptions are based on market observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The significant assumptions used to value the GMIB assets and liabilities as of March 31, 2012 were as follows:

Assumptions based on observable inputs:

•

The market return (“growth interest rate”) and discount rate assumptions are based on the market-observable LIBOR swap curve.

•

The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at the time of annuitization (claim interest rate) based on contractual terms. That rate was 1.61% at March 31, 2012 and must be projected for future time periods. These projected rates vary by economic scenario and are determined by an interest rate model using current interest rate curves and the prices of instruments available in the market including various interest rate caps and zero-coupon bonds. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim interest rate.

•

The market volatility assumptions for annuitants’ underlying mutual fund investments that are modeled based on the S&P 500, Russell 2000 and NASDAQ Composite are based on the market-implied volatility for these indices for three to seven years grading to historical volatility levels thereafter. For the remaining 50% of underlying mutual fund investments modeled based on other indices (with insufficient market-observable data), volatility is based on the average historical level for each index over the past 10 years. Using this approach, volatility ranges from 18% to 36% for equity funds, 6% to 9% for bond funds, and 0% to 1% for money market funds.

Assumptions based on unobservable inputs:

•

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

•

The annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts, ranges from 1% to 12%, and depends on the time since contract issue and the relative value of the guarantee. The weighted average annual lapse rate is 2.4%.

•

The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts and depends on the annuitant’s age, the relative value of the guarantee and whether a contractholder has had a previous opportunity to elect the benefit. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 35%. The weighted average annual annuity election rate is 12%.

•

The nonperformance risk adjustment is incorporated by adding an additional spread to the discount rate in the calculation of both (1) the GMIB liability to reflect a hypothetical market participant’s view of the risk of the Company not fulfilling its GMIB obligations, and (2) the GMIB asset to reflect a hypothetical market participant’s view of the reinsurers’ credit risk, after considering collateral. The estimated market-implied spread is company-specific for each party involved to the extent that company-specific market data is available and is based on industry averages for similarly-rated companies when company-specific data is not available. The spread is impacted by the credit default swap spreads of the specific parent companies, adjusted to reflect subsidiaries’ credit ratings relative to their parent company and any available collateral. The additional spread over LIBOR incorporated into the discount rate ranged from 5 to 120 basis points for the GMIB liability with a weighted average of 45 basis points and ranged from 35 to 125 basis points for the GMIB reinsurance asset with a weighted average of 70 basis points for that portion of the interest rate curve most relevant to these policies.

•

The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be required by a hypothetical market participant. The assumed return on capital is 10% after tax.

CIGNA CORPORATION – Form 10-Q – 20

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The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting currently observable market conditions. Other assumptions, that require the Company to make critical accounting estimates, may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that impact the net liability. The significant unobservable inputs used in the fair value measurement of the GMIB assets and liabilities are lapse rates, annuity election rates, and spreads used to calculate nonperformance risk. Significant decreases in assumed lapse rates or spreads used to calculate nonperformance risk, or increases in assumed annuity election rates would result in higher fair value measurements. Generally, a change in one of these assumptions is not necessarily accompanied by a change in another assumption. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations and, in certain situations, could be material to the Company’s financial condition.

GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles.

Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value

The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three months ended March 31, 2012 and 2011. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.

For the Three Months Ended March 31, 2012 (In millions)	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
Balance at January 1, 2012	$	1,002	$	712	$	(1,333)	$	(621)
Gains (losses) included in shareholders’ net income:
GMIB fair value gain/(loss)		-		(86)		153		67
Other		-		-		-		-
Total gains (losses) included in shareholders’ net income		-		(86)		153		67
Gains included in other comprehensive income		8		-		-		-
Losses required to adjust future policy benefits for settlement annuities ⁽¹⁾		(11)		-		-		-
Purchases, sales and settlements:
Purchases		37		-		-		-
Settlements		(3)		(9)		18		9
Total purchases, sales and settlements		34		(9)		18		9
Transfers into/(out of) Level 3:
Transfers into Level 3		73		-		-		-
Transfers out of Level 3		(34)		-		-		-
Total transfers into/(out of) Level 3		39		-		-		-
Balance at March 31, 2012	$	1,072	$	617	$	(1,162)	$	(545)
TOTAL GAINS (LOSSES) INCLUDED IN INCOME ATTRIBUTABLE TO INSTRUMENTS HELD AT THE REPORTING DATE	$	-	$	(86)	$	153	$	67
(1) Amounts do not accrue to shareholders.

CIGNA CORPORATION – Form 10-Q – 21

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For the Three Months Ended March 31, 2011 (In millions)	Fixed Maturities & Equity Securities		GMIB Assets		GMIB Liabilities		GMIB Net
Balance at January 1, 2011	$	933	$	480	$	(903)	$	(423)
Gains (losses) included in shareholders’ net income:
GMIB fair value gain/(loss)		-		(21)		37		16
Other		5		-		-		-
Total gains (losses) included in shareholders’ net income		5		(21)		37		16
Gains included in other comprehensive income		2		-		-		-
Losses required to adjust future policy benefits for settlement annuities ⁽¹⁾		(6)		-		-		-
Purchases, sales and settlements:
Purchases		7		-		-		-
Settlements		(12)		-		16		16
Total purchases, sales and settlements		(5)		-		16		16
Transfers into/(out of) Level 3:
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		(1)		-		-		-
Total transfers into/(out of) Level 3		(1)		-		-		-
Balance at March 31, 2011	$	928	$	459	$	(850)	$	(391)
TOTAL GAINS (LOSSES) INCLUDED IN INCOME ATTRIBUTABLE TO INSTRUMENTS HELD AT THE REPORTING DATE	$	5	$	(21)	$	37	$	16
(1) Amounts do not accrue to shareholders.

As noted in the tables above, total gains and losses included in shareholders’ net income are reflected in the following captions in the Consolidated Statements of Income:

•

Realized investment gains (losses) and net investment income for amounts related to fixed maturities and equity securities; and

•

GMIB fair value (gain) loss for amounts related to GMIB assets and liabilities.

In the tables above, gains and losses included in other comprehensive income are reflected in Net unrealized appreciation (depreciation) on securities in the Consolidated Statements of Other Comprehensive Income.

Reclassifications impacting Level 3 financial instruments are reported as transfers into or out of the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore gains and losses in income only reflect activity for the period the instrument was classified in Level 3.

Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. For the three months ended March 31, 2012, transfers into Level 3 from Level 2 primarily reflect an increase in the unobservable inputs used to value certain public and private corporate bonds, principally related to credit risk of the issuers.

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

CIGNA CORPORATION – Form 10-Q – 22

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Under FASB’s guidance for fair value measurements, the Company’s GMIB assets and liabilities are expected to be volatile in future periods because the underlying capital markets assumptions will be based largely on market-observable inputs at the close of each reporting period including interest rates and market-implied volatilities.

Beginning in February 2011, the Company implemented a dynamic equity hedge program to reduce a portion of the equity market exposures related to GMIB contracts (“GMIB equity hedge program”) by entering into exchange-traded futures contracts. The Company also entered into a dynamic interest rate hedge program that reduces a portion of the interest rate exposure related to GMIB contracts (“GMIB growth interest rate hedge program”) using LIBOR swap contracts and exchange-traded treasury futures contracts. See Note 9 for further information.

GMIB fair value gains of $67 million for the three months ended March 31, 2012, were primarily due to increases in interest rates and significant increases in underlying account values during the period due to favorable equity market conditions.

GMIB fair value gains of $16 million for the three months ended March 31, 2011, were primarily due to increases in interest rates and underlying account values during the period due to favorable equity market returns, partially offset by updates to the risk and profit charges that the Company anticipates a hypothetical market participant would require to assume this business.

Separate account assets

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company’s revenues and expenses. As of March 31, 2012 and December 31, 2011 separate account assets were as follows:

March 31, 2012 (In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	269	$	1,400	$	-	$	1,669
Non-guaranteed separate accounts ⁽¹⁾		1,864		4,005		943		6,812
TOTAL SEPARATE ACCOUNT ASSETS	$	2,133	$	5,405	$	943	$	8,481
(1) As of March 31, 2012, non-guaranteed separate accounts included $3.2 billion in assets supporting the Company’s pension plans, including $894 million classified in Level 3.

December 31, 2011 (In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	249	$	1,439	$	-	$	1,688
Non-guaranteed separate accounts ⁽¹⁾		1,804		3,851		750		6,405
TOTAL SEPARATE ACCOUNT ASSETS	$	2,053	$	5,290	$	750	$	8,093
(1) As of December 31, 2011, non-guaranteed separate accounts included $3.0 billion in assets supporting the Company’s pension plans, including $702 million classified in Level 3.

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

•

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

•

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

Separate account assets classified in Level 3 include investments primarily in securities partnerships, real estate and hedge funds generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments.

CIGNA CORPORATION – Form 10-Q – 23

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The following tables summarize the changes in separate account assets reported in Level 3 for the three months ended March 31, 2012 and March 31, 2011.

(In millions)	Three Months Ended March 31,
(In millions)	2012		2011
Balance at January 1	$	750	$	594
Policyholder gains ⁽¹⁾		18		58
Purchases, sales and settlements:
Purchases		184		9
Sales		-		(40)
Settlements		(11)		(59)
Total purchases, sales and settlements		173		(90)
Transfers into/(out of) Level 3:
Transfers into Level 3		3		-
Transfers out of Level 3		(1)		(3)
Total transfers into/(out of) Level 3		2		(3)
BALANCE AT MARCH 31	$	943	$	559
(1) Included are gains of $12 million attributable to instruments still held at March 31, 2012 and gains of $40 million attributable to instruments still held at March 31, 2011.

Assets and Liabilities Measured at Fair Value under Certain Conditions

Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as investments in real estate entities and commercial mortgage loans when they become impaired. During the three months ended March 31, 2012, commercial mortgage loans representing less than 1% of total investments were written down to their fair values, resulting in after-tax realized investment losses of $2 million.

During 2011, impaired commercial mortgage loans and real estate entities representing less than 1% of total investments were written down to their fair values, resulting in after-tax realized investment losses of $15 million.

These fair values were calculated by discounting the expected future cash flows at estimated market interest rates. Such market rates were derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the characteristics of the underlying real estate, including its type, quality and location. The fair value measurements were classified in Level 3 because these cash flow models incorporate significant unobservable inputs.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

Most financial instruments that are subject to fair value disclosure requirements are carried in the Company’s Consolidated Financial Statements at amounts that approximate fair value. The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at March 31, 2012 and December 31, 2011:

(In millions)	Classification in the Fair Value Hierarchy	March 31, 2012				December 31, 2011
(In millions)	Classification in the Fair Value Hierarchy		Fair Value		Carrying Value		Fair Value		Carrying Value
Commercial mortgage loans	Level 3	$	3,390	$	3,259	$	3,380	$	3,301
Contractholder deposit funds, excluding universal life products	Level 3	$	1,084	$	1,053	$	1,056	$	1,035
Long-term debt, including current maturities, excluding capital leases	Level 2	$	5,430	$	4,947	$	5,281	$	4,946

The fair values presented in the table above have been estimated using market information when available. The following is a description of the valuation methodologies and inputs used by the Company to determine fair value.

CIGNA CORPORATION – Form 10-Q – 24

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Commercial mortgage loans. The Company estimates the fair value of commercial mortgage loans generally by discounting the contractual cash flows at estimated market interest rates that reflect the Company’s assessment of the credit quality of the loans. Market interest rates are derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the property type, quality rating and average life of the loan. The quality ratings reflect the relative risk of the loan, considering debt service coverage, the loan-to-value ratio and other factors. Fair values of impaired mortgage loans are based on the estimated fair value of the underlying collateral generally determined using an internal discounted cash flow model. The fair value measurements were classified in Level 3 because the cash flow models incorporate significant unobservable inputs.

Contractholder deposit funds, excluding universal life products. Generally, these funds do not have stated maturities. Approximately 55% of these balances can be withdrawn by the customer at any time without prior notice or penalty. The fair value for these contracts is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of the individual life and annuity and retirement benefits businesses. The fair value for these contracts is determined using the fair value of these buyers’ assets supporting these reinsured contracts. The Company had a reinsurance recoverable equal to the carrying value of these reinsured contracts. These instruments were classified in Level 3 because certain inputs are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement.

Long-term debt, including current maturities, excluding capital leases. The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company’s estimated current borrowing rate for debt of similar terms and remaining maturities. These measurements were classified in Level 2 because the fair values are based on quoted market prices or other inputs that are market observable or can be corroborated by market data.

Fair values of off-balance-sheet financial instruments were not material.

NOTE 8 Investments

Total Realized Investment Gains and Losses

The following total realized gains and losses on investments include other-than-temporary impairments on debt securities but exclude amounts required to adjust future policy benefits for the run-off settlement annuity business:

(In millions)	Three Months Ended March 31,
(In millions)	2012		2011
Fixed maturities	$	12	$	21
Equity securities		4		3
Commercial mortgage loans		(3)		-
Real estate		(1)		-
Other investments, including derivatives		1		2
Realized investment gains before income taxes		13		26
Less income taxes		1		9
NET REALIZED INVESTMENT GAINS	$	12	$	17

Included in pre-tax realized investment gains (losses) above were changes in valuation reserves, asset write-downs and other-than-temporary impairments on fixed maturities as follows:

(In millions)	Three Months Ended March 31,
(In millions)	2012		2011
Credit-related ⁽¹⁾	$	5	$	-
Other		1		-
TOTAL	$	6	$	-
(1) Credit related losses include other-than-temporary declines in fair value of fixed maturities and changes in valuation reserves related to commercial mortgage loans.

CIGNA CORPORATION – Form 10-Q – 25

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Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equity securities on the Company’s Consolidated Balance Sheets. These securities are carried at fair value with changes in fair value reported in other realized investment gains (losses) and interest and dividends reported in net investment income. The Company’s hybrid investments include preferred stock or debt securities with call or conversion features.

(In millions)	As of March 31, 2012		As of December 31, 2011
Included in fixed maturities:
Trading securities (amortized cost: $2; $2)	$	2	$	2
Hybrid securities (amortized cost: $27; $26)		29		28
TOTAL	$	31	$	30
Included in equity securities:
Hybrid securities (amortized cost: $92; $90)	$	72	$	65

Fixed maturities included $58 million at March 31, 2012, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities were primarily federal government securities.

The following information about fixed maturities excludes trading and hybrid securities. The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at March 31, 2012:

(In millions)	Amortized Cost		Fair Value
Due in one year or less	$	966	$	977
Due after one year through five years		5,177		5,540
Due after five years through ten years		5,204		5,809
Due after ten years		2,756		3,499
Mortgage and other asset-backed securities		1,038		1,193
TOTAL	$	15,141	$	17,018

Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without penalties. Also, in some cases the Company may extend maturity dates.

Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities with a fair value of $31 million at March 31, 2012 and $30 million at December 31, 2011) by type of issuer is shown below.

CIGNA CORPORATION – Form 10-Q – 26

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(In millions)	March 31, 2012
(In millions)	Amortized Cost		Unrealized Appreciation		Unrealized Depreciation		Fair Value
Federal government and agency	$	509	$	339	$	-	$	848
State and local government		2,267		261		(4)		2,524
Foreign government		1,182		95		(2)		1,275
Corporate		10,145		1,064		(31)		11,178
Federal agency mortgage-backed		157		1		-		158
Other mortgage-backed		84		10		(5)		89
Other asset-backed		797		158		(9)		946
TOTAL	$	15,141	$	1,928	$	(51)	$	17,018

(In millions)	December 31, 2011
Federal government and agency	$	552	$	406	$	-	$	958
State and local government		2,185		274		(3)		2,456
Foreign government		1,173		103		(2)		1,274
Corporate		9,460		1,070		(45)		10,485
Federal agency mortgage-backed		9		-		-		9
Other mortgage-backed		73		10		(4)		79
Other asset-backed		777		160		(11)		926
TOTAL	$	14,229	$	2,023	$	(65)	$	16,187

The above table includes investments with a fair value of $2.9 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of $734 million and gross unrealized depreciation of $22 million at March 31, 2012. Such unrealized amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other comprehensive income. At December 31, 2011, investments supporting this business had a fair value of $3 billion, gross unrealized appreciation of $851 million and gross unrealized depreciation of $25 million.

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

(In millions)	Three Months Ended March 31,
(In millions)	2012		2011
Proceeds from sales	$	221	$	155
Gross gains on sales	$	15	$	14

CIGNA CORPORATION – Form 10-Q – 27

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Review of declines in fair value. Management reviews fixed maturities with a decline in fair value from cost for impairment based on criteria that include:

•

length of time and severity of decline;

•

financial health and specific near term prospects of the issuer;

•

changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and

•

the Company’s intent to sell or the likelihood of a required sale prior to recovery.

Excluding trading and hybrid securities, as of March 31, 2012, fixed maturities with a decline in fair value from amortized cost (which were primarily investment grade corporate bonds) were as follows, including the length of time of such decline:

(In millions)	Fair Value		Amortized Cost		Unrealized Depreciation		Number of Issues
Fixed maturities:
One year or less:
Investment grade	$	963	$	974	$	(11)	470
Below investment grade	$	87	$	90	$