Edgar Filing: CIGNA CORP

cigna10q.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _____ to _____

Commission file number 1-08323

CIGNA Corporation

(Exact name of registrant as specified in its charter)

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

Two Liberty Place, 1601 Chestnut Street

Philadelphia, Pennsylvania 19192

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)

of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant

was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No _

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,

or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller

reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]		Accelerated filer [ ]
Non-accelerated filer [ ]		Smaller Reporting Company [ ]

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

As of April 18, 2008, 280,813,911 shares of the issuer's common stock were outstanding.

CIGNA CORPORATION

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Statements of Income	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to the Financial Statements	5
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
	Item 4. Controls and Procedures	49

PART II.	OTHER INFORMATION
	Item 1. Legal Proceedings	50
	Item 1A. Risk Factors	51
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 6. Exhibits	53
SIGNATURE		54
EXHIBIT INDEX		E-1

As used herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated subsidiaries.

CIGNA Corporation
Consolidated Statements of Income
	Unaudited
	Three Months Ended
	March 31,
(In millions, except per share amounts)	2008			2007
Revenues
Premiums and fees	$	3,851		$	3,708
Net investment income		265			280
Mail order pharmacy revenues		296			271
Other revenues		143			94
Realized investment gains		14			21
Total revenues		4,569			4,374
Benefits and Expenses
Health Care medical claims expense		1,744			1,719
Other benefit expenses		928			836
Mail order pharmacy costs of goods sold		239			219
Guaranteed minimum income benefits expense		304			24
Other operating expenses		1,281			1,163
Total benefits and expenses		4,496			3,961
Income from Continuing Operations
before Income Taxes		73			413
Income taxes (benefits):
Current		77			132
Deferred		(59	)		4
Total taxes		18			136
Income from Continuing Operations		55			277
Income from Discontinued Operations, Net of Taxes		3			12
Net Income	$	58		$	289
Earnings Per Share - Basic:
Income from continuing operations	$	0.20		$	0.95
Income from discontinued operations		0.01			0.05
Net income	$	0.21		$	1.00
Earnings Per Share - Diluted:
Income from continuing operations	$	0.19		$	0.93
Income from discontinued operations		0.02			0.05
Net income	$	0.21		$	0.98
Dividends Declared Per Share	$	0.040		$	0.008

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

CIGNA Corporation
Consolidated Balance Sheets
				Unaudited						As of
				As of March 31,						December 31,
(In millions, except per share amounts)				2008						2007
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $11,406; $11,409)				$	12,033					$	12,081
Equity securities, at fair value (cost, $140; $127)					144						132
Commercial mortgage loans					3,291						3,277
Policy loans					1,504						1,450
Real estate					49						49
Other long-term investments					541						520
Short-term investments					36						21
Total investments					17,598						17,530
Cash and cash equivalents					2,850						1,970
Accrued investment income					247						233
Premiums, accounts and notes receivable					1,475						1,405
Reinsurance recoverables					7,205						7,331
Deferred policy acquisition costs					848						816
Property and equipment					649						625
Deferred income taxes, net					858						794
Goodwill					1,784						1,783
Other assets, including other intangibles					883						536
Separate account assets					6,591						7,042
Total assets				$	40,988					$	40,065
Liabilities
Contractholder deposit funds				$	8,595					$	8,594
Future policy benefits					8,083						8,147
Unpaid claims and claim expenses					4,144						4,127
Health Care medical claims payable					1,033						975
Unearned premiums and fees					489						496
Total insurance and contractholder liabilities					22,344						22,339
Accounts payable, accrued expenses and other liabilities					4,886						4,127
Short-term debt					251						3
Long-term debt					2,090						1,790
Nonrecourse obligations					12						16
Separate account liabilities					6,591						7,042
Total liabilities					36,174						35,317
Contingencies — Note 14
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)					88						88
Additional paid-in capital					2,488						2,474
Net unrealized appreciation, fixed maturities	$	137					$	140
Net unrealized appreciation, equity securities		8						7
Net unrealized depreciation, derivatives		(27	)					(19	)
Net translation of foreign currencies		55						61
Postretirement benefits liability adjustment		(135	)					(138	)
Accumulated other comprehensive income					38						51
Retained earnings					7,142						7,113
Less treasury stock, at cost					(4,942	)					(4,978	)
Total shareholders’ equity					4,814						4,748
Total liabilities and shareholders’ equity				$	40,988					$	40,065
Shareholders’ Equity Per Share				$	17.14					$	16.98

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


CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity
(In millions, except per share amounts)
	Unaudited
Three Months Ended March 31,	2008						2007
	Compre-			Share-			Compre-			Share-
	hensive			holders’			hensive			holders’
	Income			Equity			Income			Equity
Common Stock				$	88					$	40
Additional Paid-In Capital, January 1					2,474						2,451
Effect of issuance of stock for employee benefit plans					14						34
Additional Paid-In Capital, March 31					2,488						2,485
Accumulated Other Comprehensive Income (Loss),
January 1 prior to implementation effect					51						(169	)
Implementation effect of SFAS No.155					-						(12	)
Accumulated Other Comprehensive Income (Loss),
January 1 as adjusted					51						(181	)
Net unrealized depreciation, fixed maturities	$	(3	)		(3	)	$	(6	)		(6	)
Net unrealized appreciation, equity securities		1			1			-			-
Net unrealized depreciation on securities		(2	)					(6	)
Net unrealized depreciation, derivatives		(8	)		(8	)		(1	)		(1	)
Net translation of foreign currencies		(6	)		(6	)		-			-
Postretirement benefits liability adjustment		3			3			17			17
Other comprehensive income (loss)		(13	)					10
Accumulated Other Comprehensive Income (Loss), March 31					38						(171	)
Retained Earnings, January 1 prior to
implementation effects					7,113						6,177
Implementation effect of SFAS No. 155					-						12
Implementation effect of FIN 48					-						(29	)
Retained Earnings, January 1 as adjusted					7,113						6,160
Net income		58			58			289			289
Effects of issuance of stock for employee benefit plans					(18	)					(72	)
Common dividends declared					(11	)					(2	)
Retained Earnings, March 31					7,142						6,375
Treasury Stock, January 1					(4,978	)					(4,169	)
Repurchase of common stock					-						(576	)
Other, primarily issuance of treasury stock for employee
benefit plans					36						168
Treasury Stock, March 31					(4,942	)					(4,577	)
Total Comprehensive Income and Shareholders’ Equity	$	45		$	4,814		$	299		$	4,152

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

CIGNA Corporation
Consolidated Statements of Cash Flows
	Unaudited
(In millions)	Three Months Ended March 31,
	2008			2007
Cash Flows from Operating Activities
Net income	$	58		$	289
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations		(3	)		(12	)
Insurance liabilities		126			74
Reinsurance recoverables		17			12
Deferred policy acquisition costs		(43	)		(12	)
Premiums, accounts and notes receivable		(72	)		17
Other assets		(341	)		(28	)
Accounts payable, accrued expenses and other liabilities		596			(74	)
Current income taxes		64			100
Deferred income taxes		(59	)		4
Realized investment gains		(14	)		(21	)
Depreciation and amortization		53			54
Gains on sales of businesses (excluding discontinued operations)		(9	)		(11	)
Other, net		(21	)		(14	)
Net cash provided by operating activities		352			378
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		315			188
Equity securities		-			11
Commercial mortgage loans		12			28
Other (primarily short-term and other long-term investments)		115			143
Investment maturities and repayments:
Fixed maturities		149			107
Commercial mortgage loans		5			62
Investments purchased:
Fixed maturities		(499	)		(440	)
Equity securities		(13	)		(2	)
Commercial mortgage loans		(30	)		(69	)
Other (primarily short-term and other long-term investments)		(142	)		(185	)
Property and equipment sales		-			22
Property and equipment purchases		(68	)		(41	)
Cash provided by investing activities of discontinued operations		-			31
Other acquisitions/dispositions, net cash used		(7	)		-
Other, net		-			(6	)
Net cash used in investing activities		(163	)		(151	)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		330			141
Withdrawals and benefit payments from contractholder deposit funds		(280	)		(142	)
Change in cash overdraft position		64			12
Net change in short-term debt		248			498
Net proceeds on issuance of long-term debt		298			-
Repayment of long-term debt		-			(87	)
Repurchase of common stock		-			(583	)
Issuance of common stock		33			133
Common dividends paid		(3	)		(2	)
Net cash provided by (used in) financing activities		690			(30	)
Effect of foreign currency rate changes on cash and cash equivalents		1			-
Net increase in cash and cash equivalents		880			197
Cash and cash equivalents, beginning of period		1,970			1,392
Cash and cash equivalents, end of period	$	2,850		$	1,589
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	3		$	8
Interest paid	$	22		$	20
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED

FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

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

The interim consolidated financial statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Form 10-K for the year ended December 31, 2007.

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.

All weighted average shares, per share amounts and references to stock compensation for all periods presented have been adjusted to reflect the three-for-one stock split effective June 4, 2007.

Certain reclassifications have been made to prior period amounts to conform to the presentation of 2008 amounts.

Discontinued operations for the three months ended March 31, 2008 represented $3 million after-tax from the settlement of certain issues related to a past divestiture. Discontinued operations for the three months ended March 31, 2007 represent realized gains of $12 million after-tax from the disposition of certain directly-owned real estate investments.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Fair value measurements. Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This standard expands disclosures about fair value measurements and clarifies how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability (exit price). See Note 7 for information on the Company’s fair value measurements including new required disclosures.

The Company carries certain financial instruments at fair value in the financial statements including approximately $12 billion in invested assets at March 31, 2008. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value, however changes in the fair values of these assets accrue directly to policyholders and are not included in the Company’s revenues and expenses. At the adoption of SFAS No. 157, there were no effects to the Company’s measurements of fair values for financial instruments other than for assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits discussed below.

At adoption, the Company was required to change certain assumptions used to estimate the fair values of assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits. As a result, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance. This charge did not have an impact on the Company’s cash flows.

Because there is no market for these contracts, the assumptions used to estimate their fair values at adoption were determined using a hypothetical market participant's view of an exit price. The Company considered the following in determining the view of a hypothetical market participant:

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

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

At adoption, the assumptions used to estimate the fair value of these contracts were determined using a hypothetical market participant’s view of an exit price rather than using historical market data and actual experience to establish the Company’s future expectations. For many of these assumptions, there is limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates.

The Company considers the various assumptions used to estimate fair values of these contracts in two categories: capital markets and future annuitant and retrocessionaire behavior assumptions. Estimated components of the charge by category (net of reinsurance) are described below, including how these updated assumptions differ from those used historically to estimate fair values for these contracts.

Assumptions Related to Capital Markets - $183 million of the $202 million pre-tax charge, net of estimated receivables for reinsurance, reflects the impact of changes in capital markets assumptions including market return, discount rate, the projected interest rate used to calculate the reinsured income benefits at the time of annuitization (claim interest rate), and volatility. These assumptions were updated to reflect risk free interest rates (LIBOR swap curve) and volatility consistent with that implied by derivative instruments in a consistently active market, under the assumption that a hypothetical market participant would hedge all or a portion of the net liability. The capital markets charge is comprised of:

$131 million related to using risk free interest rates to project the growth in the contractholders’ underlying investment accounts rather than using an estimate of the actual returns for the underlying equity and bond mutual funds over time. Risk free growth rates were lower than the market return assumptions at December 31, 2007 which ranged from 5-11% varying by fund type. The Company believes risk free rates would be used by a hypothetical market participant who is expected to hedge the risk associated with these contracts because they would earn risk free interest returns from hedging instruments. However, the Company’s actual payments will be based on, among other variables, the actual returns that the contractholders’ earn on their underlying investment accounts.

$23 million related to assuming implied market volatility as of January 1, 2008 for certain indices where observable in a consistently active market. The Company believes that a hypothetical market participant would use these market observable implied volatilities rather than use average historical market volatilities.

$20 million related to projecting the interest rate used to calculate the reinsured income benefits at the time of annuitization (claim interest rate) using the market implied forward rate curve and volatility as of January 1, 2008. Claim payments are based on the 7-year Treasury Rate at the time the benefit is elected, and the Company believes that a hypothetical market participant would likely use the above market-implied approach rather than projecting the 7-year Treasury Rate grading from current levels to long-term average levels.

$9 million related to using risk free interest rates as of January 1, 2008 to discount the liability. The Company believes that a hypothetical market participant would use current risk free interest rates for discounting rather than a rate anticipated to be earned on the assets invested to settle the liability. The impact of using risk free interest rates to discount the liability is significantly less than the impact of using these rates to project the growth in contractholders’ underlying investment accounts because risk free interest rates as of January 1, 2008 are much closer to the discount rate assumption of 5.75% used at December 31, 2007 prior to the adoption of SFAS No. 157.

Assumptions Related to Future Annuitant and Retrocessionaire Behavior - $19 million of the $202 million pre-tax charge, net of estimated receivables for reinsurance, reflects the impact of the Company’s view of a hypothetical market participant’s assumptions for future annuitant and retrocessionaire behavior and primarily reflects incremental risk and profit charges.

The Company’s results of operations related to this business are expected to continue to be volatile in future periods both because underlying assumptions will be based on current market-observable inputs which will likely change each period and because the recorded liabilities, net of receivables from reinsurers, are higher after adoption of SFAS No. 157. See Note 7 for additional information.

The Financial Accounting Standards Board (FASB) deferred the effective date of SFAS No. 157 until the first quarter of 2009 for non-financial assets and liabilities (such as intangible assets, property and equipment and goodwill) that are required to be measured at fair value on a periodic basis (such as at acquisition or impairment). The FASB expects to address implementation issues during this delay. Accordingly, the Company will adopt SFAS No. 157 for non-financial assets and liabilities in the first quarter of 2009 and will evaluate the effects of adoption when the FASB provides implementation guidance.

Fair value option. Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits entities to choose fair value measurement of many financial instruments, including insurance contracts, with subsequent changes in fair value to be reported in net income for the period. This choice is made for each individual financial instrument, is irrevocable and, after implementation, must be determined when the entity first commits to or recognizes the financial instrument. The adoption of SFAS No. 159 did not impact the Company's consolidated financial statements, as no items were initially elected for fair value measurement. For financial assets and liabilities acquired in subsequent periods, the Company will determine whether to use the fair value election at the time of acquisition.

NOTE 3 – ACQUISITIONS AND DISPOSITIONS

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

Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West Healthcare”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Life and Annuity, Inc. for a cash purchase price of approximately $1.5 billion. Great-West Healthcare primarily sells administrative service medical plans with stop loss coverage to small and mid-size employer groups. Great-West Healthcare's offerings also include the following products sold through a variety of funding options: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which will be accounted for as a purchase beginning in the second quarter of 2008, was financed through a combination of available cash and the issuance of long-term debt and commercial paper (see Note 11).

The results of Great-West Healthcare will be included in the Company’s consolidated financial statements from the date of acquisition.

Sale of the Brazilian Life Insurance Operations. On April 29, 2008, the Company completed the sale of its Brazilian life insurance operations. See Note 3 to the Consolidated Financial Statements in the Company's 2007 Form 10-K for additional information.

NOTE 4 – EARNINGS PER SHARE

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,
2008
Income from continuing
operations	$	55		-		$	55
Shares (in thousands):
Weighted average		279,077		-			279,077
Options and restricted stock grants				3,401			3,401
Total shares		279,077		3,401			282,478
EPS	$	0.20	$	(0.01	)	$	0.19
2007
Income from continuing
operations	$	277		-		$	277
Shares (in thousands):
Weighted average		290,370		-			290,370
Options and restricted stock grants				5,982			5,982
Total shares		290,370		5,982			296,352
EPS	$	0.95	$	(0.02	)	$	0.93

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

	Three Months
	Ended
	March 31,
(Options in millions)	2008	2007
Antidilutive options	3.7	1.5

The Company held 70,130,685 shares of common stock in Treasury as of March 31, 2008, and 64,096,823 shares as of March 31, 2007.

NOTE 5 – HEALTH CARE MEDICAL CLAIMS PAYABLE

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

	March 31,		December 31,
(In millions)	2008		2007
Incurred but not yet reported	$	850	$	786
Reported claims in process		138		145
Other medical expense payable		45		44
Medical claims payable	$	1,033	$	975

Activity in medical claims payable was as follows:

	For the period ended
	March 31,			December 31,
(In millions)	2008			2007
Balance at January 1,	$	975		$	960
Less: Reinsurance and other
amounts recoverable		258			250
Balance at January 1, net		717			710
Incurred claims related to:
Current year		1,797			6,878
Prior years		(53	)		(80	)
Total incurred		1,744			6,798
Paid claims related to:
Current year		1,156			6,197
Prior years		526			594
Total paid		1,682			6,791
Ending Balance, net		779			717
Add: Reinsurance and other
amounts recoverable		254			258
Ending Balance	$	1,033		$	975

Reinsurance and other amounts recoverable reflect amounts due from 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.

For the three months ended March 31, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $53

million, or 0.8% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction in medical claims payable of $20 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $33 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.

For the year ended December 31, 2007, actual experience differed from the Company's key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $80 million, or 1.3% of the current year incurred claims as reported for the year ended December 31, 2006. Actual completion factors resulted in a reduction of the medical claims payable of $46 million or 0.7% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $34 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business.

The favorable impact in 2008 and 2007 relating to completion factor and medical cost trend variances is primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the establishment of the provision for moderately adverse conditions established for claims incurred related to current years.

The corresponding impact of favorable prior year development on net income was not material for the three months ended March 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 recognized for the following reasons:

First, due to the nature of the Company's retrospectively experience-rated business, only adjustments to medical claims payable on accounts in deficit affect net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrue to the Company and directly impact 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 net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.

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

The determination of liabilities for Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

NOTE 6 – GUARANTEED MINIMUM DEATH BENEFIT CONTRACTS

The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured a guaranteed minimum death benefit under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds combined with a death benefit. The Company has equity and other market exposures as a result of this product.

The determination of liabilities for guaranteed minimum death benefits requires the Company to make critical accounting estimates. The Company regularly evaluates the assumptions used in establishing reserves and changes its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. If actual experience differs from the assumptions (including lapse, partial surrender, mortality, interest rates and volatility) used in estimating these reserves, the resulting change could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition. The Company had future policy benefit reserves for guaranteed minimum death benefit contracts of $899 million as of March 31, 2008, and $848 million as of December 31, 2007. The increase in reserves is due to declines in the equity market driving down the value of the underlying mutual fund investments.

Activity in future policy benefit reserves for these guaranteed minimum death benefits contracts was as follows:

	For the period ended
	March 31,		December 31,
(In millions)	2008		2007
Balance at January 1	$	848	$	862
Less: Reinsurance recoverable		16		17
Balance at January 1, net		832		845
Add: Incurred benefits		60		61
Less: Paid benefits		19		74
Ending Balance, net		873		832
Add: Reinsurance recoverable		26		16
Ending Balance	$	899	$	848

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. As discussed below, losses or gains have been recorded in other revenues as a result of the program to reduce equity market exposures.

The following list provides information about the Company’s reserving methodology and assumptions for guaranteed minimum death benefits as of March 31, 2008:

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

·	The reserves include an estimate for partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-30% 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 program to reduce equity market exposures using futures contracts. In addition, the results of futures contracts are reflected in the liability calculation as a component of investment returns.

·	The volatility assumption is 15-30%, varying by equity fund type; 3-8%, varying by bond fund type; and 2% for money market funds.

·	The discount rate is 5.75%.

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

·	The lapse rate assumption is 0-15%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

As of March 31, 2008, the aggregate value of the underlying mutual fund investments was $26.3 billion. The death benefit coverage in force as of that date (representing the amount that the Company would have to pay if all of the approximately 720,000 contractholders had died on that date) was $5.6 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.

The notional amount of futures contract positions held by the Company at March 31, 2008 was $925 million. The Company recorded in other revenues pre-tax gains of $42 million for the first three months of 2008, compared with pre-tax losses of $7 million for the first three months of 2007 from futures contracts. Expense offsets reflecting corresponding changes in liabilities for these guaranteed minimum death benefit contracts were included in benefits and expenses.

For further information and details on these contracts and the program adopted to reduce related equity market risk, refer to Note 7 to the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

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 periodically measured at fair value, such as when impaired, or, for commercial mortgage loans, when classified as “held for sale.”

Fair value is defined as the price at which an asset could be exchanged in a current transaction between market participants. 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 (matrix pricing). 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 management believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or input used.

The Company's financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by SFAS No. 157. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:

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

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

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

Financial assets and liabilities measured at fair value on a recurring basis

The following table provides information as of March 31, 2008 about the Company’s financial assets and liabilities measured at fair value on a recurring basis. SFAS No. 157 disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders (see page 16).


(In millions)	Level 1		Level 2		Level 3		Total

Assets at fair value:

Fixed maturities (1)	$	29	$	11,295	$	709	$	12,033
Equity securities		5		122		17		144
Sub-total		34		11,417		726		12,177
Short-term investments		-		36				36
GMIB assets (2)		-		-		515		515
Total assets at fair value, excluding separate accounts	$	34	$	11,453	$	1,241	$	12,728

Liabilities at fair value:

GMIB liabilities	$	-	$	-	$	965	$	965
Other derivatives (3)		-		33		-		33
Total liabilities at fair value	$	-	$	33	$	965	$	998

(1)	As of March 31, 2008, fixed maturities includes $416 million of net appreciation required to adjust future policy benefits for certain annuities including $3 million in appreciation from securities classified in Level 3.
(2)	Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a credit of $21 million for the future cost of reinsurance.
(3)	Derivatives other than GMIB assets and liabilities are presented net of $12 million in gross derivative assets.

Level 1 financial assets - $34 million

Given the narrow definition of Level 1 and the Company's investment asset strategy, a relatively small portion of the Company’s investment assets are classified in Level 1. These assets include actively-traded U.S. government bonds and exchange-listed equity securities. Unadjusted quoted prices for these securities are provided to the Company by independent pricing services.

Level 2 financial assets - $11.5 billion and liabilities - $33 million

Fixed maturities and equity securities. Approximately 94% 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 and asset-backed securities and preferred stocks. Fair values of fixed maturities and equity securities reported in this category are largely provided by independent pricing services ($8 billion as of March 31, 2008), or are calculated by the Company using a matrix pricing model ($3.5 billion as of March 31, 2008). Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has controls in place to validate that amounts provided represent current exit values.

Typical inputs to models used by independent pricing services include but are not limited to benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage and asset-backed securities, inputs may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating. Because many fixed maturities and preferred stocks do not trade daily, independent pricing services regularly derive fair values using recent trades of securities with similar features. When recent trades are not available, pricing models are used to estimate the fair values of securities by discounting future cash flows at estimated market interest rates.

If an independent pricing service is unable to provide the fair value for a security due to insufficient market information such as for a private placement transaction, the Company will determine fair value internally using a matrix pricing model. This model estimates fair value using discounted cash flows at a market yield considering the appropriate treasury rate plus a spread. The spread is derived by reference to a similar bond or industry grid, and may be adjusted based on specific characteristics of the security, including inputs that are not readily observable in the market. The

Company assesses the significance of unobservable inputs for each security priced internally and classifies that security in Level 2 only if the unobservable inputs are insignificant.

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

Other derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as swap contracts. Fair values for these instruments are determined internally 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, 2008. The nature and use of these other derivatives are described in Note 10(F) of the Consolidated Financial Statements in the Company’s 2007 Form 10-K.

Level 3 financial assets - $1.2 billion and liabilities - $965 million

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

Fixed maturities and equity securities. $726 million or approximately 6% of fixed maturities and equity securities are classified in Level 3. Of this amount, approximately $504 million represent fixed maturities priced using indicative quotes from independent securities brokers. Because brokers do not share the specific pricing inputs and methods used to determine these quotes, and because these quotes do not represent a firm commitment to transact at the prices provided, the Company classifies the resulting values as Level 3 measurements. Broker quotes are primarily used to price complex instruments including $384 million of structured securities and $120 million of primarily private corporate bonds. Level 3 measurements may also include new public securities before there is observable market activity. The Company expects market observable data will become available for pricing these newly issued securities in the future and therefore, would expect regular transfers out of Level 3 to Level 2. Fair values for the remaining $222 million of fixed maturities and the equity securities classified in Level 3 are derived principally using unobservable inputs as there is little, if any, relevant market data and include:

·	$133 million of predominantly private corporate and structured bonds valued using internally-developed data to determine credit quality; and

·	$89 million of subordinated loans and private equity investments valued at transaction price in the absence of market data indicating the carrying values may not be recoverable.

Guaranteed minimum income benefit contracts. The Company estimates the fair value of the assets and liabilities for guaranteed minimum income benefit reinsurance contracts using assumptions regarding capital markets (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments), future annuitant and retrocessionaire behavior (including mortality, lapse, annuity election rates and retrocessional credit), as well as risk and profit charges. At adoption of SFAS No. 157, the Company updated assumptions to reflect those that the Company believes a hypothetical market participant would use to determine a current exit price for these contracts and recorded a charge to net income as described in Note 2. As certain assumptions used to estimate fair values for these contracts are largely unobservable, the Company classifies assets and liabilities associated with guaranteed minimum income benefits in Level 3 (GMIB assets and GMIB liabilities).

These GMIB assets and liabilities are estimated using a complex internal model run using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid includes the excess of the expected value of the income benefits over the values of the annuitant’s accounts at the time of

annuitization. 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. 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 assumptions used to value these assets and liabilities as of March 31, 2008 are as follows:

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

The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at the time of annuitization (claim interest rate) based on contractual terms. That rate was 2.9% at March 31, 2008 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.

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 53% 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 14 to 32% for equity funds, 3 to 8% for bond funds and 1 to 2% for money market funds.

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

·	The lapse rate assumption varies by contract from 2%-17% and depends on the time since contract issue, the relative value of the guarantee and the differing experience by issuing company of the underlying annuity contracts.

The annuity election rate assumption varies by contract and depends on the annuitant’s age, the relative value of the guarantee, the number of previous opportunities a contractholder has had to elect the benefit and the differing experience by company issuing the underlying variable annuity contracts. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second annual opportunity to elect the benefit, the assumed probability of election is up to 45%. For each subsequent annual opportunity to elect the benefit, the assumed probability of election is up to 25%. With respect to the second and subsequent election opportunities, actual data is just beginning to emerge for the Company as well as the industry and the estimates are based on this limited data.

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

The Company has considered adjustments for expenses, nonperformance risk (such as credit risk for retrocessionnaires and the Company), and model risk and believes that a hypothetical market participant would view these adjustments as offsetting. Therefore the Company determined that no adjustment for these risks was required as of March 31, 2008.

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 evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting current observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other relevant and available industry data. 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.

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

The following table summarizes the changes in assets and liabilities classified in Level 3 for the first three months of 2008. This table excludes separate account assets which are discussed on page 16 as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in this table may include changes in fair value that are attributable to both observable and unobservable inputs.


(In millions)		Fixed Maturities & Equity Securities			GMIB Asset			GMIB Liability			GMIB Net
Balance at 1/1/08:	$	732		$	173		$	(313	)	$	(140	)
Gains (losses) included in income:
Effect of adoption of SFAS No. 157		-			244			(446	)		(202	)
Results of GMIB, excluding adoption effect					125			(227	)		(102	)
Other		(5	)
Total gains (losses) included in income		(5	)		369			(673	)		(304	)
Gains (losses) included in other comprehensive income		(9	)		-			-			-
Gains (losses) required to adjust future policy benefits for certain annuities (1)		(18	)		-			-			-
Purchases, issuances, settlements		(6	)		(27	)		21			(6	)
Transfers in (out) of Level 3		32			-			-			-
Balance at 3/31/08	$	726		$	515		$	(965	)	$	(450	)
Total gains (losses) included in income attributable to instruments held at the reporting date	$	-		$	369		$	(673	)	$	(304	)

(1)

Amounts do not accrue to shareholders and are not reflected in the Company's revenues.

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

· realized investment gains (losses) for amounts related to fixed maturities and equity securities.

· guaranteed minimum income benefits expense for amounts related to GMIB assets and liabilities.

Reclassifications impacting Level 3 financial instruments are reported as transfers in (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.

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.

In the first quarter, losses on the GMIB liabilities and offsetting gains on the GMIB assets were primarily the result of declines in equity markets and risk free interest rates.

Separate account assets

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

(In millions)	Level 1		Level 2		Level 3		Total

Separate account assets:
Guaranteed separate accounts (See Note 14)	$	346	$	1,604	$	-	$	1,950
Non-guaranteed separate accounts (1)		1,598		2,632		411		4,641
Total separate account assets	$	1,944	$	4,236	$	411	$	6,591

(1)

Non-guaranteed separate accounts include $1.5 billion in assets supporting CIGNA's pension plan, including $353 million classified in Level 3.

Separate account assets in Levels 1 and 2 primarily include:

·	equity securities and corporate and structured bonds priced by independent pricing services as described above,

·	actively-traded institutional and retail mutual fund investments valued by the respective mutual fund companies, and

·	separate accounts managed and priced by an affiliate of the buyer of the retirement benefits business using their daily net asset value which is the exit price.

Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued at transaction price in the absence of market data indicating the carrying values may not be recoverable. Values may be adjusted when evidence is available to support such adjustments. Evidence may include market data as well as changes in the financial results and condition of the investment.

The following table summarizes the change in separate account assets reported in Level 3 for the first three months of 2008.

(In millions)

Balance at 1/1/08	$	403
Policyholder gains (losses) (1)		17
Purchases, issuances, settlements		(7	)
Transfers in (out) of Level 3		(2	)
Balance at 3/31/08	$	411


(1)	Included in this amount are losses of $1 million attributable to instruments still held at the reporting date.

Assets and liabilities measured at fair value on a non-recurring basis

Certain financial assets and liabilities are measured at fair value on a non-recurring basis, such as commercial mortgage loans held for sale. In the first quarter of 2008, the amount required to adjust these assets and liabilities to their fair value was insignificant.

NOTE 8– INVESTMENTS

Realized Investment Gains and Losses

The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for certain annuities:

	Three Months
	Ended
	March 31,
(In millions)	2008			2007
Fixed maturities	$	(26	)	$	4
Equity securities		-			10
Other investments,
including derivatives		40			7
Realized investment gains
from continuing operations,
before income taxes		14			21
Less income taxes		5			8
Realized investment gains
from continuing operations		9			13
Realized investment gains
from discontinued operations
before income taxes		-			18
Less income taxes		-			6
Realized investment gains
from discontinued operations		-			12
Net realized investment
gains	$	9		$	25

In 2008 and 2007, realized investment results from continuing operations primarily reflect:

·	gains from other investments on sales of equity interests in real estate limited liability entities in 2008 ($38 million pre-tax) and 2007 ($5 million pre-tax);

·	gains on sales of equity securities in 2007 ($10 million pre-tax);

·	losses on sales of fixed maturities in 2008 ($10 million pre-tax) versus gains in 2007 ($4 million pre-tax); and

·	losses on fixed maturities in 2008 due to asset write downs on securities where the Company no longer has intent to hold until recovery of fair value ($12 million pre-tax) and credit related impairments ($4 million pre-tax).

For the first three months of 2007, realized investment results from discontinued operations reflect gains on the sales of directly-owned real estate properties held for the production of investment income. Proceeds on these sales have been separately disclosed in the Company’s Consolidated Statement of Cash Flows.

Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equities on the Company’s balance sheet. These securities are carried at fair value with changes in fair value reported in realized investment gains and interest and dividends reported in net investment income. The Company elected fair value accounting for certain hybrid securities to simplify accounting and mitigate volatility in results of operations and financial condition.


(In millions)	As of March 31, 2008		As of December 31, 2007
Included in fixed maturities:
Trading securities
(amortized cost $17; $22)	$	17	$	22
Hybrid securities
(amortized cost $8; $11)		8		11
Total	$	25	$	33
Included in equity securities:
Hybrid securities
(cost $127; $114)	$	122	$	110

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

	Three Months
	Ended
	March 31,
(In millions)	2008			2007
Proceeds from sales	$	315		$	199
Gross gains from sales	$	2		$	15
Gross losses from sales	$	(12	)	$	(1	)

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 prospects of the issuer;

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

·	ability and intent to hold until recovery.

Excluding trading and hybrid securities, as of March 31, 2008, fixed maturities with a decline in fair value from cost (which were primarily investment grade corporate bonds) were as follows, including the length of time of such decline:


	Fair		Amortized		Unrealized Deprec-			Number
(Dollars in millions)	Value		Cost		iation			of Issues
Fixed Maturities:
One year or less:
Investment grade	$	2,184	$	2,298	$	(114	)		438
Below investment
grade	$	273	$	283	$	(10	)		154
More than one year:
Investment grade	$	595	$	642	$	(47	)		222
Below investment
grade	$	33	$	36	$	(3	)		10

The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. There were no equity securities with a significant decline in fair value from cost as of March 31, 2008.

NOTE 9 – REINSURANCE

In addition to the exposures for guaranteed minimum death benefit contracts discussed in Note 6 above and for guaranteed minimum income benefit contracts discussed in Notes 7 and 14, the Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance does not relieve the originating insurer of liability. The Company evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

Retirement benefits business. The Company had a reinsurance recoverable of $2.0 billion as of March 31, 2008, and $2.1 billion as of December 31, 2007 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable is secured primarily by fixed maturities and mortgage loans held in a business trust established by the reinsurer. This recoverable is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer.

Individual life and annuity reinsurance. The Company had a reinsurance recoverable of $4.7 billion at March 31, 2008 and December 31, 2007, from The Lincoln National Life Insurance Company that resulted from the 1998 sale of the Company’s individual life insurance and annuity business through an indemnity reinsurance arrangement.

Workers’ Compensation and Personal Accident Reinsurance. The Company's Run-off Reinsurance operations reinsured workers’ compensation and personal accident business in the London markets and the United States.

The Company purchased retrocessional coverage in these markets to reduce the risk of loss on these contracts. Disputes involving a number of these reinsurance and retrocessional contracts have been substantially resolved and some of the disputed contracts have been commuted.

The Company's payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on ceding companies’ claim payments relating to accidents and injuries. These claim payments can in some cases extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company's ultimate payment obligations and ultimate collection from retrocessionaires may not be known with certainty for some time.

The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of March 31, 2008, based on current information. However, it is possible that future developments could have a material adverse effect on the Company’s consolidated results of operations and, in certain situations, could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to the Company.

Other Reinsurance. The Company could have losses if reinsurers fail to indemnify the Company on other reinsurance arrangements, either because of reinsurer insolvencies or contract disputes. However, management does not expect charges for other unrecoverable reinsurance to have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.

Effects of reinsurance. In 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:

	Three Months
	Ended
	March 31,
(In millions)	2008		2007
Ceded premiums and fees
Individual life insurance
and annuity business sold	$	58	$	57
Other		59		54
Total	$	117	$	111
Reinsurance recoveries
Individual life insurance
and annuity business sold	$	89	$	92
Other		53		34
Total	$	142	$	126

NOTE 10 – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Pension benefits. Components of net pension cost were as follows:

	Three Months
	Ended
	March 31,
(In millions)	2008			2007
Service cost	$	18		$	19
Interest cost		61			58
Expected return on plan assets		(59	)		(52	)
Amortization of:
Net loss from past experience		14			31
Prior service cost		(2	)		-
Net pension cost	$	32		$	56

Other postretirement benefits. Components of net other postretirement benefit cost were as follows:

	Three Months
	Ended
	March 31,
(In millions)	2008			2007
Service cost	$	1		$	1
Interest cost		6			6
Amortization of:
Net gain from past experience		(2	)		(1	)
Prior service cost		(4	)		(4	)
Net other postretirement
benefit cost	$	1		$	2

NOTE 11 – DEBT

	March 31,		December 31,
(In millions)	2008		2007
Short-term:
Commercial paper	$	250	$	-
Current maturities of long-term debt		1		3
Total short-term debt	$	251	$	3
Long-term:
Uncollateralized debt:
7% Notes due 2011	$	222	$	222
6.375% Notes due 2011		226		226
5.375% Notes due 2017		250		250
6.35% Notes due 2018		300		-
6.37% Note due 2021		78		78
7.65% Notes due 2023		100		100
8.3% Notes due 2023		17		17
7.875% Debentures due 2027		300		300
8.3% Step Down Notes due 2033		83		83
6.15% Notes due 2036		500		500
Other		14		14
Total long-term debt	$	2,090	$	1,790

Under a universal shelf registration statement filed with the Securities and Exchange Commission (SEC), the Company issued $300 million of Notes on March 4, 2008, bearing interest at the rate of 6.35% per year, which is payable on March 15 and September 15 of each year beginning September 15, 2008. The Notes will mature on March 15, 2018.

The Company may redeem the Notes, at any time, in whole or in part, at a redemption price equal to the greater of:

·	100% of the principal amount of the Notes to be redeemed; or

·	the present value of the remaining principal and interest payments on the Notes being redeemed discounted at the applicable Treasury Rate plus 40 basis points.

On March 14, 2008, the Company entered into a new commercial paper program. Under the program, the Company is authorized to sell from time to time short-term unsecured commercial paper notes up to a maximum of $500 million. The proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. The Company uses the credit facility entered into in June 2007, as back-up liquidity to support the outstanding commercial paper. If at any time funds are not available on favorable terms under the program, the Company may use the Credit Agreement for funding. As of March 31, 2008, the Company had $250 million in commercial paper outstanding, at a weighted average interest rate of 3.14%, used in large part to finance the Great-West Healthcare acquisition.

NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) excludes amounts required to adjust future policy benefits for certain annuities.

Changes in accumulated other comprehensive income (loss) were as follows:

				Tax
				(Expense)			After-
(In millions)	Pre-tax			Benefit			tax
Three Months Ended March 31,
2008
Net unrealized depreciation, securities:
Net unrealized depreciation on
securities arising during the year	$	(30	)	$	11		$	(19	)
Plus: reclassification adjustment for
losses included in net income		26			(9	)		17
Net unrealized depreciation, securities	$	(4	)	$	2		$	(2	)
Net unrealized depreciation,
derivatives	$	(12	)	$	4		$	(8	)
Net translation of foreign
currencies	$	(8	)	$	2		$	(6	)
Postretirement benefits liability
adjustment:
Reclassification adjustment for
amortization of net losses from past
experience and prior service costs	$	6		$	(3	)	$	3
2007
Net unrealized depreciation, securities:
Implementation effect of
SFAS No. 155	$	(18	)	$	6		$	(12	)
Net unrealized appreciation on
securities arising during the year		4			(1	)		3
Less: reclassification adjustment for
gains included in net income		(14	)		5			(9	)
Net unrealized depreciation, securities	$	(28	)	$	10		$	(18	)
Net unrealized depreciation,
derivatives	$	(1	)	$	-		$	(1	)
Net translation of foreign
currencies	$	(1	)	$	1		$	-
Postretirement benefits liability
adjustment: