SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended~~September 30, 2009~~March 31, 2010


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

For the transition period from to

Commission file number1-08323

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)		(I.R.S. Employer 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.Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesþ Noo

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 filerþ		Accelerated filero		Non-accelerated filero		Smaller Reporting Companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Noþ

As of ~~October~~April 16, ~~2009, 273,436,995~~2010, 276,674,906 shares of the issuer’s common stock were outstanding.

CIGNA CORPORATION

INDEX


	Page
PART I FINANCIAL INFORMATION

Item 1. Financial Statements		1

Consolidated Statements of Income		1

Consolidated Balance Sheets		2

Consolidated Statements of Comprehensive Income and Changes in Total Equity		3

Consolidated Statements of Cash Flows		54

Notes to the Consolidated Financial Statements		65

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		4543

Item 3. Quantitative and Qualitative Disclosures About Market Risk		8473

Item 4. Controls and Procedures		8574

PART II OTHER INFORMATION

Item 1. Legal Proceedings		8675

Item ~~1. A.~~1A. Risk Factors		8776

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		8877

Item 6. Exhibits		8978

SIGNATURE		9079

INDEX TO EXHIBITS		E-1

Exhibit ~~3.2~~10.1
Exhibit ~~10.1~~10.2
Exhibit 10.3
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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

~~Part I.~~


Part I.		*FINANCIAL INFORMATION*

Item 1.

~~Item 1.~~FINANCIAL STATEMENTS

~~CIGNA Corporation~~
~~Consolidated Statements of Income~~

Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions, except per share amounts) 2009 2008 2009 2008
Revenues

Premiums and fees $ 3,985 $ 4,128 $ 12,049 $ 12,197
Net investment income 263 272 752 802
Mail order pharmacy revenues 316 300 944 882
Other revenues (61 ) 175 73 431
Realized investment gains (losses):
Other-than-temporary impairments on debt securities, net (16 ) (66 ) (42 ) (92 )
Other realized investment gains 30 43 2 64

Total realized investment gains (losses) 14 (23 ) (40 ) (28 )

Total revenues 4,517 4,852 13,778 14,284

Benefits and Expenses

Health Care medical claims expense 1,698 1,819 5,226 5,480
Other benefit expenses 754 1,049 2,551 2,877
Mail order pharmacy cost of goods sold 255 238 762 704
Guaranteed minimum income benefits (income) expense (19 ) 98 (215 ) 353
Other operating expenses 1,342 1,415 4,064 4,150

Total benefits and expenses 4,030 4,619 12,388 13,564

Income from Continuing Operations before Income Taxes
487 233 1,390 720

Income taxes (benefits):
Current 68 65 138 274
Deferred 89 (3 ) 279 (54 )

Total taxes 157 62 417 220

Income from Continuing Operations
330 171 973 500
Income from Discontinued Operations, Net of Taxes
— 1 1 3

Net Income
330 172 974 503
Less: Net Income Attributable to Noncontrolling Interest
1 1 2 2

Shareholders’ Net Income
$ 329 $ 171 $ 972 $ 501

Basic Earnings Per Share:

Shareholders’ income from continuing operations $ 1.20 $ 0.62 $ 3.55 $ 1.79
Shareholders’ income from discontinued operations — — — 0.01

Shareholders’ net income $ 1.20 $ 0.62 $ 3.55 $ 1.80

Diluted Earnings Per Share:

Shareholders’ income from continuing operations $ 1.19 $ 0.62 $ 3.54 $ 1.77
Shareholders’ income from discontinued operations — — — 0.01

Shareholders’ net income $ 1.19 $ 0.62 $ 3.54 $ 1.78

Dividends Declared Per Share $ — $ — $ 0.040 $ 0.040

Amounts Attributable to CIGNA:

Shareholders’ income from continuing operations $ 329 $ 170 $ 971 $ 498
Shareholders’ income from discontinued operations — 1 1 3

Shareholders’ Net Income
$ 329 $ 171 $ 972 $ 501

CIGNA Corporation

Consolidated Statements of Income


	Unaudited
	Three Months Ended
	March 31,
(In millions, except per share amounts)	2010			2009
Revenues
Premiums and fees	$	4,543		$	4,051
Net investment income		266			229
Mail order pharmacy revenues		348			312
Other revenues		54			217
Realized investment losses:
Other-than-temporary impairments on debt securities, net		(1	)		(17	)
Other realized investment losses		(5	)		(19	)

Total realized investment losses		(6	)		(36	)

Total revenues		5,205			4,773

Benefits and Expenses
Health Care medical claims expense		2,209			1,780
Other benefit expenses		879			1,108
Mail order pharmacy cost of goods sold		285			252
GMIB fair value gain		(4	)		(32	)
Other operating expenses		1,414			1,392

Total benefits and expenses		4,783			4,500

Income from Continuing Operations before Income Taxes		422			273

Income taxes (benefits):
Current		87			(85	)
Deferred		51			150

Total taxes		138			65

Income from Continuing Operations		284			208
Income from Discontinued Operations, Net of Taxes		—			1

Net Income		284			209
Less: Net Income Attributable to Noncontrolling Interest		1			1

Shareholders’ Net Income	$	283		$	208


Basic Earnings Per Share:
Shareholders’ income from continuing operations	$	1.03		$	0.76
Shareholders’ income from discontinued operations		—			—


Shareholders’ net income	$	1.03		$	0.76


Diluted Earnings Per Share:
Shareholders’ income from continuing operations	$	1.02		$	0.76
Shareholders’ income from discontinued operations		—			—


Shareholders’ net income	$	1.02		$	0.76


Dividends Declared Per Share	$	0.040		$	0.040


Amounts Attributable to CIGNA:
Shareholders’ income from continuing operations	$	283		$	207
Shareholders’ income from discontinued operations		—			1


Shareholders’ Net Income	$	283		$	208

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
September 30, December 31,
(In millions, except per share amounts) 2009 2008
Assets

Investments:
Fixed maturities, at fair value (amortized cost, $12,471; $11,492) $ 13,488 $ 11,781
Equity securities, at fair value (cost, $131; $140) 104 112
Commercial mortgage loans 3,607 3,617
Policy loans 1,530 1,556
Real estate 124 53
Other long-term investments 592 632
Short-term investments 201 236

Total investments 19,646 17,987
Cash and cash equivalents 836 1,342
Accrued investment income 265 225
Premiums, accounts and notes receivable, net 1,481 1,407
Reinsurance recoverables 6,689 6,973
Deferred policy acquisition costs 886 789
Property and equipment 827 804
Deferred income taxes, net 1,017 1,617
Goodwill 2,876 2,878
Other assets, including other intangibles 1,166 1,520
Separate account assets 6,964 5,864

Total assets $ 42,653 $ 41,406

Liabilities

Contractholder deposit funds $ 8,488 $ 8,539
Future policy benefits 8,304 8,754
Unpaid claims and claim expenses 4,006 4,037
Health Care medical claims payable 932 924
Unearned premiums and fees 424 414

Total insurance and contractholder liabilities 22,154 22,668
Accounts payable, accrued expenses and other liabilities 5,805 6,869
Short-term debt 104 301
Long-term debt 2,435 2,090
Nonrecourse obligations 23 16
Separate account liabilities 6,964 5,864

Total liabilities 37,485 37,808

Contingencies — Note 17

Shareholders’ Equity

Common stock (par value per share, $0.25; shares issued, 351) 88 88
Additional paid-in capital 2,510 2,502
Net unrealized appreciation (depreciation), fixed maturities $ 402 �� $ (147 )
Net unrealized appreciation, equity securities 4 7
Net unrealized depreciation, derivatives (27 ) (13 )
Net translation of foreign currencies (17 ) (60 )
Postretirement benefits liability adjustment (878 ) (861 )

Accumulated other comprehensive loss (516 ) (1,074 )
Retained earnings 8,303 7,374
Less treasury stock, at cost (5,228 ) (5,298 )

Total shareholders’ equity 5,157 3,592
Noncontrolling interest 11 6

Total equity 5,168 3,598

Total liabilities and equity $ 42,653 $ 41,406

Shareholders’ Equity Per Share
$ 18.86 $ 13.25

~~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 Total Equity~~
~~(In millions, except per share amounts)~~

Unaudited
2009 2008
Compre- Compre-
hensive Total hensive Total
Three Months Ended September 30 Income Equity Income Equity
Common Stock, September 30
$ 88 $ 88

Additional Paid-In Capital, July 1
2,506 2,493
Effects of stock issuance for employee benefit plans 4 5

Additional Paid-In Capital, September 30
2,510 2,498

Accumulated Other Comprehensive Loss, July 1
(837 ) (84 )
Net unrealized appreciation (depreciation), fixed maturities $ 302 302 $ (133 ) (133 )
Net unrealized appreciation (depreciation), equity securities (3 ) (3 ) 2 2

Net unrealized appreciation (depreciation) on securities 299 (131 )
Net unrealized appreciation (depreciation), derivatives (6 ) (6 ) 14 14
Net translation of foreign currencies 29 29 (56 ) (56 )
Postretirement benefits liability adjustment (1 ) (1 ) 3 3

Other comprehensive income (loss) 321 (170 )

Accumulated Other Comprehensive Loss, September 30
(516 ) (254 )

Retained Earnings, July 1
7,986 7,412
Shareholders’ net income 329 329 171 171
Effects of stock issuance for employee benefit plans (12 ) (1 )

Retained Earnings, September 30
8,303 7,582

Treasury Stock, July 1
(5,254 ) (5,155 )
Repurchase of common stock — (125 )
Other, primarily issuance of treasury stock for employee benefit plans 26 8

Treasury Stock, September 30
(5,228 ) (5,272 )

Shareholders’ Comprehensive Income and Shareholders’ Equity
650 5,157 1 4,642

Noncontrolling interest, July 1
9 7
Net income attributable to noncontrolling interest 1 1 1 1
Accumulated other comprehensive income attributable to noncontrolling interest 1 1 — —

Noncontrolling interest, September 30
2 11 1 8

Total Comprehensive Income and Total Equity
$ 652 $ 5,168 $ 2 $ 4,650

~~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 Total Equity~~
~~(In millions, except per share amounts)~~

Unaudited
2009 2008
Compre- Compre-
hensive Total hensive Total
Nine Months Ended September 30 Income Equity Income Equity
Common Stock, September 30
$ 88 $ 88

Additional Paid-In Capital, January 1
2,502 2,474
Effects of stock issuance for employee benefit plans 8 24

Additional Paid-In Capital, September 30
2,510 2,498

Accumulated Other Comprehensive Income (Loss), January 1
(1,074 ) 51
Implementation effect of updated guidance on other-than-temporary impairments (18 ) —
Net unrealized appreciation (depreciation), fixed maturities $ 567 567 $ (247 ) (247 )
Net unrealized appreciation (depreciation), equity securities (3 ) (3 ) 2 2

Net unrealized appreciation (depreciation) on securities 564 (245 )
Net unrealized appreciation (depreciation), derivatives (14 ) (14 ) 3 3
Net translation of foreign currencies 43 43 (79 ) (79 )
Postretirement benefits liability adjustment (17 ) (17 ) 16 16

Other comprehensive income (loss) 576 (305 )

Accumulated Other Comprehensive Loss, September 30
(516 ) (254 )

Retained Earnings, January 1
7,374 7,113
Shareholders’ net income 972 972 501 501
Effects of stock issuance for employee benefit plans (50 ) (21 )
Implementation effect of updated guidance on other-than-temporary impairments 18 —
Common dividends declared (per share: $0.04; $0.04) (11 ) (11 )

Retained Earnings, September 30
8,303 7,582

Treasury Stock, January 1
(5,298 ) (4,978 )
Repurchase of common stock — (347 )
Other, primarily issuance of treasury stock for employee benefit plans 70 53

Treasury Stock, September 30
(5,228 ) (5,272 )

Shareholders’ Comprehensive Income and Shareholders’ Equity
1,548 5,157 196 4,642

Noncontrolling interest, January 1
6 6
Net income attributable to noncontrolling interest 2 2 2 2
Accumulated other comprehensive income attributable to noncontrolling interest 3 3 — —

Noncontrolling interest, September 30
5 11 2 8

Total Comprehensive Income and Total Equity
$ 1,553 $ 5,168 $ 198 $ 4,650

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

~~CIGNA Corporation~~
~~Consolidated Statements of Cash Flows~~

Unaudited
Nine Months Ended September 30,
(In millions) 2009 2008
Cash Flows from Operating Activities

Net income $ 974 $ 503
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (1 ) (3 )
Income attributable to noncontrolling interest (2 ) (2 )
Insurance liabilities (271 ) 185
Reinsurance recoverables (1 ) 47
Deferred policy acquisition costs (60 ) (74 )
Premiums, accounts and notes receivable (72 ) 16
Other assets 350 (425 )
Accounts payable, accrued expenses and other liabilities (1,126 ) 717
Current income taxes (29 ) (5 )
Deferred income taxes 279 (54 )
Realized investment losses 40 28
Depreciation and amortization 207 181
Gains on sales of businesses (excluding discontinued operations) (24 ) (28 )
Proceeds from sales of mortgage loans held for sale 1 —
Other, net 4 (36 )

Net cash provided by operating activities 269 1,050

Cash Flows from Investing Activities

Proceeds from investments sold:
Fixed maturities 655 1,123
Equity securities 21 5
Commercial mortgage loans 23 48
Other (primarily short-term and other long-term investments) 485 279
Investment maturities and repayments:
Fixed maturities 791 660
Commercial mortgage loans 44 31
Investments purchased:
Fixed maturities (2,257 ) (2,237 )
Equity securities (8 ) (18 )
Commercial mortgage loans (121 ) (359 )
Other (primarily short-term and other long-term investments) (489 ) (344 )
Property and equipment purchases (218 ) (179 )
Acquisition of Great-West Healthcare, net of cash acquired — (1,301 )
Other (primarily other acquisitions/dispositions) — (12 )

Net cash used in investing activities (1,074 ) (2,304 )

Cash Flows from Financing Activities

Deposits and interest credited to contractholder deposit funds 1,011 989
Withdrawals and benefit payments from contractholder deposit funds (946 ) (901 )
Change in cash overdraft position 82 (3 )
Net change in short-term debt (199 ) 312
Net proceeds on issuance of long-term debt 346 297
Repayment of long-term debt (2 ) —
Repurchase of common stock — (340 )
Issuance of common stock 9 37
Common dividends paid (11 ) (14 )

Net cash provided by financing activities 290 377

Effect of foreign currency rate changes on cash and cash equivalents 9 (15 )

Net decrease in cash and cash equivalents (506 ) (892 )
Cash and cash equivalents, beginning of period 1,342 1,970

Cash and cash equivalents, end of period $ 836 $ 1,078

Supplemental Disclosure of Cash Information:

Income taxes paid, net of refunds $ 171 $ 267
Interest paid $ 107 $ 96

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

~~CIGNA CORPORATION~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~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 Corporation is the primary beneficiary (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, 2008.

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.

~~In preparing these interim consolidated financial statements, the Company has evaluated events that occurred between the balance sheet date and November 5, 2009.~~

Certain reclassifications and restatements have been made to prior period amounts to conform to the current presentation. In addition, certain restatements have been made in connection with the adoption of new accounting pronouncements. See Note 2 for further information.

~~Discontinued operations~~~~for the nine months ended September 30, 2009 primarily represented a tax benefit associated with a past divestiture, resolved at the completion of the 2005 and 2006 IRS examinations.~~

Discontinued operations for the third quarter of 2008 included a gain of $1 million after-tax from the settlement of certain issues related to a past divestiture. Discontinued operations for the nine months ended September 30, 2008 included a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.

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

~~Note 2 — Recent Accounting Pronouncements~~

~~Accounting Standards Codification.~~The Financial Accounting Standards Board (FASB) has established the Accounting Standards Codification (Codification or ASC) as the single source of authoritative accounting guidance effective for reporting in the third quarter of 2009. Therefore, the Company will use the Codification section or description when referring to GAAP except for very recent guidance that has not yet been incorporated into the Codification.

~~Other-than-temporary impairments.~~On April 1, 2009, the Company adopted the FASB’s updated guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost (ASC 320). It requires assessing the Company’s intent to sell or whether it is more likely than not that the Company will be required to sell such fixed maturities before their fair values recover. If so, an impairment loss is recognized in net income for the excess of the amortized cost over fair value. The Company must also determine if it does not expect to recover the amortized cost of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell these fixed maturities). In this case, the credit portion of the impairment loss is recognized in net income and the non-credit portion of an impairment loss is recognized in a separate component of shareholders’ equity. A reclassification adjustment from retained earnings to accumulated other comprehensive income was required for previously impaired fixed maturities that have a non-credit loss as of the date of adoption, less related tax effects.

The cumulative effect of adoption increased the Company’s retained earnings with an offsetting decrease to accumulated other comprehensive income of $18 million, with no overall change to shareholders’ equity. See Note 9 for information on the Company’s other-than-temporary impairments including additional required disclosures.

~~Noncontrolling interests in subsidiaries.~~Effective January 1, 2009, the Company adopted the FASB’s updated guidance on accounting for noncontrolling interests (ASC 810) through retroactive restatement of prior financial statements and reclassified $6 million of noncontrolling interest as of January 1, 2009 and 2008 from Accounts payable, accrued expenses and other liabilities to Noncontrolling interest in total equity. In addition, for the nine months ended September 30, 2008, net income of $2 million attributable to the noncontrolling interest has been reclassified to be included in net income, with a reduction to net income to determine net income attributable to the Company’s shareholders (“shareholders’ net income”).

~~Earnings per share.~~Effective January 1, 2009, the Company adopted the FASB’s updated earnings per share guidance (ASC 260) for determining participating securities which requires unvested restricted stock awards that contain rights to nonforfeitable dividends to be included in the denominator of both basic and diluted earnings per share (“EPS”) calculations. Prior period EPS data have been restated to reflect the adoption of this guidance. See Note 4 for the effects of this guidance on previously reported EPS amounts.

~~Business combinations.~~Effective January 1, 2009, the Company adopted the FASB’s guidance on accounting for business combinations (ASC 805) that requires fair value measurements for all future acquisitions, including contingent purchase price and certain contingent assets or liabilities of the entity to be acquired, requires acquisition related and restructuring costs to be expensed as incurred and requires changes in tax items after the acquisition date to be reported in income tax expense. There were no effects to the Company’s Consolidated Financial Statements at adoption.

~~Derivatives disclosures.~~Effective January 1, 2009, the Company expanded its disclosures on derivatives and hedging activities to comply with the FASB’s updated guidance (ASC 815) that requires the Company to disclose the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 10 for information on the Company’s derivative financial instruments including these additional required disclosures.

~~Fair value measurements.~~Effective January 1, 2008, the Company adopted the FASB’s fair value disclosure and measurement guidance (ASC 820) that 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). In addition, the FASB amended the fair value guidance in 2008 to provide additional guidance for determining the fair value of a financial asset when the market for that instrument is not active. See Note 8 for information on the Company’s fair value measurements.

The Company carries certain financial instruments at fair value in the financial statements including approximately $13.8 billion in invested assets at September 30, 2009. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in 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 this fair value guidance, there were no effects to the Company’s measurements of fair values for financial instruments other than for GMIB assets and liabilities discussed below. In addition, there were no effects to the Company’s measurements of financial assets of adopting the FASB’s 2008 amendment to this fair value guidance.

At adoption, the Company was required to change certain assumptions used to estimate the fair values of GMIB assets and liabilities. 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 exit price, rather than using historical market data and actual experience to establish the Company’s future expectations. Certain of these assumptions have limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates. On adoption, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance.

The Company’s results of operations related to this business are expected to continue to be volatile in future periods because several underlying assumptions will be based on current market-observable inputs which will likely change each period. See Note 8 for additional information.

During the first nine months of 2009, the Company adopted FASB guidance that clarifies how to determine fair value for various assets and liabilities with no material effects to the Company’s Consolidated Financial Statements.

In the third quarter of 2009, the FASB issued guidance on measuring the fair value of liabilities and for investments in certain entities to provide a practical alternative under certain conditions to determine the fair value of these investments using their net asset value or its equivalent. The Company expects no material effects on its Consolidated Financial Statements at adoption in the fourth quarter of 2009.

~~Transfers of financial assets.~~In 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,” which changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a “qualifying special purpose entity” when assessing transfers of financial instruments. The recognition and measurement provisions of this guidance must be applied to transfers that occur on or after January 1, 2010. On adoption, the Company does not expect a material effect to the results of operations or financial condition.

~~Variable interest entities.~~In 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” which amended guidance requiring periodic qualitative analyses to determine whether a variable interest entity must be consolidated by the Company. In addition, this guidance requires the Company to disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity. Any changes in consolidated entities resulting from these requirements must be applied through retrospective restatement of prior financial statements beginning in 2010. The Company is presently evaluating the impact of these new requirements.

~~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” or the “acquired business”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional employer groups. Great-West Healthcare’s offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed through a combination of cash and the issuance of both short and long-term debt.

In the first quarter of 2009, the Company completed its allocation of the total purchase price to the tangible and intangible net assets acquired based on management’s estimates of their fair values without material changes from December 31, 2008.

~~The results of Great-West Healthcare are included in the Company’s Consolidated Financial Statements from the date of acquisition.~~

The following table presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2008. The pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of that date or what such results will be for any future periods.

(Unaudited)
Nine Months Ended
September 30,
(In millions, except per share amounts) 2008
Total revenues $ 14,652
Shareholders’ income from continuing operations $ 526
Shareholders’ net income $ 529
Earnings per share:
Shareholders’ income from continuing operations
Basic $ 1.89
Diluted $ 1.87
Shareholders’ net income
Basic $ 1.90
Diluted $ 1.88

~~Note 4 — Earnings Per Share~~

~~Basic and diluted earnings per share were computed as follows:~~

Effect of
(In millions, except per share amounts) Basic Dilution Diluted
Three Months Ended September 30,

2009

Shareholders’ income from continuing operations
$ 329 $ — $ 329

Shares (in thousands):
Weighted average 274,398 — 274,398
Options — 1,732 1,732

Total shares
274,398 1,732 276,130

EPS
$ 1.20 $ (0.01 ) $ 1.19

2008

Shareholders’ income from continuing operations
$ 170 $ — $ 170

Shares (in thousands):
Weighted average 275,141 — 275,141
Options — 1,665 1,665

Total shares
275,141 1,665 276,806

EPS
$ 0.62 $ — $ 0.62

Effect of
(In millions, except per share amounts) Basic Dilution Diluted
Nine Months Ended September 30,

2009

Shareholders’ income from continuing operations
$ 971 $ — $ 971

Shares (in thousands):
Weighted average 273,698 — 273,698
Options — 993 993

Total shares
273,698 993 274,691

EPS
$ 3.55 $ (0.01 ) $ 3.54

2008

Shareholders’ income from continuing operations
$ 498 $ — $ 498

Shares (in thousands):
Weighted average 278,912 — 278,912
Options — 2,035 2,035

Total shares
278,912 2,035 280,947

EPS
$ 1.79 $ (0.02 ) $ 1.77

As described in Note 2, effective in 2009, the Company adopted the FASB’s new guidance for determining participating securities which requires the Company’s unvested restricted stock awards to be included in weighted average shares instead of being considered a common stock equivalent. Prior period share information has been restated as follows.

Three Months Ended September 30, 2008
Basic Diluted
As originally As originally
reported As adjusted reported As adjusted
Shareholders’ income from continuing operations $ 0.62 $ 0.62 $ 0.62 $ 0.62

Nine Months Ended September 30, 2008
Basic Diluted
As originally As originally
reported As adjusted reported As adjusted
Shareholders’ income from continuing operations $ 1.80 $ 1.79 $ 1.78 $ 1.77

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

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2009 2008 2009 2008
Antidilutive options 8.7 4.9 10.0 4.5

~~The Company held 77,475,700 shares of common stock in Treasury as of September 30, 2009, and 78,693,702 shares as of September 30, 2008.~~

~~Note 5 — Health Care Medical Claims Payable~~

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

September 30, December 31,
(In millions) 2009 2008
Incurred but not yet reported $ 814 $ 782
Reported claims in process 101 114
Other medical expense payable 17 28

Medical claims payable $ 932 $ 924

~~Activity in medical claims payable was as follows:~~

For the period ended
September 30, December 31,
(In millions) 2009 2008
Balance at January 1, $ 924 $ 975
Less: Reinsurance and other amounts recoverable 211 258

Balance at January 1, net 713 717
Acquired April 1, 2008 net — 90
Incurred claims related to:
Current year 5,265 7,312
Prior years (39 ) (60 )

Total incurred 5,226 7,252
Paid claims related to:
Current year 4,560 6,716
Prior years 643 630

Total paid 5,203 7,346
Ending Balance, net 736 713
Add: Reinsurance and other amounts recoverable 196 211

Ending Balance $ 932 $ 924

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 nine months ended September 30, 2009, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $39 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction in medical claims payable of $18 million, or 0.2% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $21 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business.

For the year ended December 31, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29 million, or 0.4% 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 of the medical claims payable of $31 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.

The favorable impacts in 2009 and 2008 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was not material for the three months and nine months ended September 30, 2009 and 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 shareholders’ net income recognized for the following reasons:

First, due to the nature of the Company’s retrospectively experience-rated business, only adjustments to medical claims payable on accounts in deficit affect shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue directly to the policyholder with no impact on the Company’s shareholders’ net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.

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

The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the Company’s 2008 Form 10-K.

~~Note 6 — Cost Reduction~~

During 2009, the Company continued its previously announced comprehensive review to reduce the operating expenses of its ongoing businesses. As a result, the Company recognized severance related charges in other operating expenses as follows:

~~during the third quarter of 2009, a charge of $10 million pre-tax ($7 million after-tax), for severance resulting from reductions of approximately 230 positions in its workforce; and~~

~~during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax), for severance resulting from reductions of approximately 480 positions in its workforce.~~

~~Substantially all of these charges were recorded in the Health Care segment, and are expected to be paid in cash by June 30, 2010.~~

~~Cost reduction activity for 2009 was as follows:~~

(In millions) Severance Real estate Total
Balance, January 1, 2009 $ 44 $ 11 $ 55
Add: Second quarter 2009 charge 14 — 14
Add: Third quarter 2009 charge 10 — 10

Subtotal — cost reduction actions 68 11 79
Less: Payments 36 3 39

Balance, September 30, 2009 $ 32 $ 8 $ 40

~~Note 7 — 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 guaranteed minimum death benefits (GMDB), also known as variable annuity death benefits (VADBe), 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. In periods of declining equity markets and in periods of flat equity markets following a decline, the Company’s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company’s liabilities for these guaranteed minimum death benefits decrease.

In order to substantially reduce the equity market exposures relating to guaranteed minimum death benefit contracts, the Company operates a dynamic hedge program (GMDB equity hedge program), using exchange-traded futures contracts. The hedge program is designed to substantially offset both positive and negative impacts of changes in equity markets on the GMDB liability. The hedge program involves detailed, daily monitoring of equity market movements and rebalancing the futures contracts within established parameters. While the hedge program is actively managed, it may not exactly offset changes in the GMDB liability due to, among other things, divergence between the performance of the underlying mutual funds and the hedge instruments, high levels of volatility in the equity markets, and differences between actual contractholder behavior and what is assumed. In addition, underlying mutual fund data is not reported and incorporated into the required hedge position on a real time basis, which also impacts the performance of the hedge program. Although this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it is designed and operated to substantially reduce equity market exposures resulting from this product. The results of these futures contracts are included in other revenue and amounts reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits and expenses, consistent with GAAP when a premium deficiency exists.

The GMDB reinsurance business is considered premium deficient because the expected present value of future claims and expenses exceeds the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company performs a reserve review on a quarterly basis using current market conditions and 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.

The Company had future policy benefit reserves for GMDB contracts of $1.4 billion as of September 30, 2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder’s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance refers to market rates to be earned over the life of the GMDB equity hedge program, and market volatility refers to market fluctuation. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility) used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

~~The following provides information about the Company’s reserving methodology and assumptions for GMDB as of September 30, 2009:~~

The reserve represents 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 reserve includes an estimate for future partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-20% depending on the net amount at risk for each policy and whether surrender charges apply.

The mean investment performance assumption is 5% considering the Company’s GMDB equity hedge program using futures contracts. This is reduced by fund fees ranging from 1-3% across all funds. The results of futures contracts are reflected in the liability calculation as a component of investment returns.

The volatility assumption is based on a review of historical monthly returns for each key index (e.g. S&P 500) over a period of at least ten years. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The assumption is 16-30%, varying by equity fund type; 4-10%, varying by bond fund type; and 2% for money market funds. These volatility assumptions are used along with the mean investment performance assumption to project future return scenarios.

~~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 annual lapse rate assumption is 0-21%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.~~

~~The reserve includes a provision for future policy maintenance and hedging expenses.~~

Although the year to date results include a first quarter charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves, no additional reserve strengthening has been required for GMDB since the first quarter of 2009, primarily due to the stabilization and recovery of equity markets. The components of the first quarter charge were:

~~adverse impacts of overall market declines of $50 million pre-tax ($32 million after-tax)~~CIGNA Corporation

Consolidated Balance Sheets


				Unaudited
				As of						As of
				March 31,						December 31,
(In millions, except per share amounts)				2010						2009
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $12,958; $12,580)				$	13,977					$	13,443
Equity securities, at fair value (cost, $141; $137)					122						113
Commercial mortgage loans					3,493						3,522
Policy loans					1,529						1,549
Real estate					160						124
Other long-term investments					597						595
Short-term investments					188						493

Total investments					20,066						19,839
Cash and cash equivalents					1,299						924
Accrued investment income					278						238
Premiums, accounts and notes receivable, net					1,515						1,361
Reinsurance recoverables					6,520						6,597
Deferred policy acquisition costs					1,011						943
Property and equipment					860						862
Deferred income taxes, net					941						1,029
Goodwill					2,879						2,876
Other assets, including other intangibles					1,004						1,056
Separate account assets					7,491						7,288

Total assets				$	43,864					$	43,013

Liabilities
Contractholder deposit funds				$	8,506					$	8,484
Future policy benefits					8,116						8,136
Unpaid claims and claim expenses					3,996						3,968
Health Care medical claims payable					1,341						921
Unearned premiums and fees					432						427

Total insurance and contractholder liabilities					22,391						21,936
Accounts payable, accrued expenses and other liabilities					5,606						5,797
Short-term debt					326						104
Long-term debt					2,212						2,436
Nonrecourse obligations					23						23
Separate account liabilities					7,491						7,288

Total liabilities					38,049						37,584

Contingencies — Note 17
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 351)					88						88
Additional paid-in capital					2,522						2,514
Net unrealized appreciation, fixed maturities	$	450					$	378
Net unrealized appreciation, equity securities		4						4
Net unrealized depreciation, derivatives		(26	)					(30	)
Net translation of foreign currencies		(8	)					(12	)
Postretirement benefits liability adjustment		(950	)					(958	)

Accumulated other comprehensive loss					(530	)					(618	)
Retained earnings					8,840						8,625
Less treasury stock, at cost					(5,119	)					(5,192	)

Total shareholders’ equity					5,801						5,417
Noncontrolling interest					14						12

Total equity					5,815						5,429

Total liabilities and equity				$	43,864					$	43,013

Shareholders’ Equity Per Share				$	20.97					$	19.75

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 Total Equity


	Unaudited
	2010					2009
	Compre-					Compre-
(In millions, except per share amounts)	hensive		Total			hensive			Total
Three Months Ended March 31,	Income		Equity			Income			Equity
Common Stock, January 1 and March 31,			$	88					$	88

Additional Paid-In Capital, January 1,				2,514						2,502
Effects of stock issuance for employee benefit plans				8						3

Additional Paid-In Capital, March 31,				2,522						2,505

Accumulated Other Comprehensive Loss, January 1,				(618	)					(1,074	)
Net unrealized appreciation, fixed maturities	$	72		72		$	53			53
Net unrealized depreciation, equity securities		—		—			(2	)		(2	)

Net unrealized appreciation on securities		72					51
Net unrealized appreciation, derivatives		4		4			11			11
Net translation of foreign currencies		4		4			(28	)		(28	)
Postretirement benefits liability adjustment		8		8			4			4

Other comprehensive income		88					38

Accumulated Other Comprehensive Loss, March 31,				(530	)					(1,036	)

Retained Earnings, January 1,				8,625						7,374
Shareholders’ net income		283		283			208			208
Effects of stock issuance for employee benefit plans				(57	)					(35	)
Common dividends declared (per share: $0.04; $0.04)				(11	)					(11	)

Retained Earnings, March 31,				8,840						7,536

Treasury Stock, January 1,				(5,192	)					(5,298	)
Other, primarily issuance of treasury stock for employee benefit plans				73						36

Treasury Stock, March 31,				(5,119	)					(5,262	)

Shareholders’ Comprehensive Income and Shareholders’ Equity		371		5,801			246			3,831

Noncontrolling interest, January 1,				12						6
Net income attributable to noncontrolling interest		1		1			1			1
Accumulated other comprehensive income attributable to noncontrolling interest		1		1			—			—

Noncontrolling interest, March 31,		2		14			1			7

Total Comprehensive Income and Total Equity	$	373	$	5,815		$	247		$	3,838

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

CIGNA Corporation

Consolidated Statements of Cash Flows


	Unaudited
	Three Months Ended March 31,
(In millions)	2010			2009
Cash Flows from Operating Activities
Net income	$	284		$	209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		61			69
Realized investment losses		6			36
Deferred income taxes		51			150
Gains on sale of businesses (excluding discontinued operations)		(6	)		(8	)
Income from discontinued operations, net of taxes		—			(1	)
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable		(148	)		(124	)
Reinsurance recoverables		23			(11	)
Deferred policy acquisition costs		(60	)		(28	)
Other assets		41			78
Insurance liabilities		406			273
Accounts payable, accrued expenses and other liabilities		(299	)		(464	)
Current income taxes		79			(90	)
Other, net		(44	)		(17	)

Net cash provided by operating activities		394			72

Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		240			119
Commercial mortgage loans		1			—
Other (primarily short-term and other long-term investments)		443			267
Investment maturities and repayments:
Fixed maturities		172			199
Commercial mortgage loans		11			6
Investments purchased:
Fixed maturities		(752	)		(543	)
Equity securities		(4	)		—
Commercial mortgage loans		(32	)		(8	)
Other (primarily short-term and other long-term investments)		(145	)		(146	)
Property and equipment purchases		(52	)		(60	)
Other (primarily other acquisitions/dispositions)		(5	)		—

Net cash used in investing activities		(123	)		(166	)

Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		354			373
Withdrawals and benefit payments from contractholder deposit funds		(309	)		(322	)
Change in cash overdraft position		40			14
Net change in short-term debt		—			74
Repayment of long-term debt		(2	)		(2	)
Issuance of common stock		24			—

Net cash provided by financing activities		107			137

Effect of foreign currency rate changes on cash and cash equivalents		(3	)		(10	)

Net increase in cash and cash equivalents		375			33
Cash and cash equivalents, January 1,		924			1,342

Cash and cash equivalents, March 31,	$	1,299		$	1,375

Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	6		$	9
Interest paid	$	32		$	35

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

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

The Consolidated Financial Statements include the accounts of CIGNA Corporation and its significant subsidiaries (referred to collectively as “the Company”). Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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

Discontinued operations for the three months ended March 31, 2009 represented a $1 million after-tax benefit from the settlement of certain issues related to a past divestiture.

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

Note 2 — Recent Accounting Pronouncements

Variable interest entities.Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance that requires ongoing qualitative analysis to determine whether a variable interest entity must be consolidated based on the entity’s purpose and design, the Company’s ability to direct the entity’s activities that most significantly impact its economic performance, and the Company’s right or obligation to participate in that performance (ASC 810). A variable interest entity is insufficiently capitalized or is not controlled by its equity owners through voting or similar rights. These amendments must be applied to qualifying special-purpose entities and troubled debt restructures formerly excluded from such analysis. On adoption, the Company was not required to consolidate any variable interest entities and there were no effects to its results of operations or financial condition. Although consolidation was not required, disclosures about the Company’s involvement with variable interest entities have been provided in Note 10.

Transfers of financial assets.Effective January 1, 2010, the Company adopted the FASB’s guidance for accounting for transfers of financial assets (ASC 860) that changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a “qualifying special purpose entity” when assessing transfers of financial instruments. On adoption, there were no effects to the Company’s results of operations or financial condition.

Fair value measurements.The Company adopted the FASB’s updated guidance on fair value measurements (ASU 2010-06) in the first quarter of 2010, which requires separate disclosures of significant transfers between levels in the fair value hierarchy. See Note 7 for additional information.

Other-than-temporary impairments.On April 1, 2009, the Company adopted the FASB’s updated guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost (ASC 320). A reclassification adjustment from retained earnings to accumulated other comprehensive income was required for previously impaired fixed maturities that had a non-credit loss as of the date of adoption, net of related tax effects.

The cumulative effect of adoption increased the Company’s retained earnings in the second quarter of 2009 with an offsetting decrease to accumulated other comprehensive income of $18 million, with no overall change to shareholders’ equity. See Note 8 for information on the Company’s other-than-temporary impairments including additional required disclosures.

Note 3 — Earnings Per Share (“EPS”)

Basic and diluted earnings per share were computed as follows:


(Dollars in millions, except per share amounts) Three Months Ended March 31,	Basic		Effect of Dilution			Diluted
2010
Shareholders’ income from continuing operations	$	283				$	283

Shares (in thousands):
Weighted average		275,688					275,688
Common stock equivalents				2,412			2,412

Total shares		275,688		2,412			278,100

EPS	$	1.03	$	(0.01	)	$	1.02

2009
Shareholders’ income from continuing operations	$	207				$	207

Shares (in thousands):
Weighted average		272,591					272,591
Common stock equivalents				277			277

Total shares		272,591		277			272,868

EPS	$	0.76	$	—		$	0.76


	Three Months Ended
	March 31,
(In millions)	2010		2009
Antidilutive options		5.2		11.3

The Company held 74,283,513 shares of common stock in Treasury as of March 31, 2010, and 78,169,190 shares as of March 31, 2009.

Note 4 — Health Care Medical Claims Payable


	March 31,		December 31,
(In millions)	2010		2009
Incurred but not yet reported	$	1,185	$	790
Reported claims in process		137		114
Other medical expense payable		19		17

Medical claims payable	$	1,341	$	921

Activity in medical claims payable was as follows:


	For the period ended
	March 31,			December 31,
(In millions)	2010			2009
Balance at January 1,	$	921		$	924
Less: Reinsurance and other amounts recoverable		206			211

Balance at January 1, net		715			713

Incurred claims related to:
Current year		2,259			6,970
Prior years		(50	)		(43	)

Total incurred		2,209			6,927
Paid claims related to:
Current year		1,321			6,278
Prior years		507			647

Total paid		1,828			6,925
Ending Balance, net		1,096			715
Add: Reinsurance and other amounts recoverable		245			206

Ending Balance	$	1,341		$	921

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, 2010, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $50 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2009. Actual completion factors resulted in a reduction in medical claims payable of $24 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $26 million, or 0.4% of the current year incurred claims as reported for the year ended December 31, 2009 for the insured book of business.

For the year ended December 31, 2009, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $43 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction of the medical claims payable of $21 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $22 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business.

The favorable impacts in 2010 and 2009 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.

The corresponding impact of prior year development on shareholders’ net income was not material for the three months ended March 31, 2010 and 2009. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:

The determination of liabilities for Health Care medical claims payable required the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2009 Form 10-K.

Note 5 — Cost Reduction

As part of its strategy, the Company has undertaken several initiatives to realign its organization and consolidate support functions in an effort to increase efficiency and responsiveness to customers and to reduce costs.

During 2008 and 2009, the Company conducted a comprehensive review to reduce the operating expenses of its ongoing businesses (“cost reduction program”). As a result, the Company recognized severance-related and real estate charges in other operating expenses.

Substantially all of these charges were recorded in the Health Care segment, and are expected to be paid in cash by the end of 2010.

Cost reduction activity for 2010 was as follows:


(In millions)	Severance		Real estate		Total
Balance, January 1, 2010	$	33	$	8	$	41
Less: Payments		10		1		11

Balance, March 31, 2010	$	23	$	7	$	30

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 (“GMDB”), also known as variable annuity death benefits (“VADBe”), 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. In periods of declining equity markets and in periods of flat equity markets following a decline, the Company’s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company’s liabilities for these guaranteed minimum death benefits decrease.

In order to substantially reduce the equity market exposures relating to guaranteed minimum death benefit contracts, the Company operates a dynamic hedge program (“GMDB equity hedge program”), using exchange-traded futures contracts. The hedge program is designed to offset both positive and negative impacts of changes in equity markets on the GMDB liability. The hedge program involves detailed, daily monitoring of equity market movements and rebalancing the futures contracts within established parameters. While the hedge program is actively managed, it may not exactly offset changes in the GMDB liability due to, among other things, divergence between the performance of the underlying mutual funds and the hedge instruments, high levels of volatility in the equity markets, and differences between actual contractholder behavior and what is assumed. The performance of the underlying mutual funds compared to the hedge instruments is further impacted by a time lag, since the data is not reported and incorporated into the required hedge position on a real time basis. Although this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it is designed to reduce and is effective in reducing equity market exposures resulting from this product. The results of the futures contracts are included in other revenue and amounts reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits and expenses.

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. As a result, the Company increased its reserves. Since that time, the Company has tested for premium deficiency by performing a reserve review on a quarterly basis using current market conditions and 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.

The Company had future policy benefit reserves for GMDB contracts of $1.2 billion as of March 31, 2010, and $1.3 billion as of December 31, 2009. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder’s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance for underlying equity mutual funds refers to market rates expected to be earned on the hedging instruments over the life of the GMDB equity hedge program, and for underlying fixed income mutual funds refers to the expected market return over the life of the contracts. Market volatility refers to market fluctuation. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, claim mortality, interest rates and volatility) used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

The following provides information about the Company’s reserving methodology and assumptions for GMDB as of March 31, 2010:

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). This is comprised of (a) $39 million pre-tax ($25 million after-tax) primarily related to the provision for future partial surrenders, and (b) $11 million pre-tax ($7 million after-tax) related to declines in the values of contractholders’ non-equity investments such as bond funds, neither of which is included in the GMDB equity hedge program;

adverse volatility-related impacts of $11 million pre-tax ($7 million after-tax) due to turbulent equity market conditions, including higher than expected claims and the performance of the diverse mix of equity fund investments held by contractholders being different than expected; and

adverse interest rate impacts of $12 million pre-tax ($8 million after-tax). Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance.

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

For the period ended
September 30, December 31,
(In millions) 2009 2008
Balance at January 1 $ 1,609 $ 848
Add: Unpaid Claims 34 21
Less: Reinsurance and other amounts recoverable 83 19

Balance at January 1, net 1,560 850
Add: Incurred benefits (86 ) 822
Less: Paid benefits 139 112

Ending balance, net 1,335 1,560
Less: Unpaid Claims 39 34
Add: Reinsurance and other amounts recoverable 56 83

Ending balance $ 1,352 $ 1,609

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 0-21% depending on the net amount at risk for each policy and whether surrender charges apply.

The assumed mean investment performance for the underlying equity mutual funds considers the Company’s GMDB equity hedge program using futures contracts, and is based on the Company’s view that short-term interest rates will average 5% over future periods, but considers that current short-term rates are less than 5%. The mean investment performance assumption for the underlying fixed income mutual funds (bonds and money market) is 5% based on a review of historical returns. The investment performance for underlying equity and fixed income mutual funds is reduced by fund fees ranging from 1-3% across all funds. The results of futures contracts are reflected in the liability calculation as a component of investment returns.

The volatility assumption is based on a review of historical monthly returns for each key index (e.g. S&P 500) over a period of at least ten years. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The assumption is 16-27%, varying by equity fund type; 4-10%, varying by bond fund type; and 2% for money market funds. These volatility assumptions are used along with the mean investment performance assumption to project future return scenarios.

The discount rate is 5.75%.

The claim mortality assumption is 65-89% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000. For certain contracts, a spousal beneficiary is allowed to elect to continue a contract by becoming its new owner, thereby, postponing the death claim rather than receiving the death benefit currently. For certain issuers of these contracts, the claim mortality assumption depends on age, gender, and net amount at risk for the policy.

The lapse rate assumption is 0-21%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

No reserve strengthening was required for GMDB in the first quarter of 2010, primarily due to the stabilization and recovery of equity markets.

In the first quarter of 2009, the Company reported a loss related to GMDB of $75 million pre-tax ($49 million after-tax), which included a charge of $73 million pre-tax ($47 million after-tax) to strengthen GMDB reserves. The reserve strengthening primarily reflected an increase in the provision for future partial surrenders due to market declines, adverse volatility-related impacts due to turbulent equity market conditions, and interest rate impacts.

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


	For the period ended
	March 31,			December 31,
(In millions)	2010			2009
Balance at January 1	$	1,285		$	1,609
Add: Unpaid Claims		36			34
Less: Reinsurance and other amounts recoverable		53			83

Balance at January 1, net		1,268			1,560
Add: Incurred benefits		(23	)		(122	)
Less: Paid benefits		27			170

Ending balance, net		1,218			1,268
Less: Unpaid Claims		36			36
Add: Reinsurance and other amounts recoverable		49			53

Ending balance	$	1,231		$	1,285

Benefits paid and incurred are net of ceded amounts. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include the charges discussed above. As discussed below, losses or gains have been recorded in other revenues as a result of the GMDB equity hedge program to reduce equity market exposures.

The aggregate value of the underlying mutual fund investments was $17.2 billion as of March 31, 2010 and December 31, 2009. The death benefit coverage in force was $6.3 billion as of March 31, 2010 and $7.0 billion as of December 31, 2009. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 570,000 as of March 31, 2010 and 590,000 as of December 31, 2009).

As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity market and foreign currency risks associated with this business. The notional amount of futures contract positions held by the Company at March 31, 2010 was $1.0 billion. The Company recorded in other revenues pre-tax losses of $45 million for the three months ended March 31, 2010, and pre-tax gains of $117 million for the three months ended March 31, 2009.

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

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 unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).

The Company performs ongoing analyses of prices used to value the Company’s invested assets to determine that they represent appropriate estimates of fair value. This process involves quantitative and qualitative analysis including reviews of pricing methodologies, judgments of valuation inputs, the significance of any unobservable inputs, pricing statistics and trends. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. These procedures are overseen by the Company’s investment professionals.

Financial Assets and Financial Liabilities Carried at Fair Value

The following tables provide information as of March 31, 2010 and December 31, 2009 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.


	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
March 31, 2010	Identical Assets		Observable Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	36	$	528	$	1	$	565
State and local government		—		2,523		—		2,523
Foreign government		—		1,154		15		1,169
Corporate		—		8,658		351		9,009
Federal agency mortgage-backed		—		30		—		30
Other mortgage-backed		—		114		8		122
Other asset-backed		—		84		475		559

Total fixed maturities⁽¹⁾		36		13,091		850		13,977
Equity securities		2		86		34		122

Subtotal		38		13,177		884		14,099
Short-term investments		—		188		—		188
GMIB assets⁽²⁾		—		—		479		479
Other derivative assets⁽³⁾		—		18		—		18

Total financial assets at fair value, excluding separate accounts	$	38	$	13,383	$	1,363	$	14,784

Financial liabilities at fair value:
GMIB liabilities	$	—	$	—	$	886	$	886
Other derivative liabilities		—		27		—		27

Total financial liabilities at fair value	$	—	$	27	$	886	$	913


(1)		Fixed maturities includes $320 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $56 million of appreciation for securities classified in Level 3.

(2)		The guaranteed minimum income benefit (“GMIB”) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of ~~ceded amounts. Incurred benefits reflect~~a liability of $16 million for the ~~favorable or unfavorable impact~~future cost of ~~a rising or falling equity market on the liability, and include the charges discussed above. As discussed below, losses or gains have been recorded in other revenues as a result~~reinsurance.

(3)		Other derivative assets includes $14 million of ~~the GMDB equity hedge program to reduce equity market exposures.~~ As of September 30, 2009, the aggregate value of the underlying mutual fund investments was $17.1 billion. The death benefit coverage in force as of that date (representing the estimated amount of death claims that the Company would have to pay if all of the approximately 600,000 contractholders had submitted death claims as of that date) was $7.7 billion. As of December 31, 2008, the aggregate value of the underlying mutual fund investments was $16.3 billion. The death benefit coverage in force as of that date (representing the estimated amount of death claims that the Company would have to pay if all of the approximately 650,000 contractholders had submitted death claims as of that date) was $11.1 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments. As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the equity market exposures of this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises. In addition, the Company uses foreign currency futures contracts to reduce the international equity marketinterest rate and foreign currency ~~risks associated with this business.~~ swaps qualifying as cash flow hedges and $4 million of interest rate swaps not designated as accounting hedges.


	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
December 31, 2009	Assets		Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency	$	43	$	527	$	1	$	571
State and local government		—		2,521		—		2,521
Foreign government		—		1,056		14		1,070
Corporate		—		8,241		344		8,585
Federal agency mortgage-backed		—		34		—		34
Other mortgage-backed		—		114		7		121
Other asset-backed		—		92		449		541

Total fixed maturities⁽¹⁾		43		12,585		815		13,443
Equity securities		2		81		30		113

Subtotal		45		12,666		845		13,556
Short-term investments		—		493		—		493
GMIB assets⁽²⁾		—		—		482		482
Other derivative assets⁽³⁾		—		16		—		16

Total financial assets at fair value, excluding separate accounts	$	45	$	13,175	$	1,327	$	14,547

Financial liabilities at fair value:
GMIB liabilities	$	—	$	—	$	903	$	903
Other derivative liabilities		—		30		—		30

Total financial liabilities at fair value	$	—	$	30	$	903	$	933


(1)		Fixed maturities includes $274 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $38 million of appreciation for securities classified in Level 3.

(2)		The ~~notional amount~~GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of ~~futures contract positions held by~~ the ~~Company at September 30, 2009 was $1.2 billion.~~exposures on these contracts. The ~~Company recorded in other revenues pre-tax losses~~assets are net of ~~$161~~a liability of $15 million for the ~~three months ended September 30, 2009~~future cost of reinsurance.

(3)		Other derivative assets include $12 million of interest rate and $232 million for the nine months ended September 30, 2009, and pre-tax gains of $70 million for the three months ended September 30, 2008 and $118 million for the nine months ended September 30, 2008. The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits (GMIB). All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 8 for further information. 15 ~~Note 8 — Fair Value Measurements~~ The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, suchforeign currency swaps qualifying 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 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~~hedges 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$4 million of estimation and judgment by the Company 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 GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement mayinterest rate swaps not designated as accounting hedges.

Level 1 Financial Assets

Inputs for instruments classified in Level 1 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. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.

•

~~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 Financial Liabilities Carried at Fair Value~~

The following tables provide information as of September 30, 2009 and December 31, 2008 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.

~~September 30, 2009~~

Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs
(In millions) (Level 1) (Level 2) (Level 3) Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency $ 44 $ 577 $ 1 $ 622
State and local government — 2,566 — 2,566
Foreign government — 1,040 17 1,057
Corporate — 8,041 489 8,530
Federal agency mortgage-backed — 35 — 35
Other mortgage-backed — 117 6 123
Other asset-backed — 92 463 555

Total fixed maturities⁽¹⁾
44 12,468 976 13,488
Equity securities 2 78 24 104

Subtotal 46 12,546 1,000 13,592
Short-term investments — 201 — 201
GMIB assets⁽²⁾
— — 614 614
Other derivative assets⁽³⁾
— 19 — 19

Total financial assets at fair value, excluding separate accounts $ 46 $ 12,766 $ 1,614 $ 14,426

Financial liabilities at fair value:
GMIB liabilities $ — $ — $ 1,126 $ 1,126
Other derivative liabilities — 28 — 28

Total financial liabilities at fair value $ — $ 28 $ 1,126 $ 1,154


~~(1)~~		Fixed maturities includes $392 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $60 million of appreciation for securities classified in Level 3.

~~(2)~~		The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $14 million for the future cost of reinsurance.

~~(3)~~		~~Other derivative assets includes $15 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $4 million of interest rate swaps not designated as accounting hedges.~~

~~December 31, 2008~~

Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(In millions) (Level 1) (Level 2) (Level 3) Total
Financial assets at fair value:
Fixed maturities:
Federal government and agency $ 38 $ 724 $ — $ 762
State and local government — 2,486 — 2,486
Foreign government — 923 21 944
Corporate — 6,526 330 6,856
Federal agency mortgage-backed — 37 — 37
Other mortgage-backed — 121 4 125
Other asset-backed — 57 514 571

Total fixed maturities⁽¹⁾
38 10,874 869 11,781
Equity securities 8 84 20 112

Subtotal 46 10,958 889 11,893
Short-term investments — 236 — 236
GMIB assets⁽²⁾
— — 953 953
Other derivative assets⁽³⁾
— 45 — 45

Total financial assets at fair value, excluding separate accounts $ 46 $ 11,239 $ 1,842 $ 13,127

Financial liabilities at fair value:
GMIB liabilities $ — $ — $ 1,757 $ 1,757
Other derivative liabilities — 36 — 36

Total financial liabilities at fair value $ — $ 36 $ 1,757 $ 1,793


~~(1)~~		Fixed maturities includes $514 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $111 million of appreciation for securities classified in Level 3.

~~(2)~~		The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $17 million for the future cost of reinsurance.

~~(3)~~		~~Other derivative assets include $40 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $5 million of interest rate swaps not designated as accounting hedges.~~

~~Level 1 Financial Assets~~

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 ~~92%~~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, ~~broker-dealer quotes,~~ 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.~~investments~~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.~~derivatives~~Amounts~~ classified in Level 2 represent over-the-counter instruments such as interest rate and foreign currency swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties, and determined that no adjustment for credit risk was required as of ~~September 30, 2009~~March 31, 2010 or December 31, ~~2008.~~2009. The nature and use of these other derivatives are described in Note ~~10.~~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.

Fixed maturities and equity securities. Approximately 7%6% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:


	September 30,		December 31,		March 31,		December 31,
(In millions)	2009		2008		2010		2009
Mortgage and asset-backed securities	$	469	$	518	$	483	$	456
Primarily private corporate bonds		434		270
Corporate bonds						286		288
Subordinated loans and private equity investments		97		101		115		101

Total	$	1,000	$	889	$	884	$	845

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

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 ~~and retrocessionaire~~ behavior (including mortality, lapse, and annuity election ~~rates~~rates), and ~~retrocessional credit),~~non-performance risk, as well as risk and profit charges. At adoption of the FASB’s new guidance for fair value measurements in 2008, 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 shareholders’ net income as described in Note 2. As certain assumptions (primarily related to future annuitant behavior) used to estimate fair values for these contracts are largely unobservable, the Company classifies GMIB assets and liabilities in Level 3. The Company considered the following in determining the view of a hypothetical market participant:

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

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

These GMIB assets and liabilities are estimated with a complex internal model using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants’ accounts at the time of annuitization. Generally, market return, interest rate and volatility assumptions are based on market observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The significant assumptions used to value the GMIB assets and liabilities as of ~~September 30, 2009~~March 31, 2010 were as follows:

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

•		The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at the time of annuitization (claim interest rate) based on contractual terms. That rate was ~~2.93%~~3.28% at ~~September 30, 2009~~March 31, 2010 and must be projected for future time periods. These projected rates vary by economic scenario and are determined by an interest rate model using current interest rate curves and the prices of instruments available in the market including various interest rate caps and zero-coupon bonds. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim interest rate.

•		The market volatility assumptions for annuitants’ underlying mutual fund investments that are modeled based on the S&P 500, Russell 2000 and NASDAQ Composite are based on the market-implied volatility for these indices for three to seven years grading to historical volatility levels thereafter. For the remaining ~~57%~~55% of underlying mutual fund investments modeled based on other indices (with insufficient market-observable data), volatility is based on the average historical level for each index over the past 10 years. Using this approach, volatility ranges from 17% to ~~33%~~31% for equity funds, 4% to ~~11%~~12% for bond funds and 1% to 2% for money market funds.

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

•		The annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts, ranges from 2% to ~~23%~~17% and depends on the time since contract issue and the relative value of the guarantee.

•		The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts and depends on the annuitant’s age, the relative value of the guarantee and whether a contractholder has had a previous opportunity to elect the benefit. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. Actual data is still emerging for the Company as well as the industry and the estimates are based on this limited data.

•		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. The additional spread over LIBOR incorporated into the discount rate ranged from 20 to 115 basis points for the GMIB liability and from 0 to 60 basis points for the GMIB reinsurance asset for that portion of the interest rate curve most relevant to these policies.

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

~~In addition, the Company has considered other assumptions related to model, expense and nonperformance risk in calculating the GMIB liability.~~

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 factors that impact the net liability. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain situations, could be material to the Company’s financial condition.

GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles. ~~As of September 30, 2009, Standard & Poor’s (S&P) has given a~~The current S&P financial strength rating of ~~AA to~~ one reinsurer ~~and a financial strength rating of A- to the parent company that guarantees the~~is AA-. The receivable from the ~~other reinsurer.~~second reinsurer is fully collateralized by assets held in a trust.

2017

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, 2010 and ~~nine months ended September 30, 2009 and 2008.~~2009. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in these tables may include changes in fair value that are attributable to both observable and unobservable inputs.

~~For the Three Months Ended September 30, 2009~~


	Fixed Maturities &
For the Three Months Ended March 31, 2010													Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net			Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 7/1/09	$	923		$	685		$	(1,224	)	$	(539	)
Balance at January 1, 2010													$	845		$	482		$	(903	)	$	(421	)

Gains (losses) included in shareholders’ net income:
Results of GMIB		—			(27	)		46			19
GMIB fair value gain/(loss)														—			—			4			4
Other		(9	)		—			—			—			4			—			—			—

Total gains (losses) included in shareholders’ net income		(9	)		(27	)		46			19			4			—			4			4

Gains included in other comprehensive income		36			—			—			—			12			—			—			—
Gains required to adjust future policy benefits for settlement annuities⁽¹⁾		56			—			—			—			18			—			—			—
Purchases, issuances, settlements		7			(44	)		52			8			(11	)		(3	)		13			10
Transfers into/(out of) Level 3:
Transfers into Level 3														54			—			—			—
Transfers out of Level 3		(13	)		—			—			—			(38	)		—			—			—

Balance at 9/30/09	$	1,000		$	614		$	(1,126	)	$	(512	)
Total transfers into/(out of) Level 3														16			—			—			—

Balance at March 31, 2010													$	884		$	479		$	(886	)	$	(407	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	(9	)	$	(27	)	$	46		$	19		$	4		$	—		$	4		$	4


(1)		Amounts do not accrue to shareholders.

~~For the Three Months Ended September 30, 2008~~


	Fixed Maturities &
For the Three Months Ended March 31, 2009													Fixed Maturities &
(In millions)	Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net			Equity Securities			GMIB Assets			GMIB Liabilities			GMIB Net
Balance at 7/1/08	$	695		$	447		$	(836	)	$	(389	)
Balance at January 1, 2009													$	889		$	953		$	(1,757	)	$	(804	)

Gains (losses) included in shareholders’ net income:
Results of GMIB, excluding adoption effect		—			123			(221	)		(98	)
GMIB fair value gain/(loss)														—			(38	)		70			32
Other		4			—			—			—			(4	)		—			—			—

Total gains (losses) included in shareholders’ net income		4			123			(221	)		(98	)		(4	)		(38	)		70			32

Gains included in other comprehensive income		3			—			—			—
Gains required to adjust future policy benefits for settlement annuities⁽¹⁾		41			—			—			—
Purchases, issuances, settlements		(9	)		(18	)		25			7
Losses included in other comprehensive income														(19	)		—			—			—
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾														(76	)		—			—			—
Purchases, sales, settlements														(3	)		(7	)		46			39
Transfers into/(out of) Level 3:
Transfers into Level 3		15			—			—			—			155			—			—			—
Transfers out of Level 3														(32	)		—			—			—

Balance at 9/30/08	$	749		$	552		$	(1,032	)	$	(480	)
Total transfers into/(out of) Level 3														123			—			—			—

Balance at March 31, 2009													$	910		$	908		$	(1,641	)	$	(733	)

Total gains (losses) included in income attributable to instruments held at the reporting date	$	3		$	123		$	(221	)	$	(98	)	$	(4	)	$	(38	)	$	70		$	32


(1)		Amounts do not accrue to shareholders.

2118

~~For the Nine Months Ended September 30, 2009~~

Fixed Maturities &
(In millions) Equity Securities GMIB Assets GMIB Liabilities GMIB Net
Balance at 1/1/09 $ 889 $ 953 $ (1,757 ) $ (804 )

Gains (losses) included in shareholders’ net income:

Results of GMIB — (263 ) 478 215
Other (19 ) — — —

Total gains (losses) included in shareholders’ net income
(19 ) (263 ) 478 215

Gains included in other comprehensive income 46 — — —
Losses required to adjust future policy benefits for settlement annuities⁽¹⁾
(51 ) — — —
Purchases, issuances, settlements (3 ) (76 ) 153 77
Transfers into Level 3 138 — — —

Balance at 9/30/09
$ 1,000 $ 614 $ (1,126 ) $ (512 )

Total gains (losses) included in income attributable to instruments held at the reporting date
$ (19 ) $ (263 ) $ 478 $ 215


~~(1)~~		~~Amounts do not accrue to shareholders.~~

~~For the Nine Months Ended September 30, 2008~~

Fixed Maturities &
(In millions) Equity Securities GMIB Assets GMIB Liabilities GMIB Net
Balance at 1/1/08 $ 732 $ 173 $ (313 ) $ (140 )

Gains (losses) included in shareholders’ net income:

Effect of adoption of new fair value measurement guidance — 244 (446 ) (202 )
Results of GMIB, excluding adoption effect — 190 (341 ) (151 )
Other 3 — — —

Total gains (losses) included in shareholders’ net income
3 434 (787 ) (353 )

Gains required to adjust future policy benefits for settlement annuities⁽¹⁾
7 — — —
Purchases, issuances, settlements 2 (55 ) 68 13
Transfers into Level 3 5 — — —

Balance at 9/30/08
$ 749 $ 552 $ (1,032 ) $ (480 )

Total gains (losses) included in income attributable to instruments held at the reporting date
$ 6 $ 434 $ (787 ) $ (353 )


~~(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:

~~other-than-temporary impairments on debt securities, net; other realized~~Realized investment gains (losses) and net investment income for amounts related to fixed maturities and equity securities; and

~~guaranteed minimum income benefits (income) expense~~GMIB fair value (gain) loss for amounts related to GMIB assets and liabilities.

Reclassifications impacting Level 3 financial instruments are reported as transfers ininto 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. ~~Typically, investments that transfer~~

Transfers into or out of the Level 3 ~~are classified in~~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, 2009, transfers into Level 3 from Level 2 ~~as market data on~~primarily reflect an increase in the ~~securities becomes more readily available.~~unobservable inputs used to value certain private corporate bonds, principally related to credit risk of the issuers.

The ~~company~~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 ~~GMIB~~ reinsurance arrangements remain in effect at the reporting date, the Company has reflected the total gain or loss for the period as the total gain or loss included in income attributable to instruments still held at the reporting date. However, the Company reduces the GMIB assets and liabilities resulting from these reinsurance arrangements when annuitants lapse, die, elect their benefit, or reach the age after which the right to elect their benefit expires.

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

The net ~~pre-tax~~GMIB fair value gain ~~for GMIB~~ was ~~$19~~$4 million for the three months ended ~~September 30, 2009,~~March 31, 2010, and ~~was~~due primarily ~~due~~ to ~~the following factors:~~

~~increases in underlying account values in the period, driven by~~ favorable equity market ~~and bond fund~~ returns, ~~resulting in reduced exposures ($50 million); and~~

offset by declining interest rates.

~~updates to~~The net GMIB fair value gain was $32 million for the ~~risk and profit charge estimates ($7 million)~~

~~These favorable effects were partially offset by:~~

~~decreases in interest rates ($31 million); and~~

~~other amounts, including experience varying from assumptions, model and in-force updates ($7 million)~~

~~For the nine~~three months ended ~~September 30, 2009, the net pre-tax~~March 31, 2009. The gain ~~for GMIB~~ was ~~$215 million, and was~~due primarily ~~due~~ to ~~the following factors:~~

increases in interest rates ~~($175 million);~~

~~increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures ($82 million); and~~

~~updates to the risk and profit charge estimates ($25 million).~~

~~These favorable effects were~~since December 31, 2008 partially offset ~~by:~~

~~increases to the annuitization assumption, reflecting higher utilization experience ($21 million);~~

~~updates to the lapse assumption ($14 million); and~~

~~other amounts, including experience varying from assumptions, model and in-force updates ($32 million).~~

~~For the three months ended September 30, 2008, the increase in the net GMIB liability was primarily driven by the decline in underlying account values in the period, driven~~ by declines in equity markets and bond fund returns and ~~decreases in interest rates since June 30, 2008. Excluding~~updates to the charge for the effect of adoption of FASB’s guidance for fair value measurement, the increase in the net GMIB liability for the nine months ended September 30, 2008 was primarily driven by the impact of declines in underlying account values in the period, driven by declines in equity markets and bond fund returns, resulting in increased exposure and decreases in interest rates since December 31, 2007.lapse assumption.

2319

Separate account assets

Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company’s revenues and expenses. As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 separate account assets were as follows:

~~September 30, 2009~~


	Quoted Prices in				Significant				Quoted Prices in Active		Significant Other		Significant Unobservable
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
March 31, 2010									Markets for Identical Assets		Observable Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	265	$	1,538	$	—	$	1,803	$	276	$	1,462	$	—	$	1,738
Non-guaranteed separate accounts (1)		1,660		2,917		584		5,161		1,957		3,252		544		5,753

Total separate account assets	$	1,925	$	4,455	$	584	$	6,964	$	2,233	$	4,714	$	544	$	7,491


(1)		Non-guaranteed separate accounts include ~~$2.3~~$2.6 billion in assets supporting the Company’s pension plans, including ~~$553~~$524 million classified in Level 3.

~~December 31, 2008~~


	Quoted Prices in				Significant				Quoted Prices in Active		Significant Other		Significant Unobservable
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
December 31, 2009									Markets for Identical Assets		Observable Inputs		Inputs
(In millions)	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total
Guaranteed separate accounts (See Note 17)	$	233	$	1,557	$	—	$	1,790	$	275	$	1,480	$	—	$	1,755
Non-guaranteed separate accounts (1)		1,093		2,506		475		4,074		1,883		3,100		550		5,533

Total separate account assets	$	1,326	$	4,063	$	475	$	5,864	$	2,158	$	4,580	$	550	$	7,288


(1)		Non-guaranteed separate accounts include ~~$1.5~~$2.6 billion in assets supporting the Company’s pension plans, including ~~$435~~$517 million classified in Level 3.

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

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

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

Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments. In addition, certain fixed income funds priced using the net asset values are classified in Level 3 due to restrictions on their withdrawal.

2420

The following ~~tables summarize~~table summarizes the changes in separate account assets reported in Level 3 for the three months ended March 31, 2010 and ~~nine months ended September 30, 2009 and 2008.~~2009.


	Three Months Ended						Three Months Ended
	September 30,						March 31,
(In millions)	2009			2008			2010			2009
Balance at 7/1	$	625		$	417
Balance at January 1							$	550		$	475
Policyholder gains (losses) (1)		(18	)		1			16			(46	)
Purchases, issuances, settlements		(23	)		13			(3	)		8
Transfers into/(out of) Level 3:
Transfers into Level 3								—			174
Transfers out of Level 3		—			(2	)		(19	)		(14	)

Balance at 9/30	$	584		$	429
Net transfers into/(out of) Level 3								(19	)		160

Balance at March 31							$	544		$	597


(1)		Includes losses of ~~$20~~$15 million and ~~gains~~losses of $1$46 million attributable to instruments still held at ~~September 30,~~March 31, 2010 and March 31, 2009 ~~and September 30, 2008~~ respectively.

Nine Months Ended
September 30,
(In millions) 2009 2008
Balance at 1/1 $ 475 $ 403
Policyholder gains (losses) (1) (85 ) 21
Purchases, issuances, settlements 34 22
Transfers in (out) of Level 3 160 (17 )

Balance at 9/30 $ 584 $ 429

For the three months ended March 31, 2009, transfers into Level 3 primarily represented fixed income funds that are priced using the net asset value where restrictions were placed on withdrawal.


~~(1)~~		~~Includes losses of $88 million and gains of $6 million attributable to instruments still held at September 30, 2009 and September 30, 2008 respectively.~~

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 ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, impaired real estate entities carried at cost of ~~$41~~$35 million were written down to their fair values of $8$21 million, resulting in pre-tax realized investment losses of $14 million. Also during the three months ended March 31, 2010, impaired commercial mortgage loans with carrying values of $64 million were written down to their fair values of $53 million, resulting in pre-tax realized investment losses of $11 million. During 2009, impaired commercial mortgage loans with carrying values of $143 million were written down to their fair values of $126 million, resulting in pre-tax realized investment losses of $17 million. Also, during 2009, impaired real estate entities with carrying values of $48 million were written down to their fair values of $12 million, resulting in realized investment losses of ~~$33~~$26 million. These fair values were calculated by discounting the expected future cash flows at estimated market interest rates. Such market rates were derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the characteristics of the underlying collateral including; the type, quality and location of the assets. The fair value measurements were ~~based on discounted cash flow analyses using significant unobservable inputs, and were~~ classified in Level ~~3. For the three months ended September 30, 2009 and the twelve months ended December 31, 2008, the amounts required to adjust~~3 because these ~~assets and liabilities to their fair values were not significant.~~cash flow models incorporate significant unobservable inputs.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

Most financial instruments that are subject to fair value disclosure requirements are carried in the Company’s consolidated financial statements at amounts that approximate fair value. The following table provides the fair values and carrying values of the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008:~~2009:


									March 31, 2010				December 31, 2009
											Carrying				Carrying
(In millions)	September 30, 2009				December 31, 2008				Fair Value		Value		Fair Value		Value
			Carrying				Carrying
	Fair Value		Value		Fair Value		Value
Commercial mortgage loans	$	3,393	$	3,607	$	3,401	$	3,617	$	3,407	$	3,493	$	3,323	$	3,522
Contractholder deposit funds, excluding universal life products	$	932	$	934	$	889	$	915	$	997	$	992	$	940	$	941
Long-term debt, excluding capital leases	$	2,430	$	2,427	$	1,684	$	2,077
Long-term debt, including current maturities, excluding capital leases									$	2,578	$	2,427	$	2,418	$	2,427

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

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

Contractholder deposit funds, excluding universal life products.Generally, these funds do not have stated maturities. Approximately 45% of these balances can be withdrawn by the customer at any time without prior notice or penalty. The fair value for these contracts is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of the individual life and annuity and retirement benefits businesses. The fair value for these contracts is determined using the fair value of these buyers’ assets supporting these reinsured contracts. The Company had a reinsurance recoverable equal to the carrying value of these reinsured contracts.

Long-term debt, including current maturities, excluding capital leases.The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company’s estimated current borrowing rate for debt of similar terms and remaining maturities.

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

Note 98 — Investments

Total Realized Investment Gains and Losses

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Fixed maturities	$	2		$	(67	)	$	(9	)	$	(108	)	$	15		$	(16	)
Equity securities		16			(20	)		10			(19	)		4			(17	)
Commercial mortgage loans		(4	)		3			(4	)		1			(11	)		(1	)
Other investments, including derivatives		—			61			(37	)		98			(14	)		(2	)

Realized investment gains (losses), before income taxes		14			(23	)		(40	)		(28	)
Less income taxes (benefits)		5			(8	)		(16	)		(10	)
Realized investment losses, before income taxes														(6	)		(36	)
Less income tax benefits														(3	)		(12	)

Net realized investment gains (losses)	$	9		$	(15	)	$	(24	)	$	(18	)
Net realized investment losses													$	(3	)	$	(24	)

2622

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in millions)	2009		2008		2009		2008
(In millions)									2010		2009
Credit-related (1)	$	18	$	23	$	72	$	27	$	25	$	11
Other (2)		3		40		12		64		1		10

Total(3)	$	21	$	63	$	84	$	91	$	26	$	21


(1)		Credit-related losses include other-than-temporary declines in value of fixed maturities and equity securities, and impairments of commercial mortgage loans and real estate entities. The amount related to credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income was not significant.

(2)		Prior to adoption of ~~new~~ GAAP guidance for other-than-temporary impairments on April 1, 2009, other primarily represented the impact of rising market yields on investments where the Company could not demonstrate the intent and ability to hold until recovery.

(3)		Includes other-than-temporary impairments on debt securities of $1 million in the first quarter of 2010 and $17 million in the first quarter of 2009. These impairments are included in the other category in 2010 and in both the credit-related and other categories for 2009.

Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equity securities on the Company’s Consolidated Balance Sheets. These securities are carried at fair value with changes in fair value reported in other realized investment gains and interest and dividends reported in net investment income. The Company’s hybrid investments include preferred stock or debt securities with call or conversion features. ~~The Company elected fair value accounting for certain hybrid securities to simplify accounting and mitigate volatility in results of operations and financial condition.~~


	As of September 30,		As of December 31,		As of March 31,		As of December 31,
(In millions)	2009		2008		2010		2009
Included in fixed maturities:
Trading securities (amortized cost: $8; $13)	$	9	$	13
Hybrid securities (amortized cost: $32; $10)		36		10
Trading securities (amortized cost: $8; $8)					$	8	$	8
Hybrid securities (amortized cost: $36; $37)						42		43

Total	$	45	$	23	$	50	$	51

Included in equity securities:
Hybrid securities (amortized cost: $109; $109)					$	86	$	81

Included in equity securities:
Hybrid securities (amortized cost: $110; $123)	$	79	$	84

Fixed maturities and equity securities included ~~$239~~$163 million at ~~September 30, 2009,~~March 31, 2010, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities and equity securities were primarily corporate securities.

The following information about fixed maturities excludes trading and hybrid securities. The amortized cost and fair value by contractual maturity periods for fixed maturities were as follows at ~~September 30, 2009:~~March 31, 2010:


	Amortized		Fair		Amortized		Fair
(in millions)	Cost		Value
(In millions)					Cost		Value
Due in one year or less	$	692	$	701	$	742	$	761
Due after one year through five years		3,813		4,023		4,004		4,266
Due after five years through ten years		4,770		5,094		4,928		5,268
Due after ten years		2,494		2,913		2,601		2,922
Mortgage and other asset-backed securities		662		712		639		710

Total	$	12,431	$	13,443	$	12,914	$	13,927

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.

Mortgage-backed assets consist principally of commercial mortgage-backed securities and collateralized mortgage obligations of which ~~$38~~$33 million were residential mortgages and home equity lines of credit, all of which were originated using standard underwriting practices and are not considered sub-prime loans.

Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities) by type of issuer is shown below.


	September 30, 2009									March 31, 2010
			Unrealized		Unrealized							Unrealized		Unrealized
	Amortized		Appre-		Depre-			Fair		Amortized		Appre-		Depre-			Fair
(in millions)	Cost		ciation		ciation			Value
(In millions)										Cost		ciation		ciation			Value
Federal government and agency	$	394	$	228	$	—		$	622	$	392	$	174	$	(1	)	$	565
State and local government		2,335		236		(5	)		2,566		2,350		182		(9	)		2,523
Foreign government		1,017		45		(5	)		1,057		1,122		52		(5	)		1,169
Corporate		8,023		570		(107	)		8,486		8,411		606		(57	)		8,960
Federal agency mortgage-backed		33		2		—			35		29		1		—			30
Other mortgage-backed		132		4		(14	)		122		120		8		(7	)		121
Other asset-backed		497		74		(16	)		555		490		74		(5	)		559

Total	$	12,431	$	1,159	$	(147	)	$	13,443	$	12,914	$	1,097	$	(84	)	$	13,927


(In millions)										December 31, 2009
Federal government and agency										$	398	$	174	$	(1	)	$	571
State and local government											2,341		188		(8	)		2,521
Foreign government											1,040		38		(8	)		1,070
Corporate											8,104		529		(98	)		8,535
Federal agency mortgage-backed											33		1		—			34
Other mortgage-backed											125		5		(10	)		120
Other asset-backed											494		55		(8	)		541

Total										$	12,535	$	990	$	(133	)	$	13,392

The above table includes investments with a fair value of ~~$2.4~~$2.3 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of ~~$439~~$354 million and gross unrealized depreciation of ~~$47~~$34 million at ~~September 30, 2009.~~March 31, 2010. Such unrealized amounts are required to support future policy benefit liabilities of this business and, as such, are not included in accumulated other comprehensive income. At December 31, 2009, investments supporting this business had a fair value of $2.3 billion, gross unrealized appreciation of $326 million and gross unrealized depreciation of $52 million.

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Proceeds from sales	$	266		$	432		$	676		$	1,128		$	240		$	119
Gross gains on sales	$	24		$	3		$	39		$	8		$	15		$	3
Gross losses on sales	$	(5	)	$	(8	)	$	(8	)	$	(31	)	$	(1	)	$	(3	)

2824

Review of declines in fair value.Management reviews fixed maturities ~~and equity securities~~ 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

~~prior to April 1, 2009, the Company’s ability and intent to hold these fixed maturities until recovery; beginning April 1, 2009,~~ the Company’s intent to sell or the likelihood of a required sale ~~of these fixed maturities~~ prior to ~~their~~ recovery.

When the Company determines it does not expect to recover the amortized cost basis of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell these fixed maturities), the credit portion of the impairment loss is recognized in net income and the non-credit portion, if any, is recognized in a separate component of shareholders’ equity. The credit portion is the difference between the amortized cost basis of the fixed maturity and the net present value of its projected future cash flows. Projected future cash flows are based on qualitative and quantitative factors, including probability of default, and the estimated timing and amount of recovery. For mortgage and asset-backed securities, estimated future cash flows are based on assumptions about the collateral attributes including prepayment speeds, default rates and changes in value.

Excluding trading and hybrid securities, as of ~~September 30, 2009,~~March 31, 2010, fixed maturities with a decline in fair value from amortized cost (which were primarily investment grade corporate bonds) were as follows, including the length of time of such decline:


	Fair		Amortized		Unrealized			Number		Fair		Amortized		Unrealized			Number
(In millions)	Value		Cost		Depreciation			of Issues		Value		Cost		Depreciation			of Issues
Fixed maturities:
One year or less:
Investment grade	$	679	$	706	$	(27	)		169	$	838	$	856	$	(18	)		222
Below investment grade	$	109	$	119	$	(10	)		68	$	89	$	92	$	(3	)		49
More than one year:
Investment grade	$	1,117	$	1,212	$	(95	)		174	$	605	$	661	$	(56	)		109
Below investment grade	$	82	$	97	$	(15	)		19	$	43	$	50	$	(7	)		16

The unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Approximately ~~$52~~$22 million of the unrealized depreciation is due to securities with a decline in value of greater than 20%. The remaining ~~$95~~$62 million of the unrealized depreciation is due to securities with declines in value of less than 20%. There were no equity securities with a fair value significantly lower than cost as of ~~September 30, 2009.~~March 31, 2010.

Short-term investments and cash equivalents.Short-term investments and cash equivalents includes corporate securities of $921 million, federal government securities of $171 million and money market funds of $75 million at March 31, 2010. The Company’s short-term investments and cash equivalents at December 31, 2009 included corporate securities of $624 million, federal government securities of $402 million and money market funds of $104 million.

Note 109 — Derivative Financial Instruments

The Company’s investment strategy is to manage the characteristics ~~and risks~~ of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contractholder liabilities (such as paying claims, investment returns and withdrawals). As part of this investment strategy, the Company typically uses derivatives to minimize interest rate, foreign currency and equity price ~~risks of chosen investment assets to conform to the characteristics and risks of the related insurance and contractholder liabilities.~~risks. The Company routinely monitors exposure to credit risk associated with derivatives and diversifies the portfolio among approved dealers of high credit quality to minimize credit risk. From time to time, the Company has used derivatives to enhance investment returns. In addition, the Company has written or sold contracts to guarantee minimum income ~~benefits and to enhance investment returns. See Note 7 for a discussion of derivatives associated with GMDB contracts and Note 8 for a discussion of derivatives arising from GMIB contracts.~~benefits.

The Company uses hedge accounting when derivatives are designated, ~~qualify~~qualified and ~~are~~ highly effective as hedges. Effectiveness is formally assessed and documented at inception and each period throughout the life of a hedge using various ~~qualitative and~~ quantitative methods appropriate for each hedge, including regression analysis and dollar offset. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income.

2925

The Company accounts for derivative instruments as follows:

Derivatives are reported on the balance sheet at fair value with changes in fair values reported in ~~shareholders’~~ net income or accumulated other comprehensive income.

Changes in the fair value of derivatives that hedge market risk related to future cash flows – and that qualify for hedge accounting – are reported in a separate caption in accumulated other comprehensive income. These hedges are referred to as cash flow hedges.

A change in the fair value of a derivative instrument may not always equal the change in the fair value of the hedged item; this difference is referred to as hedge ineffectiveness. Where hedge accounting is used, the Company reflects hedge ineffectiveness in ~~shareholders’~~ net income (generally as part of ~~other~~ realized investment gains and losses).

Features of certain investments and obligations, called embedded derivatives, are accounted for as derivatives. As permitted under GAAP, derivative accounting has not been applied to these features of such investments or obligations existing before January 1, 1999.

Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that contain provisions requiring both parties to such instruments to post collateral depending on net liability thresholds and the party’s financial strength or credit rating. The collateral posting requirements vary by counterparty. The aggregate fair value of derivative instruments with such credit-risk-related contingent features where a subsidiary of the Company was in a net liability position as of ~~September 30, 2009~~March 31, 2010 was ~~$28~~$25 million for which the Company was not required to post collateral with its counterparties. If the various contingent features underlying the agreements were triggered as of ~~September 30, 2009,~~March 31, 2010, the Company would be required to post collateral equal to the total net liability. Such subsidiaries are parties to certain other derivative instruments that contain termination provisions for which the counterparties could demand immediate payment of the total net liability position if the financial strength rating of the subsidiary were to decline below specified levels. As of ~~September 30, 2009,~~March 31, 2010, there was no net liability position under such derivative instruments.

The tables below present information about the nature and accounting treatment of the Company’s primary derivative financial instruments including the Company’s purpose for entering into specific derivative transactions, and their locations in and effect on the financial statements as of and for the three ~~and nine month periods~~months ended ~~September 30, 2009.~~March 31, 2010. Derivatives in the Company’s separate accounts are excluded from the tables because associated gains and losses generally accrue directly to policyholders.

3026


Instrument / Volume of
of Activity	Primary Risk	Purpose	Cash Flows	Accounting Policy


Derivatives Designated as Accounting Hedges — Cash Flow Hedges


Interest rate swaps — ~~$123~~$159 million of par value of related investments Foreign currency swaps — $179 million of U.S. dollar equivalent par value of related investments Combination swaps (interest rate and foreign currency) — $54 million of U.S. dollar equivalent par value of related investments	Interest rate and foreign currency	To hedge the interest and/or foreign currency cash flows of fixed maturities and commercial mortgage loans to match associated liabilities. Currency swaps are primarily euros, Australian dollars, Canadian dollars and British pounds for periods of up to 1211 years.	The Company periodically exchanges cash flows between variable and fixed interest rates and/or between two currencies for both principal and interest. Net interest cash flows are reported in net investment income and included in operating activities.	Using cash flow hedge accounting, fair values are reported in other long-term investments or other liabilities and accumulated other comprehensive income and amortized into net investment income or reported in other realized investment gains and losses as interest or principal payments are received.


	Fair Value Effect on the Financial Statements ~~(in~~(In millions)


					Gain (Loss) Recognized in Other														Gain (Loss) Recognized in
	As of September 30, 2009				Comprehensive Income										Accounts Payable, Accrued Expenses and				Other Comprehensive
			Accounts Payable,								Other Long-Term Investments				Other Liabilities				Income
	Other Long-Term		Accrued Expenses and		Three Months Ended			Nine Months Ended			As of		As of		As of		As of		Three Months Ended March 31,
Instrument	Investments		Other Liabilities		September 30, 2009			September 30, 2009			March 31, 2010		December 31, 2009		March 31, 2010		December 31, 2009		2010		2009
Interest rate swaps	$	10	$	—	$	1		$	(4	)	$	9	$	8	$	—	$	—	$	1	$	(1	)
Foreign currency swaps		5		24		(7	)		(22	)		5		4		21		24		4		2
Interest rate and foreign currency swaps		—		4		(4	)		(11	)		—		—		6		6		—		2

Total	$	15	$	28	$	(10	)	$	(37	)	$	14	$	12	$	27	$	30	$	5	$	3

Purchased options — ~~$309~~$315 million of cash surrender value of related life insurance policies

Interest rate

To hedge the possibility of early policyholder cash surrender when the amortized cost of underlying invested assets is greater than their fair values.

The Company pays a fee and may receive or pay cash, based on the difference between the amortized cost and fair values of underlying invested assets at the time of policyholder surrender. These cash flows will be reported in financing activities.

Using cash flow hedge accounting, fair values are reported in other assets or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to other benefit expenses over the life of the underlying invested assets.

Fair Value Effect on the Financial Statements

~~Fair~~

For the periods ended March 31, 2010 and March 31, 2009, fair values reported in other assets and other comprehensive income were ~~less than $1 million.~~not significant.

Treasury lock

Interest rate

To hedge the variability of and fix at inception date, the benchmark Treasury rate component of future interest payments on debt to be issued.

The Company paid the fair value of the contract at the expiration. Cash flows ~~are~~were reported in operating activities.

Using cash flow hedge accounting, fair values are reported in short-term investments or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to interest expense over the life of the debt issued.

Fair Value Effect on the Financial Statements

In the first quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in other comprehensive income, resulting in net cumulative losses of $26 million, to be amortized to interest expense over the life of the debt. In the second quarter of 2009, the Company issued debt and began amortizing this loss to interest expense.

~~The~~For the periods ended March 31, 2010 and March 31, 2009, the amount of gains (losses) reclassified from accumulated other comprehensive income into income was not significant. No gains (losses) were recognized due to ineffectiveness and no amounts were excluded from the assessment of hedge ineffectiveness.

3127


Instrument / Volume of
of Activity	Primary Risk	Purpose	Cash Flows	Accounting Policy



Derivatives Not Designated As Accounting Hedges

Futures — ~~$1,207~~$985 million of U.S. dollar equivalent market price of outstanding contracts	Equity and foreign currency	To reduce domestic and international equity market exposures for certain reinsurance contracts that guarantee minimum death benefits (GMDB) resulting from changes in variable annuity account values based on underlying mutual funds. Currency futures are primarily euros, Japanese yen and British pounds.	The Company receives (pays) cash daily in the amount of the change in fair value of the futures contracts. Cash flows are included in operating activities.	Fair value changes are reported in other revenues. Amounts not yet settled from the previous day’s fair value change (daily variation margin) are reported in premiums, accounts and notes receivable, net or accounts payable, accrued expenses and other liabilities.


	Fair Value Effect on the Financial Statements ~~(in~~(In millions)

Other Revenues
Three Months Ended Nine Months Ended
September 30, 2009 September 30, 2009
Futures $ (161 ) $ (232 )


	Other Revenues
	Three Months Ended March 31,
	2010			2009
Futures	$	(45	)	$	117



Interest rate swaps — $76 million of par value of related investments	Interest rate	To hedge the interest cash flows of fixed maturities to match associated liabilities.	The Company periodically exchanges cash flows between variable and fixed interest rates for both principal and interest. Net interest cash flows are reported in other realized investment gains (losses) and included in operating activities.	Fair values are reported in other long-term investments or other liabilities, with changes in fair value reported in other realized investment gains and losses.


	~~Fair Value Effect on the Financial Statements (in millions)~~

As of September 30, 2009 Realized Investment (Losses)
Other Long-Term Three Months Ended Nine Months Ended
Investments September 30, 2009 September 30, 2009
Interest rate swaps $ 4 $ — $ (1 )

Fair Value Effect on the Financial Statements (In millions)


					Realized Investment
	Other Long-Term Investments				(Losses) Three Months Ended
	As of		As of		March 31,
	March 31, 2010		December 31, 2009		2010		2009
Interest rate swaps	$	4	$	4	$	—		—

Written options (GMIB liability) — ~~$1,380~~$1,165 million of maximum potential undiscounted future payments as defined in Note 17

Purchased options (GMIB asset) — ~~$759~~$641 million of maximum potential undiscounted future receipts as defined in Note 17

Equity and interest rate

The Company has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees of minimum income benefits, resulting from the level of variable annuity account values compared with a contractually guaranteed amount. Payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments. The Company purchased reinsurance contracts to reduce a portion of the market risks assumed. These contracts are accounted for as written and purchased options.

The Company periodically receives (pays) fees based on either contractholders’ account values or deposits increased at a contractual rate. The Company will also pay (receive) cash depending on changes in account values and interest rates when contractholders first elect to receive minimum income payments. These cash flows are reported in operating activities.

Fair values are reported in other liabilities (GMIB liability) and other assets (GMIB asset). Changes in fair value are reported in ~~guaranteed minimum income benefits (income) expense.~~GMIB fair value (gain)/loss.

Fair Value Effect on the Financial Statements ~~(in~~(In millions)


					Guaranteed Minimum Income Benefits										Accounts Payable, Accrued Expenses and				GMIB Fair Value
	As of September 30, 2009				(Income) Expense						Other Assets				Other Liabilities				(Gain)/Loss
			Accounts Payable,																Three Months Ended
			Accrued Expenses and		Three Months Ended			Nine Months Ended			As of		As of		As of		As of		March 31,
Instrument	Other Assets		Other Liabilities		September 30, 2009			September 30, 2009			March 31, 2010		December 31, 2009		March 31, 2010		December 31, 2009		2010			2009
Written options (GMIB liability)	$	—	$	1,126	$	(46	)	$	(478	)	$	—	$	—	$	886	$	903	$	(4	)	$	(70	)
Purchased options (GMIB asset)		614		��		27			263			479		482		—		—		—			38

Total	$	614	$	1,126	$	(19	)	$	(215	)	$	479	$	482	$	886	$	903	$	(4	)	$	(32	)

3228

Note 10 — Variable Interest Entities

In the normal course of its activities, the Company is involved with special-purpose or other entities that are considered variable interest entities. When the Company becomes involved with a variable interest entity and when the nature of the Company’s involvement with the entity changes, in order to determine if the Company is the primary beneficiary and must consolidate the entity, it evaluates:

the structure and purpose of the entity;

the risks and rewards created by and shared through the entity; and

the entity’s participants’ ability to direct the activities, receive its benefits and absorb its losses. Participants include the entity’s sponsors, equity holders, guarantors, creditors and servicers.

Although the Company is involved with certain variable interest entities, it determined that consolidation was not required because either:

it has no power or shares equally in the power to direct the activities that most significantly impact the entities’ economic performance; or

the Company has no right to receive benefits nor obligation to absorb losses that could be significant to these variable interest entities.

The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.

The following table presents information about the nature and activities of the more significant variable interest entities including carrying amounts and their locations in and effect on the Company’s financial statements as of and for the three months ended March 31, 2010.


Variable			Factors Considered in Determining		Risk Exposure and Effect on the
Interests	Nature, Purpose and Activities		Consolidation Not Required		Financial Statements

Fixed maturities — Foreign bank obligations — $410 million par value interest of total $1,131 million par value	To create a more active market for perpetual floating-rate subordinated notes issued by foreign banks, special-purpose trusts are formed to purchase these notes and sell participation interests to investors in the form of fixed-rate debt securities and equity interests. The trusts also purchase derivative contracts to exchange the floating-rate cash flows for fixed-rate and obtain guarantees from third parties to support these fixed-rate payments to its debt holders. In certain trusts, the foreign bank perpetual notes were replaced with U.S. government-sponsored bonds. The Company owns a share of the debt securities issued by the trust and receives fixed-rate cash flows for a stated period.		The third-party guarantors of the debt securities issued by the trust generally control the activities that most significantly impact the trusts’ economic performance, are obligated to absorb any losses, and are the primary beneficiaries.		The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in fixed maturities. Unrealized changes in fair value are reported in accumulated other comprehensive income. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.

	Effect on the Financial Statements (In millions)

			Three Months Ended March 31, 2010
	As of March 31, 2010		Gain (Loss) Recognized in Other		Income from Continuing Operations before
	Fixed Maturities		Comprehensive Income⁽¹⁾		Income Taxes⁽¹⁾
	$	450	$	2	$	1


(1)		Other comprehensive income excludes $17 million and income from continuing operations before income taxes excludes $7 million of amounts required to adjust future policy benefits for the run-off settlement annuity business.


Variable			Factors Considered in Determining		Risk Exposure and Effect on the
Interests	Nature, Purpose and Activities		Consolidation Not Required		Financial Statements

Fixed maturities — Mortgage and other asset backed securities — $294 million par value interest of total $47,841 million par value	Special-purpose entities are created by third-party sponsors to increase the availability of financing for commercial or residential mortgages or other assets and provide investors with diversified exposure to these assets. The entities purchase mortgage loans or other assets, assemble pools of these assets and sell senior or subordinated securities to investors based on their risk tolerance. The securities represent a right to a share of the cash flows from the underlying assets in the pool. Typically, the most subordinate holder bears the first risk of loss and potential for higher returns. The Company owns a minority share of senior securities and receives fixed-rate cash flows.		Third-party sponsors generally control the activities that most significantly impact the entities’ economic performance, bear the first risk of loss and receive any residual returns, and are primary beneficiaries. In certain circumstances (such as when unexpected losses occur), the sponsor may lose the power to direct the entity’s activities and control would rest with the next most subordinate investor.		The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in fixed maturities. Unrealized changes in fair value are reported in accumulated other comprehensive income. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.

	Effect on the Financial Statements (in millions)

			Three Months Ended March 31, 2010
	As of March 31, 2010		Gain (Loss) Recognized in Other		Income from Continuing Operations before
	Fixed Maturities		Comprehensive Income		Income Taxes
	$	261	$	9	$	4

Equity securities and fixed maturities — Other — $59 million par value interest of total $6,795 million par value	Special-purpose trust entities are created by banks to gain access to capital markets, maintain required regulatory capital and receive tax deductions for interest paid on debt obligations. These entities purchase subordinated notes issued and guaranteed by the sponsoring banks and sell debt or equity securities. Equity interests in these entities are held by their sponsoring banks. The Company owns a minority share of these debt and equity securities and receives fixed cash flows.		The banks that create these trusts control the activities that most significantly impact their economic performance, are obligated to absorb any losses and are the primary beneficiaries.		The Company’s maximum exposure to loss is equal to the fair value of its variable interests reported on the balance sheet in equity securities and fixed maturities. Realized changes in fair value (impairment or sale) are reported in realized investment gains (losses), and interest earned is reported in net investment income.

	Effect on the Financial Statements (in millions)

	As of March 31, 2010		Three Months Ended March 31, 2010
	Equity Securities and		Gain (Loss) Recognized in Other		Income from Continuing Operations before
	Fixed Maturities		Comprehensive Income⁽¹⁾		Income Taxes⁽¹⁾
	$	52	$	—	$	3


(1)		Other comprehensive income excludes $5 million and income from continuing operations before income taxes excludes $1 million of amounts required to adjust future policy benefits for the run-off settlement annuity business.

In addition to the variable interest entities described in this table, as of March 31, 2010 the Company was also involved in:

trusts that are variable interest entities controlled by contractual provisions and holding investments that secure certain reinsurance recoverables resulting from the sales of the retirement benefits and individual life insurance and annuity businesses (see Note 11 for further information);

real estate joint ventures with carrying values of $17 million where all decisions significantly affecting the entities’ economic performance are subject to unanimous approval by the equity holders. As a result, the Company determined that the power over these entities is shared equally, and there is no primary beneficiary. The Company’s maximum exposure to loss was equal to its carrying value; and

certain fixed maturities with an aggregate fair value of $13 million issued by entities subject to troubled debt restructurings or bankruptcy proceedings. As a result, the equity owners no longer have the power to direct the significant activities of the entities. The Company’s maximum exposure to loss was equal to its fair value.

The Company does not have the power to direct these entities’ activities; therefore, it was not the primary beneficiary and did not consolidated these entities.

Note 11 — Reinsurance

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and disposition transactions where the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

Retirement benefits business.The Company had a reinsurance recoverable of ~~$1.8~~$1.7 billion as of ~~September 30, 2009,~~March 31, 2010 and ~~$1.9 billion as of~~ December 31, ~~2008~~2009 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable, which is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed maturities ~~and mortgage loans~~whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities ~~and mortgage loans~~ are held in a trust established for the benefit of the Company. As of ~~September 30, 2009,~~March 31, 2010, the book value of the trust ~~was adequately funded~~assets exceeded the recoverable and S&P had assigned this reinsurer a rating of AA-.

Individual life and annuity reinsurance.The Company had reinsurance recoverables ~~totaling $4.5~~of $4.4 billion as of ~~September 30, 2009~~March 31, 2010 and ~~$4.6 billion as of~~ December 31, ~~2008~~2009 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. ~~Effective December~~At March 31, ~~2007, a substantial portion of~~2010, the $4 billion reinsurance ~~recoverables are~~recoverable from The Lincoln National Life Insurance Company was secured by ~~investments~~assets held in a trust established for the benefit of the ~~Company. At September 30, 2009,~~Company, and was less than the market value of the trust ~~assets secured approximately 90%~~assets. The remaining recoverable from Lincoln Life & Annuity of New York of $414 million is currently unsecured, however, if this reinsurer does not maintain a specified minimum credit or claims paying rating, it is required to fully secure the ~~reinsurance recoverables.~~outstanding balance. As of March 31, 2010 S&P has assigned both The Lincoln National Life Insurance Company ~~a rating of AA-~~ and Lincoln Life & Annuity of New York a rating of ~~AA.~~AA-.

Other Ceded and Assumed Reinsurance

Ceded Reinsurance: Ongoing operations.The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Health Care, Disability and Life, and International segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of ~~$324~~$282 million as of ~~September 30, 2009~~March 31, 2010 are expected to be collected from more than 90 reinsurers which have been assigned the following financial strength ratings from S&P:


						Percent of Reinsurance								Percent of Reinsurance
	Reinsurance		Percent			Recoverable Protected			Reinsurance		Percent			Recoverable Protected
Ongoing operations (In millions)	Recoverable		of Total			by Collateral
(In millions)									Recoverable		of Total			by Collateral

AA- (Single reinsurer)	$	47		15	%		0	%	$	48		17	%		0	%
AA- or higher (Other reinsurers)		32		10	%		0	%		31		11	%		0	%
A (Single reinsurer)		30		9	%		0	%		26		9	%		0	%
A+ to A- (Other reinsurers)		118		37	%		3	%		106		38	%		3	%
Unrated (Single reinsurer)		34		10	%		96	%		34		12	%		100	%
Below A- or unrated (Other reinsurers)		63		19	%		25	%		37		13	%		64	%

Total	$	324		100	%		16	%
Total ongoing operations									$	282		100	%		22	%

The collateral protecting the recoverables includes assets held in trust and letters of credit. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of ~~September 30, 2009,~~March 31, 2010, the Company’s recoverables related to these segments were net of a reserve of ~~$11~~$9 million.

Assumed and Ceded reinsurance: Run-off Reinsurance segment.The Company’s Run-off Reinsurance operations assumed risks related to GMDB contracts, GMIB contracts, workers’ compensation, and personal accident business. The Company’s Run-off Reinsurance operations also purchased retrocessional coverage to reduce the risk of loss on these contracts.

Liabilities related to GMDB, workers’ compensation and personal accident are included in future policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under GAAP, the asset related to GMIB is recorded in the caption Other assets, including other intangibles and the liability related to GMIB is recorded in the caption Accounts payable, accrued expenses, and other liabilities on the Company’s Consolidated Balance Sheets (see Notes 87 and 17 for additional discussion of the GMIB assets and liabilities).

The reinsurance recoverables for GMDB, workers’ compensation, and personal accident of ~~$122~~$109 million as of ~~September 30, 2009~~March 31, 2010 are expected to be collected from ~~more than 100~~approximately 80 retrocessionaires which have been assigned the following financial strength ratings from S&P:


						Percent of Reinsurance								Percent of Reinsurance
	Reinsurance		Percent			Recoverable Protected			Reinsurance		Percent			Recoverable Protected
Run-off Reinsurance segment (In millions)	Recoverable		of Total			by Collateral
(In millions)									Recoverable		of Total			by Collateral

AA- or higher	$	34		28	%		10	%	$	32		29	%		10	%
A (Single reinsurer)		37		30	%		100	%		32		29	%		100	%
A- (Single reinsurer)		19		16	%		0	%		17		16	%		80	%
A+ to A- (Other reinsurers)		17		14	%		1	%		16		15	%		5	%
Below A- or unrated		15		12	%		43	%		12		11	%		50	%

Total Run-off Reinsurance segment									$	109		100	%		51	%
	$	122		100	%		38	%

The collateral protecting the recoverables ~~is primarily in the form of~~includes letters of ~~credit.~~credit and assets held in trust. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of ~~September 30, 2009,~~March 31, 2010, the Company’s recoverables related to this segment were net of a reserve of ~~$11~~$6 million.

The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on the ceding companies’ claim payments. For GMDB, claim payments vary because of changes in equity markets and interest rates, as well as claim mortality and contractholder behavior. For workers’ compensation and personal accident, the payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from retrocessionaires, may not be known with certainty for some time.

Summary.The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of ~~September 30, 2009,~~March 31, 2010, based on current information. However, it is possible that future developments could have a material adverse effect on the Company’s consolidated results of operations and, in certain situations, such as if actual experience differs from the assumptions used in estimating reserves for GMDB, could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

Effects of reinsurance.In the Company’s Consolidated Statements of Income, ~~premiums~~Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2009		2008		2009		2008		2010		2009
Ceded premiums and fees
Individual life insurance and annuity business sold	$	49	$	51	$	150	$	165	$	46	$	51
Other		56		81		171		216		64		60

Total	$	105	$	132	$	321	$	381	$	110	$	111

Reinsurance recoveries
Individual life insurance and annuity business sold	$	87	$	67	$	214	$	246	$	67	$	68
Other		42		70		124		171		44		58

Total	$	129	$	137	$	338	$	417	$	111	$	126

3432

Note 12 — Pension and Other Postretirement Benefit Plans

The Company and certain of its subsidiaries provide pension, health care and life insurance defined benefits to eligible retired employees, spouses and other eligible dependents through various domestic and foreign plans.

~~On May 8,~~ The effect of its foreign pension and other postretirement benefit plans is immaterial to the Company’s results of operations, liquidity and financial position. Effective July 1, 2009, the Company ~~announced a freeze of~~froze its primary domestic pension plans effective July 1, 2009. A curtailment of benefits occurred as a result of this action since it eliminated the accrual of benefits effective July 1, 2009 for active employees enrolled in the domesticdefined benefit pension plans. ~~Accordingly,~~

For the ~~Company recognized an after-tax curtailment gain of $30 million during the second quarter of 2009, which was the remaining unamortized negative prior service cost at May~~three months ended March 31, 2009. As a result of the plan freeze, the Company re-measured the benefit obligations of the affected plans effective May 31, 2009, causing a reduction in the pension obligation of $47 million in the second quarter of 2009. The reduction primarily reflects an increase in the discount rates used to re-measure the pension plan obligations from 6.25% at December 31, 2008 to 6.5% at May 31, 2009 reflecting the change in market interest rates. Significant changes from2010, the Company’s ~~disclosures at December 31, 2008 as a result of the decision to freeze the domestic pension plans are as follows:~~

~~The Company’s~~ postretirement ~~benefit~~benefits liability adjustment ~~increased~~decreased by ~~$27~~$3 million pre-tax ($178 million after-tax) ~~for the nine months ended September 30, 2009,~~ resulting in ~~a decrease to accumulated other comprehensive income. The~~an increase to ~~the liability~~shareholders’ equity. The decrease in this adjustment was primarily due to ~~the effect of the curtailment, partially offset by net~~ amortization of actuarial losses.

As a result of the curtailment discussed above, there will be no pre-tax amortization of negative prior service costs after June 30, 2009. The Company previously disclosed that it expected to record amortization of negative prior service costs of $11 million pre-tax in 2009. The Company had been amortizing negative prior service costs related to previous plan amendments over a 6-year period.

The Company now expects estimated amortization of actuarial losses for the pension plans to be approximately $34 million pre-tax for the full year 2009, compared with the previous estimate of $54 million. The decline primarily reflects two factors:

The weighted average amortization period for the frozen plans is now based on the average expected remaining life of plan participants, which is approximately 31 years. This compares with the Company’s previous amortization period of six years, which reflected the expected remaining future service of active employees. This change in amortization period occurred after the plan freeze because the workforce is considered inactive for pension accounting purposes as these employees will no longer earn pension benefits.

~~The increase in the discount rate lowered the net actuarial loss to be amortized.~~

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Service cost	$	1		$	19		$	43		$	56		$	—		$	21
Interest cost		64			60			187			181			59			61
Expected long-term return on plan assets		(60	)		(58	)		(180	)		(175	)		(63	)		(60	)
Amortization of:
Net loss from past experience		3			15			30			43			7			17
Prior service cost		—			(2	)		(4	)		(8	)		—			(3	)

Net pension cost	$	8		$	34		$	76		$	97		$	3		$	36

The Company funds its qualified pension plans at least at the minimum amount required by the Pension Protection Act of 2006, which requires companies to fully fund defined benefit pension plans over a seven-year period beginning in 2008. ~~The Internal Revenue Service recently issued regulations providing relief in measuring pension plan funding obligations for 2009. As a result, only approximately $90~~For the three months ended March 31, 2010, the Company contributed $55 million, of which $12 million was required and $43 million was voluntary. For the Company’s $354 million in domestic pension plan contributions during the nine months ended September 30, 2009 were necessary to meet minimum funding requirements and the remaining contributions were voluntary. Although not required,remainder of 2010, the Company ~~may~~expects to make additional required contributions of $57 million and voluntary contributions of ~~approximately $55 million during the remainder of 2009.~~$100 million.

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Service cost	$	1		$	—		$	1		$	1		$	—		$	—
Interest cost		6			6			18			18			5			6
Expected long-term return on plan assets		—			—			(1	)		(1	)		—			—
Amortization of:
Net gain from past experience		(1	)		(2	)		(3	)		(6	)		—			(2	)
Prior service cost		(5	)		(5	)		(14	)		(13	)		(4	)		(5	)

Net other postretirement benefit cost	$	1		$	(1	)	$	1		$	(1	)	$	1		$	(1	)

Note 13 — Debt

September 30, December 31,
(In millions) 2009 2008
Short-term:

Commercial paper $ 100 $ 299
Current maturities of long-term debt 4 2

Total short-term debt $ 104 $ 301

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 300 300
8.5% Notes due 2019 349 —
6.37% Notes due 2021 78 78
7.65% Notes due 2023 100 100
8.3% Notes due 2023 17 17
7.875% Debentures due 2027 300 300
8.3% Step Down Notes due 2033 83 83
6.15% Notes due 2036 500 500
Other 10 14

Total long-term debt $ 2,435 $ 2,090

Short-term and long-term debt were as follows:

~~Under a universal shelf registration statement filed with~~


	March 31,		December 31,
(In millions)	2010		2009
Short-term:
Commercial paper	$	100	$	100
Current maturities of long-term debt		226		4

Total short-term debt	$	326	$	104

Long-term:
Uncollateralized debt:
7% Notes due 2011	$	—	$	222
6.375% Notes due 2011		226		226
5.375% Notes due 2017		250		250
6.35% Notes due 2018		300		300
8.5% Notes due 2019		349		349
6.37% Notes due 2021		78		78
7.65% Notes due 2023		100		100
8.3% Notes due 2023		17		17
7.875% Debentures due 2027		300		300
8.3% Step Down Notes due 2033		83		83
6.15% Notes due 2036		500		500
Other		9		11

Total long-term debt	$	2,212	$	2,436

In the ~~Securities and Exchange Commission,~~first quarter of 2010, the ~~Company issued $350 million~~7% Notes due 2011 were reclassified into current maturities of ~~8.5% Notes on May 4, 2009 ($349 million, net of~~long-term debt discount, with an effective interest rate of 9.90% per year). The difference between the stated and effective interest rates primarily reflects the effect of a treasury lock. See Note 10 for further information. Interest is payable on May 1 and November 1 of each year beginning November 1, 2009. These Notessince they will mature ~~on May 1, 2019.~~

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

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

•		the present value of the remaining principal and interest payments on the Notes being redeemed discounted at the applicable treasury rate plus 50 basis points (8.50% Notes due 2019) or 40 basis points (6.35% Notes due 2018).

less than one year.

3634

On March 14, 2008, the Company entered into a new commercial paper program (“the Program”). Under the Program, the Company is authorized to sell from time to time short-term unsecured commercial paper notes up to a maximum of $500 million. The proceeds are 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 its credit agreement for funding. In October 2008, the Company added an additional dealer to its Program. As of September 30, 2009, the Company had $100 million in commercial paper outstanding at a weighted average interest rate of 0.53% and remaining maturities ranging from five to 55 days.

Note 14 — Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss excludes amounts required to adjust future policy benefits for the run-off settlement annuity business. Changes in accumulated other comprehensive loss were as follows:

Tax
(Expense) After-
(In millions) Pre-Tax Benefit Tax
Three Months Ended September 30, 2009

Net unrealized appreciation, securities:

Net unrealized appreciation on securities arising during the period $ 479 $ (168 ) $ 311
Reclassification adjustment for (gains) included in shareholders’ net income (18 ) 6 (12 )

Net unrealized appreciation, securities $ 461 $ (162 ) $ 299

Net unrealized depreciation, derivatives
$ (9 ) $ 3 $ (6 )

Net translation of foreign currencies
$ 46 $ (17 ) $ 29

Postretirement benefits liability adjustment:

Reclassification adjustment for amortization of net losses from past experience and prior service costs $ (3 ) $ 2 $ (1 )

Net postretirement benefits liability adjustment $ (3 ) $ 2 $ (1 )

Three Months Ended September 30, 2008

Net unrealized depreciation, securities:

Net unrealized depreciation on securities arising during the period $ (290 ) $ 104 $ (186 )
Reclassification adjustment for losses included in shareholders’ net income 87 (32 ) 55

Net unrealized depreciation, securities $ (203 ) $ 72 $ (131 )

Net unrealized appreciation, derivatives
$ 23 $ (9 ) $ 14

Net translation of foreign currencies
$ (85 ) $ 29 $ (56 )

Postretirement benefits liability adjustment:

Reclassification adjustment for amortization of net losses from past experience and prior service costs $ 6 $ (3 ) $ 3

Net postretirement benefits liability adjustment $ 6 $ (3 ) $ 3

Tax
(Expense) After-
(In millions) Pre-Tax Benefit Tax
Nine Months Ended September 30, 2009

Net unrealized appreciation, securities:

Implementation effect of updated guidance on other-than-temporary impairments $ (27 ) $ 9 $ (18 )
Net unrealized appreciation on securities arising during the year 867 (300 ) 567
Reclassification adjustment for (gains) included in shareholders’ net income (1 ) (2 ) (3 )

Net unrealized appreciation, securities $ 839 $ (293 ) $ 546

Net unrealized depreciation, derivatives
$ (22 ) $ 8 $ (14 )

Net translation of foreign currencies
$ 68 $ (25 ) $ 43

Postretirement benefits liability adjustment:

Reclassification adjustment for amortization of net losses from past experience and prior service costs $ 9 $ (2 ) $ 7
Curtailment gain (46 ) 16 (30 )

Reclassification adjustment included in shareholders’ net income (37 ) 14 (23 )
Net change due to valuation update 10 (4 ) 6

Net postretirement benefits liability adjustment $ (27 ) $ 10 $ (17 )

Nine Months Ended September 30, 2008

Net unrealized depreciation, securities:

Net unrealized depreciation on securities arising during the year $ (504 ) $ 177 $ (327 )
Reclassification adjustment for losses included in shareholders’ net income 127 (45 ) 82

Net unrealized depreciation, securities $ (377 ) $ 132 $ (245 )

Net unrealized appreciation, derivatives
$ 5 $ (2 ) $ 3

Net translation of foreign currencies
$ (119 ) $ 40 $ (79 )

Postretirement benefits liability adjustment:

Reclassification adjustment for amortization of net losses from past experience and prior service costs $ 16 $ (6 ) $ 10
Net change due to valuation update 9 (3 ) 6

Net postretirement benefits liability adjustment $ 25 $ (9 ) $ 16


				Tax
(In millions) Three Months Ended March 31,	Pre-Tax			(Expense) Benefit			After- Tax
2010
Net unrealized appreciation, securities:
Net unrealized appreciation on securities arising during the period	$	127		$	(42	)	$	85
Reclassification adjustment for (gains) included in shareholders’ net income		(19	)		6			(13	)

Net unrealized appreciation, securities	$	108		$	(36	)	$	72

Net unrealized appreciation, derivatives	$	6		$	(2	)	$	4

Net translation of foreign currencies	$	6		$	(2	)	$	4

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	3		$	5		$	8


2009
Net unrealized appreciation, securities:
Net unrealized appreciation on securities arising during the period	$	43		$	(13	)	$	30
Reclassification adjustment for losses included in shareholders’ net income		33			(12	)		21

Net unrealized appreciation, securities	$	76		$	(25	)	$	51

Net unrealized appreciation, derivatives	$	17		$	(6	)	$	11

Net translation of foreign currencies	$	(44	)	$	16		$	(28	)

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	7		$	(3	)	$	4

Note 15 — Income Taxes

A. Income Tax Expense

The Company has historically accrued U.S. income taxes on the undistributed earnings of foreign subsidiaries. ~~In 2009,~~During the first quarter of 2010, the Company determined that the prospective earnings of its ~~South Korean operation~~Hong Kong operations are to be permanently invested overseas. ~~Income taxes for this operation will therefore be accrued at~~The Company made a similar determination as related to the ~~tax rate~~prospective earnings of ~~the foreign jurisdiction. As a result,~~its South Korea operations in 2009. This permanent investment of earnings increased shareholders’ net income ~~increased~~ for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 by ~~$24~~$14 million, which included ~~$22~~$6 million ~~representing~~(including $1 million related to realized investment gains) related to the ~~unrecognized~~Hong Kong implementation and $8 million attributable to recording taxes for the first quarter of 2010 at the foreign jurisdiction’s tax rate. As of March 31, 2010, deferred tax liabilities ~~attributable~~not recognized as a result of the permanent investment of South Korea and Hong Kong operation earnings was $37 million.

B. Unrecognized Tax Benefits

Gross unrecognized tax benefits declined for the three months ended March 31, 2010 by $22 million which was primarily due to ~~its investment~~the reversal of previously established liabilities that were reevaluated in ~~the South Korean subsidiary that are considered permanent in nature. Management is currently assessing whether the undistributed earnings~~light of ~~certain other foreign operations will be permanently invested overseas.~~new factors and technical developments. The effect on shareholders’ net income was not material.

During the first quarter of 2009, the IRS completed its examination of the Company’s 2005 and 2006 consolidated federal income tax returns, resulting in an increase to shareholders’ net income of $21 million ($20 million in continuing operations and $1 million in discontinued operations). This increase reflected a reduction in net unrecognized tax benefits of $8 million ($17 million reported in income tax expense, partially offset by a $9 million pre-tax charge) and a reduction of interest and penalties of $13 million (reported in income tax expense).

Gross unrecognized tax benefits declined for the nine months ended September 30, 2009 by $6 million. This decline was primarily due to completion of the IRS examination noted above which increased shareholders’ net income by $8 million, partially offset by non-audit related changes in net unrecognized tax benefits which decreased shareholder net income by $4 million.

Over the next ~~twelve~~12 months, the Company has determined it reasonably possible that the level of unrecognized tax benefits could increase or decrease significantly, subject to developments in certain matters in dispute with the IRS. It is also reasonably possible there could be a significant ~~change~~decline in the level of valuation allowances recorded against deferred tax benefits of the reinsurance operations ~~and certain unrealized investment losses~~ within the next ~~twelve~~12 months. The Company, however, is currently unable to reasonably estimate the potential impact of such changes.

C. Other Tax Matters

During the first quarter of 2009, final resolution was reached in one of the two disputed issues associated with the IRS examination of the Company’s 2003 and 2004 consolidated federal income tax returns. The second of these disputed matters remains unresolved and on June 4, 2009, the Company initiated litigation of this matter by filing a petition in the United States Tax Court. Due to the nature of the litigation process, the timing of the resolution of this matter is uncertain. Though the Company expects to prevail, an unfavorable resolution of this litigation would result in a charge to shareholder’s net income of up to ~~$15~~$17 million, representing net interest expense on the cumulative incremental tax for all affected years.In addition, ~~there~~two issues remain ~~two~~ unresolved ~~issues~~ from the IRS examination of the Company’s 2005 and 2006 consolidated federal income tax returns. ~~The Company initiated a regulatory appeal of these matters on March 31, 2009 by filing a formal protest of the proposed adjustments.~~ One of these unresolved issues is the same matter which remains in dispute from the prior IRS examination. The Company is attempting to resolve the other matter through the administrative appeals process, and filed a formal protest of the proposed adjustments on March 31, 2009.

The recently enacted Patient Protection & Affordable Care Act, including the Reconciliation Act of 2010, included provisions limiting the tax deductibility of certain future retiree benefit and compensation-related payments. The effect of these provisions reduced shareholders’ net income for the first quarter of 2010 by $5 million. The Company ~~continues~~will continue to evaluate ~~income~~the tax ~~specific provisions that were included in the 2010 federal budget proposal, particularly those related to the U.S. taxation~~effect of foreign operations. Also, certain of the healthcare reform proposals under consideration by Congress include provisions which, if enacted as currently proposed, could increase the Company’s effective tax rate.these provisions.

Note 16 — Segment Information

The Company’s operating segments generally reflect groups of related products, except for the International segment which is generally based on geography. In accordance with GAAP, operating segments that do not require separate disclosure have been combined into Other Operations. The Company measures the financial results of its segments using “segment earnings (loss),” which ~~subsequent to implementing the FASB’s guidance for noncontrolling interests,~~ is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses.

Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated. The effect on prior periods is not material.

Summarized segment financial information was as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Premiums and fees, Mail order pharmacy revenues and Other revenues
Health Care	$	3,194		$	3,357		$	9,723		$	9,841		$	3,731		$	3,289
Disability and Life		684			656			2,074			1,986			690			701
International		486			476			1,392			1,434			534			439
Run-off Reinsurance		(149	)		81			(211	)		152			(38	)		121
Other Operations		42			47			132			138			43			44
Corporate		(17	)		(14	)		(44	)		(41	)		(15	)		(14	)

Total	$	4,240		$	4,603		$	13,066		$	13,510		$	4,945		$	4,580

Shareholders’ income from continuing operations
Health Care	$	200		$	187		$	549		$	482		$	167		$	155
Disability and Life		64			70			220			211			70			63
International		38			44			144			144			72			42
Run-off Reinsurance		30			(105	)		116			(252	)		4			(26	)
Other Operations		23			20			63			64			19			19
Corporate		(35	)		(31	)		(97	)		(133	)		(46	)		(22	)

Segment Earnings		320			185			995			516			286			231
Realized investment gains (losses), net of taxes		9			(15	)		(24	)		(18	)
Realized investment losses, net of taxes														(3	)		(24	)

Shareholders’ income from continuing operations	$	329		$	170		$	971		$	498		$	283		$	207

3937

Note 17 — Contingencies and Other Matters

The Company, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business.

Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business

Separate account assets are contractholder funds maintained in accounts with specific investment objectives. The Company records separate account liabilities equal to separate account assets. In certain cases, primarily associated with the sold retirement benefits business (which was sold in April 2004), the Company guarantees a minimum level of benefits for retirement and insurance contracts written in separate accounts. The Company establishes an additional liability if management believes that the Company will be required to make a payment under these guarantees.

The Company guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. This percentage varies depending on the asset class within a sponsoring employer’s portfolio (for example, a bond fund would require a lower percentage than a riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers do not maintain the required levels of separate account assets, the Company or an affiliate of the buyer has the right to redirect the management of the related assets to provide for benefit payments. As of ~~September 30, 2009,~~March 31, 2010, employers maintained assets that exceeded the benefit obligations. Benefit obligations under these arrangements were ~~$1.8~~$1.7 billion as of ~~September 30, 2009.~~March 31, 2010. Approximately ~~76%~~75% of these guarantees are reinsured by an affiliate of the buyer of the retirement benefits business. The remaining guarantees are provided by the Company with minimal reinsurance from third parties. There were no additional liabilities required for these guarantees as of ~~September 30, 2009.~~March 31, 2010. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy. See Note 87 for further information on the fair value hierarchy.

The Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.

Other Financial Guarantees

Guaranteed minimum income benefit contracts.The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income benefits under certain variable annuity contracts issued by other insurance companies. A contractholder can elect the guaranteed minimum income benefit ~~(GMIB)~~(“GMIB”) within 30 days of any eligible policy anniversary after a specified contractual waiting period. The Company’s exposure arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the policy’s current account value. At the time of annuitization, the Company pays the excess (if any) of the guaranteed benefit over the benefit based on the current account value in a lump sum to the direct writing insurance company.

In periods of declining equity markets or declining interest rates, the Company’s GMIB liabilities increase. Conversely, in periods of rising equity markets and rising interest rates, the Company’s liabilities for these benefits decrease.

The Company estimates the fair value of the GMIB assets and liabilities using assumptions for market returns and interest rates, volatility of the underlying equity and bond mutual fund investments, mortality, lapse, annuity election rates, nonperformance risk, and risk and profit charges. ~~Assumptions were updated beginning at January 1, 2008 to reflect requirements for fair value measurements.~~ See Note 87 for additional information on how fair values for these liabilities and related receivables for retrocessional coverage are determined.

The Company is required to disclose the maximum potential undiscounted future payments for ~~guarantees related to minimum income benefits.~~GMIB contracts. Under these guarantees, the future payment amounts are dependent on equity and bond fund market and interest rate levels prior to and at the date of annuitization election, which must occur within 30 days of a policy anniversary, after the appropriate waiting period. Therefore, the future payments are not fixed and determinable under the terms of the contract. Accordingly, the Company has estimated the maximum potential undiscounted future payments using hypothetical adverse assumptions, defined as follows:

no annuitants surrendered their accounts;

all annuitants lived to elect their benefit;

all annuitants elected to receive their benefit on the next available date ~~(2009~~(2010 through 2014); and

all underlying mutual fund investment values remained at the ~~September 30, 2009~~March 31, 2010 value of $1.3 billion with no future returns.

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The maximum potential undiscounted payments that the Company would make under those assumptions would aggregate ~~$1.4~~$1.2 billion before reinsurance recoveries. The Company expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The Company has retrocessional coverage in place from two external reinsurers which covers 55% of the exposures on these contracts. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

Certain other guarantees.The Company had indemnification obligations to lenders of up to ~~$239~~$236 million as of ~~September 30, 2009~~March 31, 2010, related to borrowings by certain real estate joint ventures which the Company either records as an investment or consolidates. These borrowings, which are nonrecourse to the Company, are secured by the joint ventures’ real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in 2010 through 2017. The Company’s indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of ~~September 30, 2009.~~March 31, 2010.

As of ~~September 30, 2009,~~March 31, 2010, the Company guaranteed that it would compensate the lessors for a shortfall of up to $44 million in the market value of certain leased equipment at the end of the lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had liabilities for these guarantees of $8 million as of ~~September 30, 2009.~~March 31, 2010.

As part of the reinsurance and administrative service arrangements acquired from Great-West Life and Annuity, Inc., the Company is responsible to pay claims for the group medical and long-term disability business of Great-West Healthcare and collect related amounts due from their third party reinsurers. Any such amounts not collected will represent additional assumed liabilities of the Company and decrease shareholders’ net income if and when these amounts are determined uncollectible. At ~~September 30, 2009,~~March 31, 2010, there were no receivables recorded for paid claims due from third party reinsurers for this business and unpaid claims related to this business were estimated at ~~$24~~$22 million.

The Company had indemnification obligations as of ~~September 30, 2009~~March 31, 2010 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, the filing of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations, since not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities required for these indemnification obligations as of ~~September 30, 2009.~~March 31, 2010.

The Company contracts on an administrative services only (“ASO”) basis with customers who fund their own claims. The Company charges these customers administrative fees based on the expected cost of administering their self-funded programs. In some cases, the Company provides performance guarantees associated with meeting certain service related and other performance standards. If these standards are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company establishes liabilities for estimated payouts associated with these performance guarantees. Approximately 12% of reported ASO fees are at risk, with actual reimbursements of less than 1% of reported ASO fees.

The Company has agreements with certain banks that provide banking services to settle claim checks processed by the Company for ASO and certain minimum premium customers. The customers are responsible for adequately funding their accounts as claim checks are presented for payment. Under these agreements, the Company guarantees that the banks will not incur a loss if a customer fails to properly fund its account. The guarantee will fluctuate daily. As of March 31, 2010, the aggregate maximum exposure under these guarantees was approximately $700 million. Through April 29, 2010, the exposure that existed at March 31, 2010 has been reduced by approximately 85% from customers’ funding of claim checks when presented for payment. In addition, the Company can limit its exposure under these guarantees by suspending claim payments for any customer who has not adequately funded their bank account.

The Company does not expect that these guarantees will have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.

Regulatory and Industry Developments

Employee benefits regulation.The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the Federal Departments of Labor and Justice, as well as the courts. Regulation, legislation and judicial decisions have resulted in changes to industry and the Company’s business practices and will continue to do so in the future. In addition, the Company’s subsidiaries are routinely involved with various claims, lawsuits and regulatory and IRS audits and investigations that could result in financial liability, changes in business practices, or both. Health care regulation and legislation in its various forms, including the implementation of the Patient Protection and Affordable Care Act (including the Reconciliation Act) that was signed into law during the first quarter of 2010, could have an adverse effect on the Company’s health care operations if it inhibits the Company’s ability to respond to market demands, adversely affects the way the Company does business, or results in increased medical or administrative costs without improving the quality of care or services.

Other possible regulatory and legislative changes or judicial decisions that could have an adverse effect on the Company’s employee benefits businesses include:

additional mandated benefits or services that increase costs;

legislation that would grant plan participants broader rights to sue their health plans;

changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for the Company’s health care products and services;

changes in Employee Retirement Income Security Act ~~(ERISA)~~of 1974 (“ERISA”) regulations resulting in increased administrative burdens and costs;

additional restrictions on the use of prescription drug formularies and rulings from pending purported class action litigation, which could result in adjustments to or the elimination of the average wholesale price or “AWP” of pharmaceutical products as a benchmark in establishing certain rates, charges, discounts, guarantees and fees for various prescription drugs;

additional privacy legislation and regulations that interfere with the proper use of medical information for research, coordination of medical care and disease and disability management;

additional variations among state laws mandating the time periods and administrative processes for payment of health care provider claims;

legislation that would exempt independent physicians from antitrust laws; and

changes in federal tax laws, such as amendments that could affect the taxation of employer provided benefits.

The employee benefits industry remains under scrutiny by various state and federal government agencies and could be subject to government efforts to bring criminal actions in circumstances that could previously have given rise only to civil or administrative proceedings.

Concentration of risk.For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated ~~29%~~32% of the segment’s revenues ~~for the third quarter of 2009~~ and ~~28% of the segment’s revenues for the nine months ended September 30, 2009. South Korea generated 37%~~39% of the segment’s earnings for the ~~third quarter of 2009 and 43% of the segment’s earnings for the nine~~three months ended ~~September 30, 2009.~~March 31, 2010. Due to the concentration of business in South Korea, the International segment is exposed to potential losses resulting from economic and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, which could have a significant impact on the segment’s results and the Company’s consolidated financial results.

Litigation and Other Legal Matters

The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits, investigations and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs including payments to providers and benefit level disputes. Litigation of income tax matters is accounted for under FASB’s accounting guidance for uncertainty in income taxes. Further information can be found in Note 15. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously and has recorded accruals in accordance with GAAP. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to the Company’s consolidated results of operations, liquidity or financial condition.

Managed care litigation.On April 7, 2000, several pending actions were consolidated in the United States District Court for the Southern District of Florida in a multi-district litigation proceeding captionedIn re Managed Care Litigationchallenging, in general terms, the mechanisms used by managed care companies in connection with the delivery of or payment for health care services. The consolidated cases includeShane v. Humana, Inc., et al.,Mangieri v. CIGNA Corporation,Kaiser and Corrigan v. CIGNA Corporation, et al.andAmer. Dental Ass’n v. CIGNA Corp. et al.

In 2004, the court approved a settlement agreement between the physician class and CIGNA. However, a dispute over disallowed claims under the settlement submitted by a representative of certain class member physicians is in arbitration. Separately, in 2005, the court approved a settlement between CIGNA and a class of non-physician health care providers. Only the American Dental Association case remains unresolved. On March 2, 2009, the Court dismissed with prejudice five of the six counts of the ~~complaint with prejudice.~~complaint. On March 20, 2009, the Court declined to exercise supplemental jurisdiction over the remaining state law claim and dismissed the case. Plaintiffs ~~filed a notice~~appealed on February 26, 2010 before the United States Court of ~~appeal on April 17, 2009.~~Appeals for the Eleventh Circuit. CIGNA denies the allegations and will continue to vigorously defend itself.

CIGNA has received insurance recoveries related to ~~this litigation.~~theIn re Managed Care Litigation. In 2008, the ~~trial court~~Court of Common Pleas of Philadelphia County ruled that the Company is not entitled to insurance recoveries from one of the two insurers from which the Company is pursuing further recoveries. CIGNA appealed that decision and on June 3, 2009, the Superior Court of Pennsylvania reversed the trial court’s decision, remanding the case to the trial court for further proceedings.

Broker compensation.Beginning in 2004, the Company, other insurance companies and certain insurance brokers received subpoenas and inquiries from various regulators, including the New York and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorney’s Office for the Southern District of California and the U.S. Department of Labor relating to their investigations of insurance broker compensation. CIGNA ~~has~~ cooperated with the inquiries and investigations.

On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life Insurance Company of North America, were named as defendants in a multi-district litigation proceeding,In re Insurance Brokerage Antitrust Litigation, consolidated in the United States District Court for the District of New Jersey. The complaint alleges that brokers and insurers conspired to hide commissions, thus increasing the cost of employee benefit plans, and seeks treble damages and injunctive relief. Numerous insurance brokers and other insurance companies are named as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in favor of the defendants. Plaintiffs ~~have filed an appeal.~~appealed. CIGNA denies the allegations and will continue to vigorously defend itself.

Amara cash balance pension plan litigation.On December 18, 2001, Janice Amara filed a class action lawsuit, ~~now~~ captionedJanice C. Amara, Gisela R. Broderick, Annette S. Glanz, individually and on behalf of all others similarly situated v. CIGNA Corporation and CIGNA Pension Plan,in the United States District Court for the District of Connecticut against CIGNA Corporation and the CIGNA Pension Plan on behalf of herself and other similarly situated participants in the CIGNA Pension Plan affected by the 1998 conversion to a cash balance formula. The plaintiffs allege various ERISA violations including, among other things, that the Plan’s cash balance formula discriminates against older employees; the conversion resulted in a wear away period (during which the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are not adequately disclosed in the Plan.

In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension Plan on the age discrimination and wear away claims. However, the court found in favor of the plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from the existing cash balance formula for the majority of the class, requiring class members to receive their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment and post-judgment interest. ~~The court stayed implementation of the decision until the parties’ appeals have been exhausted.~~ Both parties appealed the court’s ~~decisions.~~decisions to the United States Court of Appeals for the Second Circuit which issued a decision on October 6, 2009 affirming the District Court’s judgment and order on all issues. On January 4, 2010, the Company and the plaintiffs filed separate petitions for a writ of certiorari to the United States Supreme Court, both of which are fully briefed and pending. The implementation of the judgment is currently stayed. The Company will continue to vigorously defend itself in this case. In the second quarter of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax), which principally reflects the Company’s best estimate of the liabilities related to the court order. On October 6, 2009, the Second Circuit Court of Appeals issued a decision affirming the District Court’s judgment and order on all issues. On October 26, 2009 the Company moved the Second Circuit Court of Appeals to continue to stay the implementation of the decision citing its intention to seek to appeal to the United States Supreme Court. The Company will continue to vigorously defend itself in this case.

Ingenix.On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of UnitedHealthcare, used to calculate payments for services provided by out-of-network providers. The Company received four subpoenas from the New York Attorney General’s office in connection with this investigation and responded appropriately. On February 17, 2009, the Company entered into an Assurance of Discontinuance resolving the investigation. In connection with the industry-wide resolution, the Company contributed $10 million to the establishment of a new non-profit company that will compile and provide the data currently provided by Ingenix. In addition, on March 28, 2008, the Company received a voluntary request for production of documents from the Connecticut Attorney General’s office seeking certain out-of-network claim payment information. The Company has responded appropriately. Since January 2009, the Company has received and responded to inquiries regarding the use of Ingenix data from the Illinois and Texas ~~Attorney~~Attorneys General and the Departments of Insurance in Illinois, Florida, Vermont, Georgia, Pennsylvania, Connecticut, and ~~Alaska and will be responding to a letter from the Illinois Attorney General received on October 9, 2009.~~Alaska.

The Company was named as a defendant in seven putative nationwide class actions asserting that due to the use of data from Ingenix, Inc., the Company improperly underpaid claims, an industry-wide issue. Two actions were brought on behalf of members, (Franco v. CIGNA Corp. et al.,andChazen v. CIGNA Corp. et al.), and five actions were brought on behalf of providers, (American Medical Association et al. v. CIGNA Corp. et al., Shiring et al. v. CIGNA Corp. et al.,;Higashi et al. v. CGLIC et al.~~and~~; Pain Management and Surgery Center of Southeast Indiana v. CGLIC et al.;andNorth Peninsula Surgical Center v. Connecticut General Life Insurance Co. et al.)~~. Six~~, all of ~~the seven matters~~which have been consolidated into theFrancocase pending in the United States District Court for the District of New Jersey. The consolidated amended complaint, filed on August 7, 2009, asserts claims under ERISA, the RICO statute, the Sherman Antitrust Act and New Jersey state law. CIGNA filed a motion to dismiss the consolidated amended complaint on September 9, ~~2009.~~2009, which is now fully briefed and pending. Discovery is ongoing and class certification is scheduled to be ~~litigated in March and April of 2010. The one remaining class action that has not yet been consolidated in the~~~~Franco~~~~case is~~~~North Peninsula Surgical Center~~~~filed on July 6, 2009,~~briefed in the ~~United States District Court for the Central District~~second quarter of ~~California, asserting claims under ERISA, the Sherman Antitrust Act and state unfair competition law.~~2010.

On June 9, 2009, CIGNA filed motions in the United States District Court for the Southern District of Florida to enforce theIn re Managed Care ~~MDL~~ Litigationsettlement described above by enjoining the RICO and antitrust causes of action asserted by the provider and medical association plaintiffs in theIngenixlitigation on the ground that they arose prior to and were released in the April 2004 settlement. On November 30, 2009, the Court granted the motions and ordered the provider and association plaintiffs to withdraw their RICO and antitrust claims from theIngenixlitigation by December 21, 2009. The plaintiffs filed notices of appeal with the United States Court of Appeals for the Eleventh Circuit on December 10 and 11, 2009, along with motions ~~are now~~to stay the order pending appeal. On January 12, 2010, the United States Court of Appeals for the Eleventh Circuit stayed the order pending resolution of the appeal. The appeal is fully briefed and pending.

One of the provider plaintiffs, Pain Management and Surgery Center of Southern Indiana, filed a voluntary dismissal of its claims on November 11, 2009.

It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to use of data provided by Ingenix, Inc. The Company denies the allegations asserted in the investigations and litigation and will vigorously defend itself in these matters.

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Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

INDEX



Introduction			4543

Consolidated Results of Operations			4746

Critical Accounting Estimates			5149

Segment Reporting			5549

Health Care			5550

Disability and Life			6053

International			6254

Run-off Reinsurance			6456

Other Operations			6758

Corporate			6859

Discontinued Operations			6859

Industry Developments ~~and Other Matters~~			6960

Liquidity and Capital Resources			7061

Investment Assets			7665

Market Risk			8170

Cautionary Statement			8271

INTRODUCTION

In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries ~~(the Company)~~(“the Company”) make certain forward-looking statements relating to the Company’s financial condition and results of operations, as well as to trends and assumptions that may affect the Company. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for ~~2009”~~2010”). Actual results may differ from the Company’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis ~~(MD&A)~~(“MD&A”), including in the Cautionary Statement beginning on page ~~82.~~71. The forward-looking statements contained in this filing represent management’s current estimate as of the date of this filing. Management does not assume any obligation to update these estimates.

The following discussion addresses the financial condition of the Company as of ~~September 30, 2009,~~March 31, 2010, compared with December 31, ~~2008,~~2009, and its results of operations for the ~~third quarter of 2009 and nine~~three months ended ~~September 30, 2009~~March 31, 2010 compared with the same ~~periods~~period last year. This discussion should be read in conjunction with MD&A included in the Company’s ~~2008~~2009 Form 10-K, to which the reader is directed for additional information.

Certain reclassifications ~~and restatements~~ have been made to prior period amounts to conform to the current presentation. ~~In addition, certain amounts have been restated as a result of the adoption of new accounting pronouncements. See Note 2 to the Consolidated Financial Statements for additional information.~~

Overview

The Company constitutes one of the largest investor-owned health service organizations in the United States. Its subsidiaries are major providers of health care and related benefits, the majority of which are offered through the workplace. In addition, the Company has an international operation that offers ~~life, accident and~~ supplemental health, life and accident insurance products as well as international health care products and services to businesses and individuals in selected markets. The Company also has certain inactive businesses, including a Run-off Reinsurance segment.

4543

Ongoing Operations

The Company’s ability to increase revenue, shareholders’ net income and operating cash flow from ongoing operations is directly related to progress in executing on ~~the execution of~~ its strategic initiatives, the success of which is measured by certain key factors, including the Company’s ability to:

profitably price products and services at competitive levels that reflect emerging experience;

maintain and grow its customer base;

cross sell its various health and related benefit products;

invest available cash at attractive rates of return for appropriate durations;

~~effectively manage~~reduce other operating ~~expenses;~~expenses in the Health Care segment; and

effectively deploy capital.

Strategy

As a global health service organization, CIGNA’s mission remains focused on helping the people it serves improve their health, well-being and sense of security. CIGNA’s long-term growth strategy is based on: (1) growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals.

CIGNA expects to focus on the following areas it believes represent the markets or areas with the most potential for profitable growth:

In the Health Care segment, the Company is concentrating on: (1) further enhancing its geographic focus in the middle market in order to create geographic density; (2) growing the “Select” market, which generally includes employers with more than 50 but fewer than 250 employees, by leveraging the Company’s customer knowledge, differentiated service model, product portfolio and distribution model; and (3) engaging those national account employers who share and will benefit from the Company’s value proposition of using health advocacy and employee engagement to increase productivity, performance and the health outcomes of their employees.

In the Disability and Life segment, CIGNA’s strategy is to grow its disability business by fully leveraging the key components of its industry-leading disability management model to reduce medical costs for its clients and return their employees to work sooner through: (1) early claim notification and outreach; (2) a full suite of clinical and return-to-work resources; and (3) specialized case management services.

In the International segment, the Company is targeting growth through: (1) product and channel expansion in its supplemental health, life and accident insurance business in key Asian geographies; (2) the introduction of new expatriate benefits products; and (3) further geographic expansion.

The Company plans to improve its strategic and financial flexibility by driving further reductions in its Health Care operating expenses, improving its medical cost competitiveness in targeted markets and effectively managing balance sheet exposures.

Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to health advocacy as a means of creating sustainable solutions for employers, improving the health of the individuals that the Company serves, and lowering the costs of health care for all constituencies.

Health Care Reform

In the first quarter of 2010, the Patient Protection and Affordable Care Act, including the Reconciliation Act of 2010, (collectively, “the Act”) was signed into law. The Act mandates broad changes in the delivery of health care benefits that may impact the Company’s current business model, including its relationship with current and future customers, producers and health care providers, products, services, processes and technology. The Company is evaluating potential business opportunities resulting from the Act that will enable it to leverage the strengths and capabilities of its broad health and wellness portfolio. The Act includes provisions for mandatory coverage of benefits and a minimum medical loss ratio, eliminates lifetime and annual benefit limits and creates health insurance exchanges. These provisions are expected to take effect over the next several years from 2010 to 2018.

The Act will require that health services companies such as CIGNA and others in the healthcare industry help fund the additional insurance benefits and coverages provided from this legislation through the assessment of fees and excise taxes. The amount which the Company will be required to pay starting in 2014 for these fees and excise taxes will result in charges to the Company’s financial statements in future periods. In addition, since these fees and excise taxes will not be tax deductible, the Company’s effective tax rate is expected to increase in future periods. However, the Company is unable to estimate the amount of these fees and excise taxes or the increase in the effective tax rate because guidance for their calculation has not been finalized.

The Act also changes certain tax laws which affect the Company’s 2010 financial statements. Although these provisions do not become effective until 2013, they are expected to limit the tax deductibility of certain future retiree benefit and compensation-related payments. For the three months ended March 31, 2010, the Company recorded an after-tax charge of approximately $5 million related to these changes. The Company expects to record additional after-tax charges of $5 million for the balance of the year with respect to the known effects of the tax provisions, but will continue to evaluate their impact as further guidance is made available.

Management is currently unable to estimate the ultimate impact of the Act on the Company’s results of operations, financial condition and liquidity due to the uncertainties of interpretation, implementation and timing of the many provisions of the Act. Management is closely monitoring this legislation and has formed a task force to implement and report on the Company’s compliance with the Act, to actively engage with regulators to assist with the conversion of legislation to regulation and to assess potential opportunities arising from the Act.

Run-off Operations

Effectively managing the various exposures of its run-off operations is important to the Company’s ongoing profitability, operating cash flows and available capital. The results are influenced by a range of economic factors, especially movements in equity markets and interest rates. In order to substantially reduce the impact of equity market movements on the liability for guaranteed minimum death benefits ~~(GMDB)~~(“GMDB”, also known as “VADBe”), the Company operates an equity hedge program. The Company actively monitors the performance of the hedge program, and evaluates the cost/benefit of hedging other risks. Results are also influenced by behavioral factors, including future partial surrender election rates for GMDB contracts, annuity election rates for guaranteed minimum income benefits ~~(GMIB)~~(“GMIB”) contracts, annuitant lapse rates, as well as the collection of amounts recoverable from retrocessionaires. The Company actively studies policyholder behavior experience and adjusts future expectations based on the results of the studies, as warranted. The Company also performs regular audits of ceding companies to ensure that premiums received and claims paid properly reflect the underlying risks, and to maximize the probability of subsequent collection of claims from retrocessionaires. Finally, the Company monitors the financial strength and credit standing of ~~the~~its retrocessionaires and ~~establishes~~requests or collects collateral when warranted.

Summary

The Company’s overall results are influenced by a range of economic and other factors, especially:

cost trends and inflation for medical and related services;

utilization patterns of medical and other services;

employment levels;

the tort liability system;

developments in the political environment both domestically and internationally, including ~~efforts to reform the~~ U.S. health care ~~system;~~reform;

interest rates, equity market returns, foreign currency fluctuations and credit market volatility, including the availability and cost of credit in the future; and

federal, state and ~~state~~international regulation.

The Company regularly monitors the trends impacting operating results from the above mentioned key factors and economic and other factors affecting its operations. The Company develops strategic and tactical plans designed to improve performance and maximize its competitive position in the markets it serves. The Company’s ability to achieve its financial objectives is dependent upon its ability to effectively execute on these plans and to appropriately respond to emerging economic and company-specific trends.

CONSOLIDATED RESULTS OF OPERATIONS

The Company ~~seeks to improve~~measures the ~~performance~~financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations before after-tax realized investment results. Adjusted income from operations is defined as consolidated segment earnings (loss) excluding special items (defined below) and ~~profitably grow its ongoing~~the results of the GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the Company’s businesses and ~~manage~~permits analysis of trends in underlying revenue, expenses and shareholders’ net income. This measure is not determined in accordance with accounting principles generally accepted in the ~~risks associated with~~United States (“GAAP”) and should not be viewed as a substitute for the ~~run-off reinsurance~~most directly comparable GAAP measure, which is shareholders’ income from continuing operations.

Summarized below is a reconciliation between shareholders’ income from continuing operations and adjusted income from operations.

FINANCIAL SUMMARY


	Three Months Ended
	March 31,
(In millions)	2010			2009
Premiums and fees	$	4,543		$	4,051
Net investment income		266			229
Mail order pharmacy revenues		348			312
Other revenues		54			217
Total realized investment losses		(6	)		(36	)

Total revenues		5,205			4,773
Benefits and expenses		4,783			4,500

Income from continuing operations before taxes		422			273
Income taxes		138			65

Income from continuing operations		284			208
Less: Net income attributable to noncontrolling interest		1			1

Shareholders’ income from continuing operations		283			207
Less: realized investment losses, net of taxes		(3	)		(24	)

Segment earnings		286			231
Less: adjustments to reconcile to adjusted income from operations:
Results of GMIB business (after-tax)		5			23
Special item (after-tax):
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)		—			20

Adjusted income from operations	$	281		$	188

Summarized below is adjusted income from operations by segment:


	Three Months Ended
	March 31,
(In millions)	2010			2009
Adjusted Income (Loss) From Operations
Health Care	$	167		$	154
Disability and Life		70			58
International		72			41
Run-off Reinsurance		(1	)		(49	)
Other Operations		19			18
Corporate		(46	)		(34	)

Total	$	281		$	188

~~Acquisition~~Overview of ~~Great-West Healthcare~~March 31, 2010 Consolidated Results of Operations

~~On April 1, 2008,~~Adjusted income from operations increased significantly for the ~~Company acquired~~first three months of 2010 compared to the ~~Healthcare division of Great-West~~same period in 2009, primarily reflecting stronger earnings in the ongoing business segments (Health Care, Disability and Life and ~~Annuity, Inc. (“Great-West Healthcare” or~~International) as well as improved results in the ~~“acquired business”) through 100% indemnity reinsurance agreements and~~Run-off Reinsurance segment primarily due to the ~~acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare. The purchase price was approximately $1.5 billion and consisted~~absence of a ~~payment to~~charge in the seller of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional employer groups. Great-West Healthcare’s offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed through a combination of cash and the issuance of both short and long-term debt.

~~See Note 3 to the Consolidated Financial Statements for additional information~~.

~~Initiatives to Lower Operating Expenses~~

~~during the third~~first quarter of 2009 ~~a charge~~related to the GMDB business.

Shareholders’ income from continuing operations for the first three months of ~~$10 million pre-tax ($7 million after-tax), for severance resulting~~2010 also increased significantly compared with the same period in 2009 due to higher adjusted income from ~~reductions of approximately 230 positions in its workforce; and~~

~~during the second quarter of 2009, a charge of $14 million pre-tax ($9 million after-tax), for severance resulting from reductions of approximately 480 positions in its workforce.~~

~~Substantially all of these charges~~operations as cited above as well as improved realized investment results. These favorable effects were ~~recorded~~partially offset by lower earnings in the ~~Health Care segment,~~GMIB business along with the absence of the 2009 benefit from the completion of an IRS examination.

Special Item and ~~are expected to be paid~~GMIB

Management does not believe that the special item noted in ~~cash by June 30, 2010. As a result~~the table above is representative of ~~these actions,~~the Company’s underlying results of operations. Accordingly, the Company ~~expects annualized after-tax savings of approximately $30 million~~excluded this special item from adjusted income from operations in ~~2010 and beyond. A portion of the savings is being realized in 2009.~~

~~CONSOLIDATED RESULTS OF OPERATIONS~~

~~FINANCIAL SUMMARY~~

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2009 2008 2009 2008
Premiums and fees $ 3,985 $ 4,128 $ 12,049 $ 12,197
Net investment income 263 272 752 802
Mail order pharmacy revenues 316 300 944 882
Other revenues (61 ) 175 73 431
Total realized investment gains (losses) 14 (23 ) (40 ) (28 )

Total revenues 4,517 4,852 13,778 14,284
Benefits and expenses 4,030 4,619 12,388 13,564

Income from continuing operations before taxes 487 233 1,390 720
Income taxes 157 62 417 220

Income from continuing operations 330 171 973 500
Shareholders’ income from discontinued operations, net of taxes — 1 1 3

Net income 330 172 974 503
Less: Net income attributable to noncontrolling interest 1 1 2 2

Shareholders’ net income $ 329 $ 171 $ 972 $ 501

Realized investment gains (losses), net of taxes $ 9 $ (15 ) $ (24 ) $ (18 )

~~Special Items~~

In order to facilitate an understanding and comparison of results of operations and permit analysis of trends in underlying revenue, expenses and shareholders’ income from continuing ~~operations, presented below are~~operations.

There were no special items ~~which management believes are not representative~~for the first three months of ~~the underlying results of operations.~~2010.

~~SPECIAL ITEMS~~

Pre-Tax After-Tax
Benefit Benefit
(In millions) (Charge) (Charge)
Three Months Ended September 30,

2009

Cost reduction charge $ (10 ) $ (7 )

Nine Months Ended September 30,

2009

Curtailment gain $ 46 $ 30
Cost reduction charge (24 ) (16 )
Completion of IRS examination (9 ) 20

Total $ 13 $ 34

2008

Charges related to litigation matters $ (117 ) $ (76 )

See Note 12 to the Consolidated Financial Statements for additional information related to the curtailment gain and Note 6 to the Consolidated Financial Statements for further discussion of the cost reduction charge. The ~~other~~ special item for the first three months of 2009 ~~is a result of~~resulted from the completion of the 2005 and 2006 IRS examinations. See Note 15 to the Consolidated Financial Statements for additional information.

~~See Note 17 to~~The Company also excludes the ~~Consolidated Financial Statements for further discussion~~results of the litigation charge associated with the pension plan reported in the second quarter of 2008. The remaining special item for 2008 consisted of charges related to certain litigation matters which were reported in the Health Care segment.

~~Overview of Consolidated Results of Operations~~

~~Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008~~

~~Shareholders’ income from continuing operations for the three months ended September 30, 2009 increased significantly compared with the three months ended September 30, 2008, as a result of:~~

~~significantly improved results in the Run-off Reinsurance segment resulting from the absence of the third quarter 2008 charge related to the GMDB business and favorable results from~~ the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in ~~2009 compared with losses~~fair value, which are reported in ~~2008.~~shareholders’ net income, are volatile and unpredictable. See the ~~Run-off Reinsurance section of this MD&A for further discussion;~~

~~increased segment earnings in the Health Care segment; and~~

~~more favorable realized investment results.~~

~~Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008~~

Shareholders’ income from continuing operations was also significantly higher for the nine months ended September 30, 2009 compared with the same period in 2008. In addition to the items cited above related to the three months ended September, the increase for the nine months resulted from:

•		~~the absence of the $131 million charge in the GMIB business resulting from the adoption of guidance for fair value measurements;~~

•		~~favorable results from the GMIB business in 2009 compared with losses in 2008 (excluding the $131 million charge from adopting the new fair value guidance); and~~

•		~~the favorable year over year impact of the following special items as noted in the above table:~~

	•		~~completion of the IRS examination;~~

	•		~~the curtailment gain on the pension plan, partially offset by cost reduction charges; and~~

	•		~~litigation charges reported for the nine months ended September 30, 2008. There were no litigation charges reported as special items for the nine months ended September 30, 2009.~~

Higher segment earnings in the Health Care segment also contributed to the increase in shareholders’ income from continuing operations for the nine months ended September 30, 2009. Partially offsetting these favorable effects were higher net realized investment losses in 2009.

~~See the Segment reporting~~Critical Accounting Estimates section of the MD&A ~~for further information regarding segment earnings for each~~beginning on page 55 of the Company’s ~~segments~~2009 Form 10-K for ~~both~~more information on the ~~three months~~effect of capital market assumption changes on shareholders’ net income. Because of this volatility, and ~~nine months ended September 30, 2009 compared with~~since the ~~same periods~~GMIB business is in ~~2008.~~run-off, management does not believe that its results are meaningful in assessing underlying results of operations.

Outlook for ~~2009 and~~ 2010

The Company expects ~~full-year 2009 shareholders’~~2010 adjusted income from ~~continuing~~ operations ~~excluding realized investment results, the results of the GMIB business, and special items,~~ to be ~~higher than 2008 due~~comparable to ~~lower losses in the Run-off Reinsurance segment. Overall segment earnings in the ongoing operating segments (Health Care, Disability and Life, and International) are expected to be~~or slightly higher than ~~2008.~~2009. Information is not available for management to reasonably estimate the future results of the GMIB business or realized investment ~~gains (losses), or~~results due in part to interest rate and stock market volatility and other internal and external factors. This outlook includes an assumption that GMDB (also known as “VADBe”) results will be approximately break-even for full-year 2010, reflecting the Company’s view that the long-term reserve assumptions are appropriate and assuming that capital markets remain stable during the year. In addition, the Company is not able to identify or reasonably estimate the financial impact of special items ~~for the remainder of 2009. Special items for the remainder of 2009~~in 2010 however they may include potential ~~charges~~adjustments associated with ~~the previously announced~~ cost reduction, ~~plan, as well as~~ litigation, ~~related~~and tax-related items.

~~The Company expects~~This outlook reflects the Company’s best estimate of the impacts of Health Care Reform (“the Act”, see the Introduction section of this MD&A beginning on page 43) on its 2010 ~~shareholders’ income from continuing operations, excluding realized investment results, the~~ results of the GMIB business, and special items, to be comparable to or slightly higher than 2009. As discussed above, information is not available for management to reasonably estimate future realized investment gains (losses), the results of the GMIB business or to identify or reasonably estimate future special items in 2010.

The Company’s outlook for both 2009 and 2010 reflects management’s assumption that equity market conditions and volatility will continue to be stable for the remainder of 2009 and 2010. However, that assumption, together with the other earnings projections used to develop this outlook, isoperations subject to the factors cited in the Cautionary Statement beginning on page ~~82 and the sensitivities discussed in the Critical Accounting Estimates section~~71 of the MD~~&A beginning on page 51 and in the Company’s 2008 Form 10-K.~~&A. If unfavorable equity market and interest rate movements occur, the Company could experience losses related to investment impairments and the GMIB and GMDB ~~business.~~businesses. These losses could adversely impact the Company’s consolidated results of operations and financial condition by potentially reducing the capital of the Company’s insurance subsidiaries and reducing their ~~dividend paying~~dividend-paying capabilities.

4947

Revenues

Total revenue ~~decreased~~increased by 7%9% for the first three months ~~ended September 30, 2009,~~of 2010, compared with the first three months ~~ended September 30, 2008 and decreased by 4% for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008.~~of 2009. Changes in the components of total revenue are described more fully below.

Premiums and Fees

Premiums and fees ~~decreased~~increased by 3%12% for the first three months ~~ended September 30, 2009,~~of 2010, compared with the first three months ~~ended September 30, 2008,~~of 2009, primarily reflecting membership ~~declines~~growth in the Health Care ~~segment largely due to disenrollment.~~segment’s risk businesses as well as growth in the International segment. See segment reporting discussions for additional detail and drivers.

Premiums and fees decreased by 1% for the nine months ended September 30, 2009, compared with the nine months ended September 30, 2008, reflecting membership declines in Health Care and the unfavorable effect of foreign currency translation in International, offset by the absence of premiums and fees from the acquired business in the first quarter of 2008 since this business was acquired April 1, 2008.

Net Investment Income

Net investment income ~~decreased~~increased by 3%16% for the first three months ~~ended September 30, 2009,~~of 2010, compared with the first three months ~~ended September 30, 2008,~~of 2009, primarily ~~due to lower~~reflecting improved income from real estate funds which reflects declines in market values due to the continued weakness in commercial real estate market fundamentals, and lower investment yields driven by declines in short-term interest rates partially offset by higher assets.

~~For the nine months ended September 30, 2009, net investment income decreased by 6% compared with the nine months ended September 30, 2008 due to lower income from real estate funds and~~on security partnerships and ~~lower~~higher yields on investment ~~yields partially offset by higher invested~~ assets.

Mail Order Pharmacy Revenues

Mail order pharmacy revenues increased by 5%12% for the first three months ~~ended September 30, 2009,~~of 2010, compared with the first three months ~~ended September 30, 2008~~of 2009, primarily reflecting an increase in volume and ~~increased by 7% for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008. These changes were primarily due to rate increases.~~price.

Other Revenues

Other revenues ~~include~~included the impact of the futures contracts associated with the GMDB equity hedge program. The Company reported losses of ~~$161~~$45 million for the first three months ~~ended~~of 2010 and ~~$232~~gains of $117 million for the ~~nine~~first three months ~~ended September 30,~~of 2009 associated with the GMDB equity hedge ~~program, compared with gains of $70 million for the three months ended and $118 million for the nine months ended September 30, 2008.~~program. The losses in ~~2009 reflect~~2010 reflected increases in stock market values, while the gains in ~~2008~~2009 primarily ~~reflect~~reflected declines in stock market values. Excluding the impact of these futures contracts, other revenues ~~decreased by 5%~~remained flat for the first three months ~~ended September 30, 2009, and decreased by 3% for the nine months ended September 30, 2009~~of 2010 compared with the same ~~periods~~period in ~~2008. These decreases primarily reflect declines in amortization of deferred gains on the sales of the retirement benefits and individual life insurance and annuity businesses.~~2009.

Realized Investment Results

Realized investment results improved ~~significantly~~ for the first three months ~~ended September 30, 2009,~~of 2010, compared with the first three months ~~ended September 30, 2008~~of 2009 primarily due ~~to improving market conditions which resulted in:~~to:

~~lower impairment losses;~~

~~fair~~increases in the value ~~gains on~~of hybrid securities in ~~2009~~the first three months of 2010 compared with ~~losses~~decreases in ~~2008~~the same period in 2009 (changes in fair value for these securities are reported in realized investment results);

absence of securities credit impairments in the first three months of 2010 reflecting improved market conditions; and

gains on sales of fixed maturities ~~and equities~~ in ~~2009 compared with losses on sales in 2008.~~the first three months of 2010.

These ~~favorable factors~~improvements were ~~substantially~~partially offset by ~~the absence of a gain~~increased impairments on ~~sale of a~~ real estate ~~venture~~funds and mortgage loans in ~~the third quarter of 2008.~~

~~Realized investment losses were higher for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008, primarily~~2010 due to the ~~absence~~impact of ~~significant gains~~the continued weak economic environment on the ~~sales of~~commercial real estate ~~ventures reported in the first and third quarters of 2008, partially offset by the following items which largely resulted from improving market conditions:~~

~~gains on sales of fixed maturities and equities in 2009 compared with losses in 2008;~~

~~gains on hybrid securities in 2009 compared with losses in 2008; and~~

~~lower impairment losses.~~

market.

See Note 98 to the Consolidated Financial Statements for additional information.

CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements in accordance with ~~accounting principles generally accepted in the United States of America (GAAP)~~GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the consolidated financial statements. Management considers an accounting estimate to be critical if:

it requires assumptions to be made that were uncertain at the time the estimate was made; and

changes in the estimate or different estimates that could have been selected could have a material effect on the Company’s consolidated results of operations or financial condition.

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

The Company’s most critical accounting estimates, as well as the effects of hypothetical changes in material assumptions used to develop each estimate, are described in the Company’s ~~2008~~2009 Form 10-K beginning on page 4955 and are as follows:

future policy benefits –— guaranteed minimum death benefits;

Health Care medical claims payable;

accounts payable, accrued expenses and other liabilities, and other assets –— guaranteed minimum income benefits;

reinsurance recoverables for Run-off Reinsurance;

accounts payable, accrued expenses and other liabilities –— pension liabilities;

investments — fixed maturities; and

investments ~~– fixed maturities.~~— commercial mortgage loans — valuation reserves.

The Company regularly evaluates items which may impact critical accounting estimates. ~~During~~As of March 31, 2010, there are no significant changes to the ~~nine months ended September 30, 2009, the Company updated the following~~ critical accounting ~~estimates:~~


~~Balance Sheet Caption /~~
~~Nature of Critical Accounting Estimate~~	~~Assumptions / Approach Used~~	~~Effect if Different Assumptions Used~~
*~~Future policy benefits – Guaranteed minimum death benefits~~* These liabilities are estimates of the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received. The amounts to be paid represent the excess of the guaranteed death benefit over the values of contractholders’ accounts. The death benefit coverage in force as of September 30, 2009 (representing the estimated amount payable if all of approximately 600,000 contractholders had submitted death claims as of that date)estimates from what was ~~approximately $7.7 billion.~~ ~~Liabilities for future policy benefits for these contracts were as follows (in millions):~~ •~~September 30, 2009 – $1,352~~ • ~~December 31, 2008~~– ~~$1,609~~	The Company estimates these liabilities based on assumptions for lapse, partial surrender, mortality, 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. The Company monitors actual experience to update these estimates as necessary. ~~Lapse refers to the full surrender of an annuity prior to a contractholder’s death.~~ Partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining any available death benefit coverage in effect at the time of the withdrawal. Once a partial surrender is made, the liability increases reflecting lower future assumed premiums, a lower likelihood of lapse, and a lower likelihood of account values recovering sufficiently to reduce the death benefit exposure in future periods. These effects are not covered by the Company’s GMDB equity hedge program. Market declines could expose the Company to higher amounts of death benefit exposure that can be retained by contractholders subsequent to a significant partial surrender and to higher election rates of future partial surrenders. Thus, if equity markets decline, the Company’s liability for partial surrenders increases and there is no corresponding offset from the hedge program. The election rate for expected future partial surrenders is updated quarterly based on emerging experience. Interest rates include both (a) the mean investment performance assumption considering the Company’s GMDB equity hedge program which reflects the average short-term interest rate to be earned over the life of the program, and (b) the liability discount rate assumption. ~~Volatility refers to the degree of variation of future market returns of the underlying mutual fund investments.~~	Current assumptions used to estimate these liabilities are detailed in Note 7 to the Consolidated Financial Statements. Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur. If these unfavorable assumption changes were to occur when the recorded reserve is insufficient, the approximate after-tax decrease in shareholders’ net income would be as follows: • ~~5% increase in mortality rates — $30 million~~ • ~~10% decrease in lapse rates — $20 million~~ • ~~10% increase in election rates for future partial surrenders — $5 million~~ • ~~50 basis point decrease in interest rates:~~ • ~~Mean Investment Performance — $30 million~~ • ~~Discount Rate — $30 million~~ • ~~10% increase in volatility — $20 million~~ As of September 30, 2009, if contractholder account values invested in underlying equity mutual funds declined by 10% due to equity market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders would be approximately $20 million. As of September 30, 2009, if contractholder account values invested in underlying bond/money market mutual funds declined by 3% due to bond/money market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders and an increase in unhedged exposure would be approximately $15 million. ~~The amounts would be reflected in the Run-off Reinsurance segment.~~


~~Balance Sheet Caption /~~
~~Nature of Critical Accounting Estimate~~	~~Assumptions / Approach Used~~	~~Effect if Different Assumptions Used~~
*~~Accounts payable, accrued expenses and other liabilities, and Other assets – Guaranteed minimum income benefits~~* These liabilities are estimates of the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received. The amounts to be paid represent the excess of the expected value of the income benefit over the value of the annuitants’ accounts at the time of annuitization. The assets associated with these contracts represent receivables in connection with reinsurance that the Company has purchased from two external reinsurers, which covers 55% of the exposures on these contracts. As discussed in Note 2 to the Consolidated Financial Statements, the Company implemented new guidance for fair value measurements on January 1, 2008. At adoption, the Company was required to change certain assumptions. As a result, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax). ~~Liabilities related to these contracts were as follows (in millions):~~ •~~September 30, 2009 – $1,126~~ • ~~December 31, 2008~~–~~$1,757~~ ~~Estimated amounts receivable related to these contracts from two external reinsurers, were as follows (in millions):~~ •~~September 30, 2009 – $614~~ • ~~December 31, 2008~~–~~$953~~	With the adoption of new guidance for fair value measurements, the Company updated assumptions to reflect those that the Company believes a hypothetical market participant would use to determine a current exit price. The Company estimates a hypothetical market participant’s view of these assumptions considering market observable information, the actual and expected experience of the Company, and other relevant and available industry sources. Resulting changes in fair value are reported in ~~GMIB expense.~~ The Company considers the various assumptions used to estimate the fair values of assets and liabilities associated with these contracts in two categories. The first group of assumptions used to estimate these fair values consist of capital market inputs including market returns and discount rates, claim interest rates and market volatility. Interest rates include (a) market returns, (b) the liability discount rate assumption and (c) the projected interest rates used to calculate the reinsured income benefit at the time of annuitization (claim interest rate). ~~Volatility refers to the degree of variation of future market returns of the underlying mutual fund investments.~~ ~~The second group of assumptions consists of future annuitant behavior including annuity election rates, lapse, and mortality, retrocessionnaire credit risk, and a risk and profit charge.~~ ~~Annuity election rates refer to the proportion of annuitants who elect to receive their income benefit as an annuity.~~ ~~Lapse refers to the full surrender of an annuity prior to annuitization of the policy.~~ ~~Credit risk refers to the ability of these reinsurers to pay.~~ ~~Risk and profit charge refers to the amount that a hypothetical market participant would include in the valuation to cover the uncertainty of outcomes and the desired return on capital.~~	Current assumptions used to estimate these liabilities are detailed in Note 8 to the Consolidated Financial Statements. With the adoption of new guidance for fair value measurements, the Company’s results of operations are expected to be more volatile in future periods because several assumptions will be based largely on market-observable inputs at the close of each period including interest rates and market implied volatilities. Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur. If these unfavorable assumption changes were to occur, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be as follows: • ~~50 basis point decrease in interest rates (which are aligned with LIBOR) used for projecting market returns and discounting~~– ~~$15 million~~ • ~~50 basis point decrease in interest rates used for projecting claim exposure (7-year Treasury rates)~~–~~$30 million~~ • ~~20% increase in implied market volatility~~–~~$5 million~~ • ~~5% decrease in mortality — $1 million~~ • ~~10% increase in annuity election rates~~–~~$5 million~~ • ~~10% decrease in lapse rates~~–~~$5 million~~ • ~~10% decrease in amounts receivable from reinsurers (credit risk)~~–~~$40 million~~ • ~~10% increase to the risk and profit charge – $5 million~~ Market declines which reduce annuitants’ account values expose the Company to higher potential claims which results in a larger net liability. If annuitants’ account values as of September 30, 2009 declined by 10% due to the performance of the underlying mutual funds, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be approximately $30 million. All of these estimated impacts due to unfavorable changes in assumptions could vary from quarter to quarter depending on actual reserve levels, the actual market conditions or changes in the anticipated view of a hypothetical market participant as of any future valuation date. ~~The amounts would be reflected in the Run-off Reinsurance segment.~~

~~Investments — Fixed Maturities~~.Losses for “other-than-temporary” impairments of fixed maturities must be recognized in shareholders’ net income based on an estimate of fair value or the present value of expected cash flows by management. Determining whether a decline in value is “other-than-temporary” includes an evaluation of the reasons for, the significance of, and the duration of the decrease in value of the security and the Company’s intent to sell or likelihood of a required sale of the security before recovery. For all fixed maturities with cost in excess of their fair value, if this excess was determined to be “other-than-temporary”, shareholders’ net income as of September 30, 2009 ~~would have decreased by $96 million after-tax. See Note 9 to the Consolidated Financial Statements for more information.~~Form 10-K.

Summary

There are other accounting estimates used in the preparation of the Company’s Consolidated Financial Statements, including estimates of liabilities for future policy benefits other than those identified above, as well as estimates with respect to goodwill, unpaid claims and claim expenses, post-employment and postretirement benefits other than pensions, certain compensation accruals and income taxes.

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

SEGMENT REPORTING

Operating segments generally reflect groups of related products, but the International segment is generally based on geography. The Company measures the financial results of its segments using “segment earnings (loss),” which is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses. “Adjusted income from operations” for each segment is defined as segment earnings excluding special items and the results of the Company’s GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the segment and permits analysis of trends. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is segment earnings. Each segment provides a reconciliation between segment earnings and adjusted income from operations.

Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated; the effect on prior periods is not material.

Health Care Segment

Segment Description

The Health Care segment includes medical, dental, behavioral health, prescription drug and other products and services that may be integrated to provide consumers with comprehensive health care solutions. This segment also includes group disability and life insurance products that were historically sold in connection with certain experience-rated medical products. These products and services are offered through a variety of funding arrangements such as guaranteed cost, retrospectively experience-rated and administrative services only arrangements.

The Company measures the operating effectiveness of the Health Care segment using the following key factors:

segment ~~earnings;~~earnings and adjusted income from operations;

membership growth;

sales of specialty products to core medical customers;

changes in operating expenses per member; and

medical expense as a percentage of premiums (medical ~~cost~~care ratio) in the guaranteed cost business.

Results of Operations

FINANCIAL SUMMARY
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2009 2008 2009 2008
Premiums and fees $ 2,812 $ 2,991 $ 8,578 $ 8,760
Net investment income 52 54 132 154
Mail order pharmacy revenues 316 300 944 882
Other revenues 66 66 201 199

Segment revenues 3,246 3,411 9,855 9,995

Mail order pharmacy cost of goods sold 255 238 762 704
Benefits and other expenses 2,681 2,892 8,243 8,549

Benefits and expenses 2,936 3,130 9,005 9,253

Income before taxes 310 281 850 742
Income taxes 110 94 301 260

Segment earnings $ 200 $ 187 $ 549 $ 482

Realized investment gains (losses), net of taxes $ (1 ) $ 15 $ (17 ) $ 23

Special items (after-tax) included in segment earnings:
Curtailment gain $ — $ — $ 25 $ —
Cost reduction charge $ (4 ) $ — $ (12 ) $ —
Completion of IRS examination $ — $ — $ 1 $ —
Charge related to litigation matters $ — $ — $ — $ (24 )
FINANCIAL SUMMARY


	Three Months Ended
	March 31,
(In millions)	2010			2009
Premiums and fees	$	3,319		$	2,911
Net investment income		54			34
Mail order pharmacy revenues		348			312
Other revenues		64			66

Segment revenues		3,785			3,323

Mail order pharmacy cost of goods sold		285			252
Benefits and other expenses		3,240			2,833

Benefits and expenses		3,525			3,085

Income before taxes		260			238
Income taxes		93			83

Segment earnings		167			155
Less: special item (after-tax) included in segment earnings:
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)		—			1

Adjusted income from operations	$	167		$	154

Realized investment losses, net of taxes	$	(3	)	$	(5	)

5550

~~Excluding the special items noted in the table above, the~~The Health Care segment’s ~~earnings~~adjusted income from operations for the first three months ~~ended September 30, 2009 were higher than~~of 2010 increased by 8%, compared with the same period ~~last year,~~in 2009 primarily due to:

~~lower operating expenses reflecting volume related declines, as well as a favorable impact~~increased membership in risk businesses resulting ~~from the comprehensive review of ongoing expenses, including the impact of pension changes;~~

~~improved~~in higher specialty ~~earnings;~~penetration; and

higher net ~~stop loss earnings driven by improved total medical cost management in the acquired business, tempered by revenue pressure in the remaining stop loss business~~investment income primarily ~~due to disenrollment.~~reflecting higher security partnership income and yields.

These favorable effects were partially offset by:

lower ~~membership;~~

~~lower~~earnings on experience-rated ~~earnings reflecting lower underwriting margins; and~~

~~lower guaranteed cost earnings primarily reflecting a higher medical cost ratio in part due to an increase in flu-related and other facility-based claims.~~

Segment earnings for the nine months ended September 30, 2009, as compared with the nine months ended September 30, 2008, were favorably impacted by the absence of a $7 million after-tax adjustment related to a large experience-rated life and non-medical account in run-out recorded in the first quarter of 2008.

Excluding this item and the special items noted in the table above, segment earnings for the nine months ended September 30, 2009 were higher compared to the nine months ended September 30, 2008 reflecting:

~~improved specialty earnings;~~

~~higher stop loss earnings largely benefiting from the acquired business (effective April 1, 2008);~~business; and

higher ~~Medicare risk earnings due~~medical care ratio in ~~part to higher membership.~~

~~These favorable effects were largely offset by:~~

~~lower membership;~~

~~lower investment income, primarily reflecting lower real estate and security partnership income;~~

~~lower~~the guaranteed cost ~~earnings primarily reflecting a higher medical cost ratio in part due to an increase in flu-related and other facility-based claims; and~~business.

~~lower Medicare Part D earnings reflecting lower margins, as well as a decline in membership.~~

Revenues

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2009		2008		2009		2008		2010		2009
Medical:
Guaranteed cost excluding voluntary / limited benefits^(1),(2)	$	784	$	857	$	2,367	$	2,647
Voluntary / Limited Benefits		58		49		176		151
Guaranteed cost^(1),(2)									$	928	$	857
Experience-rated^(2),(3)		418		512		1,276		1,499		483		432
Stop loss		312		348		965		859		321		333
Dental		179		195		550		589		200		186
Medicare		152		104		443		300		362		138
Medicare Part D		71		63		273		273		170		110
Other⁽⁴⁾		124		127		382		384		138		131

Total medical		2,098		2,255		6,432		6,702		2,602		2,187
Life and other non-medical		46		44		142		138		33		50

Total premiums		2,144		2,299		6,574		6,840		2,635		2,237
Fees^(2),(5)		668		692		2,004		1,920		684		674

Total premiums and fees	$	2,812	$	2,991	$	8,578	$	8,760	$	3,319	$	2,911


(1)		Includes guaranteed cost premiums primarily associated with open access, ~~and~~ commercial HMO and voluntary/limited benefits, as well as other risk-related products.

(2)		Premiums and/or fees associated with certain specialty products are also included.

(3)		Includes minimum premium members who have a risk profile similar to experience-rated funding arrangements. The risk portion of minimum premium revenue is reported in experience-rated medical premium whereas the self funding portion of minimum premium revenue is recorded in fees. Also, includes certain non-participating cases for which special customer level reporting of experience is required.

(4)		Other medical premiums include risk revenue for specialty products.

(5)		Represents administrative service fees for medical members and related specialty product fees for non-medical members as well as fees related to Medicare Part D of ~~$11~~$10 million for the three months ended ~~September 30, 2009~~March 31, 2010 and ~~$28 million for the nine months ended September 30, 2009 and $19~~$8 million for the three months ended ~~September 30, 2008 and $48 million for the nine months ended September 30, 2008.~~March 31, 2009.

Premiums and fees~~decreased~~increased by 6%14% for the first three months ~~ended September 30, 2009 and decreased by 2% for the nine months ended September 30, 2009,~~of 2010 compared with the same ~~periods~~period of ~~2008. This primarily reflects lower~~2009 reflecting membership ~~largely due to disenrollment.~~

~~This impact was~~growth in most products, as well as rate increases partially offset by ~~rate increases, as well as membership growth in the Medicare private fee for services product.~~lower service membership.

Net investment income~~decreased~~increased by 4%59% for the first three months ~~ended September 30, 2009 and decreased by 14% for the nine months ended September 30, 2009~~of 2010 compared with the same ~~periods~~period of ~~2008~~2009 reflecting ~~lower~~higher security partnership income ~~from real estate funds~~ and ~~security partnerships partially offset by~~ higher ~~invested assets.~~yields.

Other revenuesfor the Health Care segment consist of revenues earned on direct channel sales of certain specialty products, including behavioral health and disease management.

5751

Benefits and Expenses

Health Care segment benefits and expenses consist of the following:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2009		2008		2009		2008		2010		2009
Medical claims expense	$	1,698		1,819	$	5,226		5,480	$	2,209	$	1,780
Other benefit expenses		48		49		134		151		28		48
Mail order pharmacy cost of goods sold		255		238		762		704		285		252
Other operating expenses		935		1,024		2,883		2,918		1,003		1,005

Total benefits and expenses	$	2,936	$	3,130	$	9,005	$	9,253	$	3,525	$	3,085

Medical claims expense~~decreased~~increased by 7%24% for the first three months ~~ended September 30, 2009 and decreased by 5% for the nine months ended September 30, 2009~~of 2010 compared with the same ~~periods~~period in ~~2008~~2009 largely due to ~~lower~~higher medical membership, particularly in the ~~experience-rated~~Medicare Private Fee For Service (“Medicare PFFS”) and ~~guaranteed cost businesses; partially offset by~~commercial risk business as well as increases in medical ~~expenses related to claim trend and Medicare member driven growth.~~cost inflation.

Other operating expenses~~include expenses related to:~~

•		~~both retail and mail order pharmacy;~~

•		~~disease management;~~

•		~~voluntary and limited benefits;~~

•		~~Medicare claims administration businesses; and~~

•		~~integration costs associated with the acquired business.~~

~~Excluding the items noted above, as well as the special items noted in the Results of Operations table, other operating expenses~~ for the first three months ~~ended September 30, 2009~~of 2010 were lower than the same period last year reflecting ~~volume related declines, as well as a favorable impact resulting from the comprehensive review of ongoing expenses, including~~ the impact of pension changes. Operating expenses increased for the nine months ended September 30, 2009, compared with the nine months ended September 30, 2008, primarily due to expenses related to the acquired business (effective April 1, 2008),changes, lower amortization and staffing reductions, partially offset by ~~the impact~~volume driven increases, as a result of ~~pension changes.~~membership growth in risk products.

Other Items Affecting Health Care Results

Health Care Medical Claims Payable

Medical claims payable also increased $420 million largely driven by medical membership growth, particularly in the Medicare PFFS and commercial risk business as noted above, reflecting new business, as well as seasonality in the Stop Loss products (see Note 4 to the Consolidated Financial Statements for additional information).

Medical Membership

The ~~Company’s~~Health Care segment’s medical membership includes any individual for whom the Company retains medical underwriting risk, who uses the Company’s network for services covered under their medical coverage or for whom the Company administers medical claims. As of ~~September 30 ,~~March 31, estimated medical membership was as follows:


(In thousands)	2009		2008		2010		2009
Guaranteed cost excluding voluntary/limited benefits⁽¹⁾		762		902
Voluntary/limited benefits		220		202

Guaranteed cost⁽¹⁾						1,083		1,021
Experience-rated⁽²⁾						811		804

Total commercial risk						1,894		1,825
Medicare		51		35		145		47

Total guaranteed cost		1,033		1,139
Experience-rated⁽²⁾		764		913
Total risk						2,039		1,872
Service		9,307		9,848		9,314		9,497

Total medical membership		11,104		11,900		11,353		11,369


(1)		Includes ~~guaranteed cost~~ members primarily associated with open access, ~~and~~ commercial HMO and voluntary/limited benefits as well as other risk-related products.

(2)		Includes minimum premium members, who have a risk profile similar to experience-rated members. Also, includes certain non-participating cases for which special customer level reporting of experience is required.

The ~~net decrease in the~~ Company’s overall medical membership ~~is 7%~~ as of ~~September 30, 2009~~March 31, 2010 is consistent when compared with ~~September 30, 2008,~~March 31, 2009, primarily driven by significant new business sales and improved persistency in the risk businesses, offset by a decline in service membership largely reflecting disenrollment ~~across all funding arrangements as a result of the current economic environment.~~after March 31, 2009.

5852

~~Operational Improvement Initiatives~~

The Company is focused on several initiatives including developing and enhancing a customer focused service model. This effort is expected to require significant investments over the next three to five years. These investments are expected to enable the Company to grow its membership and to improve operational effectiveness and profitability by developing innovative products and services that promote customer engagement at a competitive cost. Executing on these operational improvement initiatives is critical to attaining a leadership position in the health care marketplace.

~~The operational improvement initiatives currently underway are discussed below.~~

~~Reducing other operating expenses.~~The Company operates in an intensely competitive marketplace and its ability to establish a competitive cost advantage is key to achieving its initiatives. Accordingly, the Company is focused on reducing operating expenses in three key areas primarily to facilitate operating efficiency and responsiveness to customers. These three areas include: customer acquisition, which encompasses spending on sales, the account management process, underwriting and marketing; fulfillment, mainly claims processing and billing; and reducing overhead in various administrative and staffing functions. In connection with these efforts, in the fourth quarter of 2008, the Company reviewed staffing levels and organization and announced a plan to reorganize its business model and supporting areas to more tightly align the ongoing operating segments. As part of this ongoing review of operating expenses, during the third quarter of 2009 the Company identified additional job eliminations, in order to facilitate operating efficiency and meet the challenges and opportunities presented by the current economic environment.

~~Maintaining and upgrading information technology systems.~~The Company’s current business model and long-term strategy require effective and reliable information technology systems. The Company’s current systems architecture will require continuing investment to meet the challenges of increasing customer demands from both our existing and emerging client base to support its business growth and strategies, improve its competitive position and provide appropriate levels of service to customers. The Company is focused on providing these enhanced strategic capabilities in response to increasing customer expectations, while continuing to provide a consistent, high quality customer service experience with respect to the Company’s current programs. Accordingly, in 2009, the Company’s efforts will be focused primarily on optimizing the technology underlying our claims processing and call servicing capabilities with specific emphasis on reducing handling time and improving customer service. Continued integration of the Company’s multiple administrative and customer facing platforms is also required to support the Company’s growth strategies, and to ensure reliable, efficient and effective customer service both in today’s employer focused model as well as in a customer directed model. The Company’s ability to effectively deploy capital to make these investments will influence the timing and the impact these initiatives will have on its operations.

~~Profitable sales and customer retention.~~~~The Company continues to focus on selling profitable new business and retaining current customers by:~~

•		~~focusing on targeted segments where buyers value our health improvement capabilities;~~

•		~~providing a diverse product portfolio that meets current market needs as well as emerging consumer-directed trends;~~

•		~~developing and implementing the systems, information technology and infrastructure to deliver member service that keeps pace with the emerging consumer-directed market trends;~~

•		~~ensuring competitive provider networks;~~

•		~~maintaining a strong clinical quality in medical, specialty health care and disability management; and~~

•		~~increasing specialty penetration.~~

The Company is also focused on segment and product expansion. With respect to segment expansion, our focus is predominantly in the “Select” (employers with 51-250 employees), and individual segments. As part of its effort to achieve these objectives, the Company completed the acquisition of Great-West Healthcare of Denver, Colorado on April 1, 2008. This acquisition will enable the Company to broaden its distribution reach and health care professional network, particularly in the western regions of the United States, and expand the range of health benefits and product offerings.

The Company has also recently developed new product offerings for its guaranteed cost and experienced-rated portfolios. These offerings will provide our employer clients with lower-cost options for providing medical, pharmacy and dental benefits.

Driving additional cross-selling is also key to our integrated benefits value proposition. We are expanding network access for our dental product and improving network flexibility to ensure better alignment with our customers’ needs. Also, with the acquisition of Great-West Healthcare, we will be working in 2009 to transition this book to CIGNA pharmacy and increase pharmacy penetration across the entire book.

~~Offering products that meet emerging customer and market trends.~~~~In order to meet emerging customer and market trends, the Company’s suite of products (CIGNATURE~~^®~~, CareAllies~~^®~~, and CIGNA Choice Fund~~^®) offers various options to customers and employers and is key to our customer engagement strategy. Offerings include: choice of benefit, participating provider network, funding, medical management, and health advocacy options. Through the CIGNA Choice Fund^®, the Company offers a set of customer-directed capabilities that includes options for health reimbursement arrangements and/or health savings accounts and enables customers to make effective health decisions using information tools provided by the Company.

~~Underwriting and pricing products effectively.~~One of the Company’s key priorities is to achieve strong profitability in a competitive health care market. The Company is focused on effectively managing pricing and underwriting decisions at both the case and overall book of business level, particularly for the guaranteed cost book, as well as its experience-rated, ASO businesses and stop loss coverages.

~~Effectively managing medical costs.~~~~The Company operates under a centralized medical management model, which helps facilitate consistent levels of care for its members and reduces infrastructure expenses.~~

The Company is focused on continuing to effectively manage medical utilization and unit costs. The Company believes that by increasing the quality of medical care and improving access to care we can drive reductions in total medical cost and better outcomes, resulting in healthier members. To help achieve this, the Company continues to focus on contracting with providers, enhancing clinical activities, as well as engaging our members and clients/employers. In addition, the Company seeks to strengthen its network position in selected markets. In connection with the Great-West Healthcare acquisition in April 2008, the Company has made significant progress converting and integrating these acquired members to its extensive preferred provider network which offers access to a broad range of utilization review and case management services at a reduced medical cost. The integration is progressing well, with savings from medical cost management initiatives (including contract integration and enhancement of clinical activities) projected to be on target, with most to be achieved by the end of 2009.

~~Delivering quality service to customers and health care professionals.~~The Company is focused on delivering competitive service to customers, health care professionals and clients. The Company believes that further enhancing quality service can improve customer retention and, when combined with useful health information and tools, can help motivate customers to become more engaged in their personal health, and will help promote healthy outcomes thereby removing cost from the system. The evolution of the consumer-driven health care market is driving increased product and service complexity and is raising customers’ expectations with respect to service levels, which is expected to require significant investment, management attention and heightened interaction with customers.

The Company is focused on the development and enhancement of a service model that is capable of meeting the challenges brought on by the increasing product and service complexity and the heightened expectations of health care customers. The Company continues to make significant investments in the development and implementation of systems and technology to improve the provider service experience for customers and health care professionals, enhance its capabilities and improve its competitive position.

The Company’s health advocacy capabilities support its recent membership efforts. The Company must be able to deliver those capabilities efficiently and cost-effectively. The Company continues to identify additional cost savings to further improve its competitive cost position. Savings generated from the Company’s operating efficiency initiatives provide capital to make investments that will enhance its capabilities in the areas of customer engagement, particularly product development, the delivery of customer service and health advocacy and related technology.

Disability and Life Segment

Segment Description

The Disability and Life segment includes group disability, life, accident and specialty insurance and case management services for disability and workers’ compensation.

Key factors for this segment are:

•		premium and fee growth, including new business and customer retention;

•		~~net investment income;~~

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

•		~~other operating expense as a percentage of earned premiums and fees (expense ratio).~~

net investment income;

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

other operating expense as a percentage of earned premiums and fees (expense ratio).

Results of Operations

FINANCIAL SUMMARY


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010		2009
Premiums and fees	$	654		$	627		$	1,987		$	1,896		$	661	$	672
Net investment income		62			65			180			193			64		57
Other revenues		30			29			87			90			29		29

Segment revenues		746			721			2,254			2,179			754		758
Benefits and expenses		656			624			1,952			1,884			656		678

Income before taxes		90			97			302			295			98		80
Income taxes		26			27			82			84			28		17

Segment earnings	$	64		$	70		$	220		$	211			70		63
Less: special item (after-tax) included in segment earnings:
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)														—		5

Adjusted income from operations													$	70	$	58

Realized investment gains (losses), net of taxes	$	5		$	(17	)	$	(2	)	$	(23	)	$	1	$	(10	)

Special items (after-tax) included in segment earnings:
Curtailment gain	$	—		$	—		$	4		$	—
Cost reduction charge	$	(1	)	$	—		$	(2	)	$	—
Completion of IRS examination	$	—		$	—		$	5		$	—

~~Segment earnings~~The Disability and Life segment’s adjusted income from operations increased 21% for the first three months ~~ended September 30,~~of 2010 compared with the same period in 2009 ~~include a special item for a cost reduction charge. Excluding the special item, segment results reflect lower earnings from the~~reflecting:

higher net investment income;

favorable accident claims experience; and

continued strong disability ~~business primarily resulting from higher expenses including an expense charge related to a settlement,~~claims management experience.

These favorable impacts were partially offset by less favorable life ~~and specialty claims experience and lower net investment income, partially offset by favorable accident~~ claims experience. ~~Segment earnings continue to reflect competitively strong margins driven by the sustained value the Company delivers to its customers from its disability management programs.~~

~~Segment earnings for the nine months ended September 30, 2009~~Results in 2010 include the $10 million after-tax favorable ~~after-tax~~ impact of reserve studies ~~of $34~~as compared with the $9 million of which $20 million reflects strong results from the Company’s disability management programs over the past several years, an expense charge and special items for the pension curtailment gain, cost reduction charge and completion of an IRS examination. Segment earnings for the nine months ended September 30, 2008 include theafter-tax favorable ~~after-tax~~ impact of reserve studies of $16 million. Excluding the impact of the reserve studies, an expense charge and special items, segment earnings decreased due to lower investment income and less favorable life, specialty and disability claims experience, partially offset by favorable accident claims experience.in 2009.

Revenues

Premiums and fees~~increased 4%~~decreased 2% for the first three months ~~ended September 30, 2009 and 5% for the nine months ended September 30, 2009~~of 2010 compared with the same ~~periods~~period of ~~2008~~2009 reflecting ~~new~~the Company’s decision to exit a large, low margin assumed government life insurance program (-$38 million) and the sale of the renewal rights to the student and participant accident business (-$5 million). Excluding the impact of those two items, premiums and fees increased 5% as a result of disability and life sales growth and continued solid ~~customer retention in the disability and life lines of business, partially offset by less favorable customer retention in the specialty line of business.~~persistency.

Net investment income~~decreased 5%~~increased 12% for the first three months ~~ended September 30,~~of 2010 compared with the same period of 2009 ~~and 7% for the nine months ended September 30, 2009 reflecting lower yields and lower real estate and~~due to higher security partnership ~~income.~~income and invested assets.

Benefits and Expenses

Benefits and expenses decreased 3% for the first three months ~~ended September 30,~~of 2010 compared with the same period of 2009, ~~include~~primarily as a result of the ~~favorable pre-tax impact of reserve studies of $7 million, an expense charge~~Company’s exit from the government life insurance program and the ~~special item for cost reduction charge. Benefits~~sale of renewal rights to the student and ~~expenses for the three months ended September 30, 2008 include the favorable pre-tax impact of reserve studies of $7 million.~~participant accident business. Excluding the impact of ~~the reserve studies, an expense charge and the special item for cost reduction charge,~~those two items, benefits and expenses increased 4%3%, ~~primarily~~ reflecting disability and life business growth and less favorable life ~~specialty and disability~~ claims experience partially offset by ~~more~~ favorable accident ~~claims experience.~~claim experience and a lower operating expense ratio. The less favorable life claims experience was ~~driven by the higher average size of death claims. The less favorable disability claims experience was~~primarily driven by higher new ~~claims partially offset by higher resolutions. The more favorable accident claim experience was driven by lower~~ claim counts. The ~~overall flat expense ratio reflects effective operating expense management offset by investments in the claim operations and strategic information technology initiatives.~~

Benefits and expenses for the nine months ended September 30, 2009 include the net favorable pre-tax impact of reserve studies of $49 million, an expense charge and special items. Benefits and expenses for the nine months ended September 30, 2008 include the favorable pre-tax impact of reserve studies of $23 million. Excluding the impact of the reserve studies, an expense charge and special items, benefits and expenses increased 5%, primarily reflecting disability and life business growth and less favorable life, specialty and disability claims experience partially offset by more favorable accident ~~claims experience. The less favorable life~~ claims experience was driven by the ~~higher average size~~absence of ~~death~~the catastrophic plane crash in the first quarter of 2009 and lower new claims. The ~~less favorable disability claims experience was driven by higher new claims~~lower operating expense ratio reflects the Company’s continued focus on operating expense management partially offset by ~~higher resolutions. The more favorable accident claim experience was driven by lower claim counts. The overall flat expense ratio reflects effective operating expense management offset by~~strategic investments in ~~the claim operations and strategic~~ information technology ~~initiatives.~~and the claims operations. Benefits and expenses in 2010 include the $15 million before-tax favorable impact of reserve studies as compared to the $13 million favorable before-tax impact of reserve studies in 2009.

International Segment

Segment Description

The International segment includes ~~life, accident and~~ supplemental health, life and accident insurance products and international health care products and services, including those offered to expatriate employees of multinational corporations.

The key factors for this segment are:

•		~~premium growth, including new business and customer retention;~~

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

•		~~operating expense as a percentage of earned premium (expense ratio).~~

premium growth, including new business and customer retention;

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

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

impact of foreign currency movements.

Results of Operations

FINANCIAL SUMMARY


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
*(In millions)*	2009			2008			2009			2008			2010		2009
Premiums and fees	$	482		$	471		$	1,378		$	1,422		$	527	$	434
Net investment income		17			23			50			62			19		16
Other revenues		4			5			14			12			7		5

Segment revenues		503			499			1,442			1,496			553		455
Benefits and expenses		447			428			1,251			1,269			459		390

Income before taxes		56			71			191			227			94		65
Income taxes		17			26			45			81			21		22
Income attributable to noncontrolling interest		1			1			2			2			1		1

Segment earnings	$	38		$	44		$	144		$	144			72		42
Less: special item (after-tax) included in segment earnings:
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)														—		1

Adjusted income from operations													$	72	$	41

Impact of foreign currency movements included in segment earnings	$	(2	)	$	(4	)	$	(18	)	$	(5	)	$	7	$	(9	)

Realized investment gains (losses), net of taxes	$	—		$	(2	)	$	1		$	(2	)	$	2	$	(2	)

Special items (after-tax) included in segment earnings:
Cost reduction charge	$	(2	)	$	—		$	(2	)	$	—
Curtailment gain	$	—		$	—		$	1		$	—
Completion of IRS examination	$	—		$	—		$	1		$	—

6254

During the ~~second~~first quarter of ~~2009,~~2010, the Company’s International ~~Segment~~segment implemented a capital management strategy to permanently invest the earnings of its ~~South Korean~~Hong Kong operation overseas. Income taxes for this operation, and the Korea operation which implemented a similar strategy in the second quarter of 2009, will ~~therefore~~ be recorded at the tax rate of the respective foreign jurisdiction. ~~Segment earnings reflect~~The International segment’s adjusted income from operations reflected favorable tax adjustments of ~~$14~~$5 million ~~for~~from the implementation of this strategy ~~for~~and $8 million from the ~~nine months ended September 30, 2009. In addition to the implementation effect, segment earnings also reflect the ongoing~~ impact of the lower tax ~~rate~~rates on the permanently invested earnings in Korea and Hong Kong for first quarter of ~~$3 million for the three months ended September 30, 2009 and $8 million for the nine months ended September 30, 2009.~~2010. Excluding the impact of ~~the Korean~~these tax adjustments and foreign currency movements, ~~and~~ the ~~special items noted above,~~ International ~~segment earnings decreased 11%~~segment’s adjusted income from operations increased 27% for the ~~three months ended September 30, 2009 and 3% for the nine months ended September 30, 2009,~~first quarter of 2010 compared with the same ~~periods~~period last year. The ~~decreases for the three~~increase is primarily due to strong revenue growth and ~~nine months ended September 30, 2009 were primarily driven~~higher persistency, partially offset by unfavorable claims experience in the ~~life, accident and~~ supplemental health, life and accident insurance business, ~~and~~particularly in South Korea. Favorable loss ratios in the expatriate employee benefits ~~business. The unfavorable effects were partially offset by strong revenue growth and~~business also contributed to the increase. Both businesses continue to deliver competitively strong ~~margins in both businesses.~~margins. The impact of foreign currency movements iswas calculated by comparing the reported results to what the results would have been had the exchange rates remained constant with the prior year’s comparable period exchange rates.

Revenues

Premiums and fees.~~Premiums~~Excluding the effect of foreign currency movements, premiums and fees ~~increased 2%~~were $477 million for the ~~three months ended September 30, 2009 and decreased 3%~~first quarter of 2010 compared with reported premiums of $434 million for the ~~nine months ended September 30, 2009, compared with the~~ same ~~periods~~period last ~~year.~~year, an increase of 10%. The increase ~~for the three months ended September 30, 2009~~ was primarily attributable to new sales growth in the ~~life, accident and~~ supplemental health, life and accident insurance operations, particularly in South Korea, and membership growth in the expatriate employee benefits business partially offset by unfavorable foreign currency movements. The decrease for the nine months ended September 30, 2009 was primarily attributable to unfavorable currency movements partially offset by new sales growth in the life, accident and supplemental health insurance operations, particularly in South Korea,rate actions and membership growth in the expatriate employee benefits business.

~~Premiums and fees, excluding~~To exclude the effect of foreign currency movements, premiums and fees were ~~$517 million for~~calculated using the ~~three months ended September 30, 2009~~prior year’s comparable period exchange rates, allowing foreign currency neutral comparison to the prior years’ reported premiums and ~~$1,572 million for~~fees.

Net investment incomeincreased by 19% in the ~~nine months ended September 30, 2009,~~first quarter of 2010, compared with ~~$496 million for~~ the ~~three months ended September 30, 2008 and $1,442 million for the nine months ended September 30, 2008.~~same period last year. The increase was primarily due to favorable foreign currency movements, particularly in South Korea.

Benefits and Expenses

~~Benefits~~Excluding the impact of foreign currency movements, benefits and expenses ~~increased 4%~~were $416 million for the ~~three months ended September 30, 2009~~first quarter of 2010 compared with reported benefits and ~~decreased 1%~~expenses of $390 million for the ~~nine months ended September 30, 2009, compared with the~~ same ~~periods~~period last ~~year.~~year, an increase of 7%. The increase in the ~~third~~first quarter of ~~2009~~2010 was primarily due to business growth and higher ~~loss ratios~~claims in the supplemental health, life and ~~increased amortization of deferred acquisition costs~~accident insurance business, particularly in South Korea, partially offset by ~~foreign currency movements. The decrease for~~lower claims in the ~~nine months ended September 30, 2009 was primarily due to foreign currency movements partially offset by business growth, higher loss ratios and increased amortization of acquisition costs.~~expatriate employee benefits business.

Loss ratios increased for the ~~three months and for the nine months ended September 30, 2009,~~first quarter of 2010 in the ~~life accident and~~ supplemental health, life and accident insurance business and decreased in the expatriate benefits businesses ~~due~~compared to ~~unfavorable claims experience.~~the same period last year.

Policy acquisition expenses ~~were level~~increased for the ~~three months ended September 30, 2009 in the life, accident~~first quarter of 2010, reflecting foreign currency movements and ~~supplemental health business, reflecting~~ business growth ~~and higher~~partially offset by lower amortization of deferred acquisition costs associated with ~~lower~~higher persistency ~~offset by foreign currency movements. Policy acquisition expenses decreased for the nine months ended September 30, 2009~~ in the ~~life, accident and~~ supplemental health, ~~business due to foreign currency movements, partially offset by business growth~~life and ~~higher amortization of deferred acquisition costs associated with lower persistency.~~accident insurance business.

Expense ratios decreased for the ~~three months and for~~first quarter of 2010 compared to the ~~nine months ended September 30, 2009,~~same period last year, reflecting effective expense management.

Other Items Affecting International Results

For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated ~~29%~~32% of the segment’s revenues ~~for the third quarter of 2009~~ and ~~28% of the segment’s revenues for the nine months ended September 30, 2009. South Korea generated 37%~~39% of the segment’s earnings for the ~~third~~first quarter of ~~2009 and 43% of the segment’s earnings for the nine months ended September 30, 2009.~~2010. Due to the concentration of business in South Korea, the International segment is exposed to potential losses resulting from economic and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, which could have a significant impact on the segment’s results and the Company’s consolidated financial results.

6355

Run-off Reinsurance Segment

Segment Description

The Company’s reinsurance operations were discontinued and are now an inactive business in run-off mode since the sale of the U.S. individual life, group life and accidental death reinsurance business in 2000. This segment is predominantly comprised of guaranteed minimum death benefit ~~(GMDB,~~(“GMDB”, also known as ~~VADBe)~~“VADBe”), guaranteed minimum income benefit ~~(GMIB)~~(“GMIB”), workers’ compensation and personal accident reinsurance products.

The determination of liabilities for GMDB and GMIB ~~required~~requires the Company to make assumptions and critical accounting estimates. The Company describes the assumptions used to develop the reserves for GMDB in Note 76 to the Consolidated Financial Statements and for the assets and liabilities associated with GMIB in Note 87 to the Consolidated Financial Statements. The Company also provides the effects of hypothetical changes in assumptions in the Critical Accounting Estimates section of the MD&A beginning on page 55 of the Company’s 2009 Form 10-K.

The Company excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable.

Results of Operations

FINANCIAL SUMMARY


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In millions)	2009			2008			2009			2008			2010			2009
Premiums and fees	$	11		$	10		$	23		$	35		$	8		$	6
Net investment income		28			25			86			70			28			24
Other revenues		(160	)		71			(234	)		117			(46	)		115

Segment revenues		(121	)		106			(125	)		222			(10	)		145
Benefits and expenses		(159	)		286			(295	)		638			(17	)		185

Income (loss) before income tax benefits		38			(180	)		170			(416	)		7			(40	)
Income taxes (benefits)		8			(75	)		54			(164	)		3			(14	)

Segment earnings (loss)	$	30		$	(105	)	$	116		$	(252	)		4			(26	)
Less: results of GMIB business														5			23

Realized investment gains (losses), net of taxes	$	4		$	(3	)	$	(2	)	$	(5	)
Adjusted loss from operations													$	(1	)	$	(49	)

Results of GMIB business (after-tax) included in segment earnings (loss):
Charge on adoption of fair value measurements for GMIB contracts	$	—		$	—		$	—		$	(131	)
Results of GMIB business excluding charge on adoption	$	16		$	(61	)	$	149		$	(91	)
Realized investment losses, net of taxes													$	(1	)	$	(3	)

Segment results for the first three months ~~ended September 30, 2009~~of 2010 improved from the same period last year due to ~~favorable results for the GMIB business (presented in the table above) and~~ the absence of a charge for reserve strengthening in the GMDB business in 2009, both resulting from improved equity market conditions in 2009. The three months ended September 30, 2008 included reserve strengthening for the GMDB business of $72 million after-tax. No reserve strengthening has been required for GMDB since the first quarter of 2009, primarily due to the stabilization and recovery of equity markets. Segment results include the favorable after-tax impact of reserve studies for the workers compensation and personal accident businesses of $14 million for the three months ended September 30, 2009 and $25 million for the three months ended September 30, 2008.

~~Segment results for the nine months ended September 30, 2009 improved significantly from the same period last year due to~~partially offset by less favorable results for the GMIB business (presented in the table above),. Excluding the results of the GMIB and ~~a smaller amount of reserve strengthening~~GMDB business, adjusted loss from operations for Run-off Reinsurance for the ~~GMDB business in 2009 ($47 million after-tax for the nine~~first three months ~~ended September 30, 2009,~~of 2010 was flat compared to $72 million after-tax for the nine months ended September 30, 2008). Segment results include the favorable after-tax impact of reserve studies for the workers compensation and personal accident businesses of $16 million for the nine months ended September 30, 2009 and $25 million for the same period of ~~2008.~~2009.

See the Benefits and Expenses section for further discussion around the results of the GMIB and GMDB businesses.

Other Revenues

Other revenues included pre-tax losses of $45 million for the first three months of 2010 from futures contracts used in the GMDB equity hedge program (see Note 76 to the Consolidated Financial Statements), compared with gains of ~~$161~~$117 million for the ~~three months ended and $232 million for the nine months ended September 30, 2009, compared with pre-tax gains~~same period of ~~$70 million for the three months ended and $118 million for the nine months ended September 30, 2008.~~2009. Amounts reflecting corresponding changes in liabilities for GMDB contracts were included in benefits and expenses consistent with GAAP when a premium deficiency exists (see below “Other Benefits and Expenses”). The ~~notional amount of the~~Company held futures contract positions ~~held by the Company at September 30, 2009~~ related to this program ~~was $1.2 billion.~~with a notional amount of $1 billion at March 31, 2010.

Benefits and Expenses

Benefits and expenses were comprised of the following:


	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30,					September 30,					March 31,
(In millions)	2009			2008		2009			2008		2010			2009
GMIB (income) expense	$	(19	)	$	98	$	(215	)	$	353
GMIB fair value gain											$	(4	)	$	(32	)
Other benefits and expenses		(140	)		188		(80	)		285		(13	)		217

Benefits and expenses	$	(159	)	$	286	$	(295	)	$	638	$	(17	)	$	185

GMIB ~~(Income) Expense.~~fair value gain.Under the GAAP guidance for fair value measurements, the Company’s results of operations are expected to be volatile in future periods because ~~several~~capital market assumptions ~~will be~~needed to estimate the assets and liabilities for the GMIB business are based largely on market-observable inputs at the close of each reporting period including interest rates (LIBOR swap curve) and market-implied volatilities. See Note 7 to the Consolidated Financial Statements for additional information about assumptions and asset and liability balances related to GMIB.

~~The pre-tax income for GMIB was $19 million for~~For the first three months ~~ended September 30, 2009 and~~of 2010, GMIB fair value gain was $4 million, primarily due to ~~the following factors:~~

•		~~increases in underlying account values in the period, driven by~~ favorable equity market and bond fund returns, ~~resulting in reduced exposures ($50 million); and~~

•		~~updates to the risk and profit charge estimates ($7 million).~~

~~These favorable effects were~~ partially offset ~~by:~~

•		~~decreases in interest rates ($31 million); and~~

•		~~other amounts, including experience varying from assumptions, model and in-force updates ($7 million).~~

by generally lower interest rates.

For the ~~nine months ended September 30, 2009, the pre-tax income for GMIB was $215 million, and was primarily due to the following factors:~~

•		~~increases in interest rates ($175 million);~~

•		~~increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures ($82 million); and~~

•		~~updates to the risk and profit charge estimates ($25 million).~~

~~These favorable effects were partially offset by:~~

•		~~increases to the annuitization assumption, reflecting higher utilization experience ($21 million);~~

•		~~updates to the lapse assumption ($14 million); and~~

•		~~other amounts, including experience varying from assumptions, model and in-force updates ($32 million).~~

~~During the~~first three months ~~ended September 30,~~of 2009, GMIB fair value gain was $32 million, primarily a result of increases in interest rates since December 31, 2008, ~~the pre-tax expense for GMIB of $98 million was primarily driven~~partially offset by declines in equity markets and bond fund returns. For the nine months ended September 30, 2008, GMIB pre-tax expense of $353 million included a pre-tax charge of $202 million for the adoption of guidance for fair value measurements, which is discussed further in Note 2returns and updates to the Consolidated Financial Statements. Excluding this one-time effect of adopting fair value measurements, expense for the nine months ended September 30, 2008 was primarily the result of declines in equity markets and bond fund returns.lapse assumption.

The GMIB liabilities and related assets are calculated using a complex internal model and assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and related asset) is higher than the Company believes will ultimately be required to settle claims primarily because market-observable interest rates are used to project growth in account values of the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market participant. The Company’s payments for GMIB claims are expected to occur over the next 15 to 20 years and will be based on actual values of the underlying mutual funds and the 7-year ~~treasury~~Treasury rate at the dates benefits are elected. Management does not believe that current market-observable interest rates reflect actual growth expected for the underlying mutual funds over that timeframe, and therefore believes that the recorded liability and related asset do not represent what management believes will ultimately be required as this business runs off.

However, significant declines in mutual fund values that underlie the contracts (increasing the exposure to the Company) together with declines in the 7-year ~~treasury~~Treasury rates (used to determine claim payments) similar to what occurred during 2008 and early 2009 would increase the expected amount of claims that would be paid out for contractholders who choose to annuitize. It is also possible that such unfavorable market conditions would have an impact on the level of contractholder annuitizations, particularly if ~~these~~such unfavorable market conditions persisted for an extended period.

Other Benefits and Expenses.Other benefits and expenses reflected income for the first three ~~and nine~~ months ~~ended September 30, 2009,~~of 2010, compared to expense during the ~~comparable periods~~same period in ~~2008. These fluctuations reflect~~2009 due primarily to the ~~impact~~absence of ~~significant improvements~~a $73 million pre-tax charge to strengthen GMDB reserves in the first quarter of 2009 (see below). Changes in equity markets on ~~guaranteed minimum death benefit~~GMDB contracts ~~compared with equity market declines during 2008.~~also contributed to the decrease in benefits and expenses. Equity market improvements ~~result~~ in ~~increases in~~2010 increased the underlying annuity account values, which ~~decreases~~decreased the exposure under the ~~contracts.~~contracts and benefits expense. Equity market declines ~~result~~ in ~~decreases in~~2009 decreased the underlying annuity account values, which ~~increases~~increased the exposure under the ~~contracts.~~contracts and benefits expense. These changes in benefits expense are partially offset by futures gains and losses, discussed in Other Revenues above.

~~The~~For the first three months of 2010, no reserve strengthening for GMDB reserves was required. In the first quarter of 2009, the Company recorded additional other benefits and expenses of $73 million ($47 million after-tax) ~~primarily~~ to strengthen GMDB ~~reserves during the first quarter of 2009. These~~reserves. The amounts were primarily due ~~to:~~

•		~~adverse impacts of~~to an increase in the provision for future partial surrenders due to overall market declines, of $50 million ($32 million after-tax). This includes (a) $39 million ($25 million after-tax) primarily related to the provision for future partial surrenders and (b) $11 million ($7 million after-tax) related to declines in the values of contractholders’ non-equity investments such as bond funds, neither of which is included in the GMDB equity hedge program;

•		adverse volatility-related impacts ~~of $11 million ($7 million after-tax)~~ due to turbulent equity market conditions ~~including higher than expected claims and the performance of the diverse mix of equity fund investments held by contractholders being different than expected; and~~

•		adverse interest rate impacts of $12 million ($8 million after-tax). Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance.

~~The Company recorded additional other benefits~~ and ~~expenses of $111 million ($72 million after-tax) primarily to strengthen GMDB reserves during the third quarter of 2008. These amounts were primarily due to:~~

•		adverse impacts of overall market declines of $51 million ($33 million after-tax). This includes an increase in the provision for expected future partial surrenders and declines in the values of contractholders’ non-equity investments such as bond funds, neither of which is covered by the GMDB equity hedge program;

•		adverse volatility-related impacts due to turbulent equity market conditions. Volatility risk is not covered by the GMDB equity hedge program, and equity market volatility in the quarter impacted the effectiveness of the program. In aggregate, these volatility-related impacts totaled $55 million of the charge ($36 million after-tax); and

•		adverse interest rate impacts of $5 million ($3 million after-tax). Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance.

adverse interest rate impacts.

See Note 76 to the Consolidated Financial Statements for additional information about assumptions and reserve balances related to GMDB.

6657

Segment Summary

The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on ceding companies’ claim payments. For GMDB and GMIB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and policyholder behavior. For workers’ compensation and personal accident, the claim payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from its retrocessionaires may not be known with certainty for some time.

The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of ~~September 30, 2009,~~March 31, 2010, based on current information. However, it is possible that future developments, which could include but are not limited to worse than expected claim experience and higher than expected volatility, could have a material adverse effect on the Company’s consolidated results of operations and could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to the Company.

Other Operations Segment

Segment Description

Other Operations consist of:

•		~~non-leveraged and leveraged corporate-owned life insurance (COLI);~~

•		~~deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and~~

•		~~run-off settlement annuity business.~~

non-leveraged and leveraged corporate-owned life insurance (“COLI”);

deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and

run-off settlement annuity business.

Results of Operations

FINANCIAL SUMMARY


	Three Months Ended					Nine Months Ended						Three Months Ended
	September 30,					September 30,						March 31,
(In millions)	2009		2008			2009			2008			2010			2009
Premiums and fees	$	26	$	29		$	83		$	84		$	28		$	28
Net investment income		104		104			304			313			101			98
Other revenues		16		18			49			54			15			16

Segment revenues		146		151			436			451			144			142
Benefits and expenses		111		120			353			354			115			126

Income before taxes		35		31			83			97			29			16
Income taxes		12		11			20			33			10			(3	)

Segment earnings	$	23	$	20		$	63		$	64			19			19
Less: special item (after-tax) included in segment earnings:
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)													—			1

Realized investment gains (losses), net of taxes	$	1	$	(8	)	$	(4	)	$	(11	)
Adjusted income from operations												$	19		$	18

Special item (after-tax) included in segment earnings:
Completion of IRS examination	$	—	$	—		$	1		$	—
Realized investment losses, net of taxes												$	(2	)	$	(4	)

~~Segment earnings~~Adjusted income from operations for Other Operations ~~for~~increased in the first three months ~~ended September 30, 2009 increased~~of 2010 compared with the same period ~~last year due to~~in 2009, reflecting higher ~~COLI~~ earnings ~~reflecting increased~~driven by higher investment income ~~partially~~ offset by ~~the~~a continued decline in deferred gain amortization associated with the sold businesses. ~~For~~

Revenues

Net investment income.Net investment income increased 3% in the ~~nine~~first three months ~~ended September 30, 2009, earnings declined~~of 2010 compared with the same period ~~last year~~in 2009, reflecting higher average invested assets for COLI business and higher yields.

Other revenues.Other revenues decreased 6% in the first three months of 2010 compared with the same period in 2009 primarily due to ~~the continued decline in~~lower deferred gain amortization ~~associated with~~related to the sold ~~businesses partially offset by increased COLI earnings driven by higher investment income~~retirement benefits and ~~favorable mortality.~~individual life insurance and annuity businesses. The amount of the deferred gain amortization recorded was $6 million in the first quarter of 2010 and $8 million in the first quarter of 2009.

Corporate

Description

Corporate reflects amounts not allocated to segments, such as net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment operations), interest on uncertain tax positions, certain litigation matters, intersegment eliminations, compensation cost for stock options and certain corporate overhead expenses such as directors’ ~~expenses.~~expenses and, beginning in 2010, pension expense related to the Company’s frozen pension plans.

FINANCIAL SUMMARY

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2009 2008 2009 2008
Segment loss $ (35 ) $ (31 ) $ (97 ) $ (133 )

Special items (after-tax) included in segment loss:
Completion of IRS examination $ — $ — $ 12 $ —
Charges related to litigation matters $ — $ — $ — $ (52 )


	Three Months Ended
	March 31,
(In millions)	2010			2009
Segment loss	$	(46	)	$	(22	)
Less: special item (after-tax) included in segment loss:
Completion of IRS examination (See Note 15 to the Consolidated Financial Statements)		—			12

Adjusted loss from operations	$	(46	)	$	(34	)

~~Excluding~~Corporate’s adjusted loss from operations was higher in the ~~special items noted above (see Consolidated Results~~first three months of ~~Operations~~2010, compared with the same period in 2009, primarily reflecting:

higher net interest expense, primarily driven by a higher long-term debt balance;

tax expense for postretirement benefits resulting from health care reform (“the Act”, see the Introduction section of the MD&A beginning on page ~~47 for more information on special items), Corporate losses were higher for both the three months ended~~43); and ~~the nine months ended September 30, 2009, compared with same periods last year. The increase in losses primarily reflects higher net interest~~

pension expense ~~attributable~~related to ~~lower average invested assets and increased debt to finance the acquired business. In addition, directors’ expenses increased due to increases in~~ the Company’s ~~stock price during the three months ended and nine months ended September 30, 2009 compared with decreases during the three months ended and nine months ended September 30, 2008.~~frozen pension plans which was reported in Corporate beginning in 2010.

DISCONTINUED OPERATIONS

Description

Discontinued operations represent results associated with certain investments or businesses that have been sold or are held for sale.

Discontinued operations for the ~~nine~~first three months ~~ended September 30,~~of 2009 primarily represented a tax benefit from a past divestiture resolved at the completion of the 2005 and 2006 IRS examinations.

Discontinued operations for the third quarter of 2008 included a gain of $1 million after-tax from the settlement of certain issues related to a past divestiture. Discontinued operations for the nine months ended September 30, 2008, also included a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.

6859

INDUSTRY DEVELOPMENTS ~~AND OTHER MATTERS~~

~~Proposed Health Care Reform~~

Addressing the affordability and availability of health insurance, including reducing the number of uninsured, is a major initiative of President Obama and the U.S. Congress, and proposals that may address these issues are pending in the U.S. Congress. The proposals vary and include measures that would change the dynamics of the health care industry and/or the employer’s role in the provision of benefits, such as the potential creation of a new government-run health plan(s) that would compete with the Company and other private health plans; the potential creation of federal or state-level Exchanges (or similar constructs) that could serve as a distribution mechanism and/or additional regulatory structure for certain segments of the health care market; potential changes to medical coverage, such as expansion of eligibility under existing public programs, minimum medical benefit ratios for health plans, mandatory issuance of insurance coverage; requirements that would limit the ability of health plans and insurers to vary premiums based on assessments of underlying risk; and new taxes and assessments specific to health care insurers and/or certain benefit plan designs. Any comprehensive health care reform package enacted will likely be phased in over a number of years and would be subject to a broader regulatory process. Because of the unsettled nature of these initiatives and the numerous steps required to implement them the Company remains uncertain as to the ultimate impact these changes will have on its business. For additional discussion regarding our risks related to health care reform, see “Item 1A. Risk Factors.”

~~Other Matters~~

The disability industry is under continuing review by regulators and legislators with respect to its offset practices regarding Social Security Disability Insurance (“SSDI”). There has been specific inquiry as to the industry’s role in ~~assisting~~providing assistance to individuals with their applications for SSDI. The Company has received one Congressional inquiry and has responded to the information request. Also, legislation prohibiting the offset of SSDI payments against private disability insurance payments for prospectively issued policies was introduced but not enacted in the Connecticut state legislature. The Company is also involved in related pending litigation. If the industry is forced to change its offset SSDI procedures, the practices and products for the Company’s Disability and Life segment could be significantly impacted.

In 1998, the Company sold its individual life insurance and annuity business to Lincoln National Life Insurance Company and its affiliates (“Lincoln”). Because this business was sold in an indemnity reinsurance transaction, the Company is not relieved of primary liability for the reinsured business and had reinsurance recoverables totaling $4.5 billion as of September 30, 2009. Lincoln has secured approximately 90% of its reinsurance obligations under these arrangements by placing assets into a trust which qualifies under Regulation 114 of the New York Insurance Department.

The Company’s remaining reinsurance recoverables are unsecured. If Lincoln does not maintain a specified financial strength rating, at the Company’s request, Lincoln is contractually required to provide additional assurance that it will meet its reinsurance obligations, to include placing assets in a trust to secure these remaining reinsurance recoverables.

Since the filing of the Company’s 2008 Form 10-K, Moody’s has downgraded the financial strength rating of the Lincoln affiliated reinsurer to A2 from A1 and S&P has downgraded its rating to AA- from AA. In light of the downgrades, the Company is closely monitoring the situation.

6960

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company maintains liquidity at two levels: the subsidiary level and the parent company level.

Liquidity requirements at the subsidiary level generally consist of:

•		claim and benefit payments to policyholders; and

•		operating expense requirements, primarily for employee compensation and benefits.

The Company’s subsidiaries normally meet their operating requirements by:

•		maintaining appropriate levels of cash, cash equivalents and short-term investments;

•		using cash flows from operating activities;

•		selling investments;

•		matching investment ~~maturities~~durations to ~~the~~those estimated ~~duration of~~for the related insurance and contractholder liabilities; and

•		borrowing from its parent company.

Liquidity requirements at the parent company level generally consist of:

•		debt service and dividend payments to shareholders; and

•		~~funding of~~ pension ~~plans.~~plan funding.

The parent normally meets its liquidity requirements by:

•		maintaining appropriate levels of cash, cash equivalents and short-term investments;

•		collecting dividends from its subsidiaries;

•		using proceeds from issuance of debt and equity securities; and

•		borrowing from its subsidiaries.

Cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, were as follows:


(In millions)	2009			2008			2010			2009
Operating activities	$	269		$	1,050		$	394		$	72
Investing activities	$	(1,074	)	$	(2,304	)	$	(123	)	$	(166	)
Financing activities	$	290		$	377		$	107		$	137

Cash flows from operating activities consist of cash receipts and disbursements for premiums and fees, mail order pharmacy and other revenues, gains (losses) recognized in connection with the Company’s GMDB equity hedge program, investment income, taxes, and benefits and expenses.

Because certain income and expense transactions do not generate cash, and because cash transactions related to revenue and expenses may occur in periods different from when those revenues and expenses are recognized in shareholders’ net income, cash flows from operating activities can be significantly different from shareholders’ net income.

Cash flows from investing activities generally consist of net investment purchases or sales and net purchases of property and equipment, which includes capitalized software, as well as cash used to acquire businesses.

Cash flows from financing activities are generally comprised of issuances and re-payment of debt at the parent company level, proceeds on the issuance of common stock resulting from stock option exercises, and stock repurchases. In addition, the subsidiaries report net deposits/withdrawals to/from investment contract liabilities (which include universal life insurance liabilities) because such liabilities are considered financing activities with policyholders.

7061

~~2009:~~2010:

Operating activities

For the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, cash flows from operating activities were ~~less~~higher than net income by ~~$705~~$110 million. Net income contains certain after-tax non-cash income and expense items, including:

•		Favorable results of the GMIB ~~income~~business of ~~$149 million;~~

•		~~a curtailment gain of $30 million, net of a cost reduction charge of $16 million;~~

•		~~tax benefits related to the IRS examination of $20~~$5 million;

•		depreciation and amortization charges of ~~$135~~$40 million; and

•		realized investment losses of ~~$24~~$3 million.

Cash flows from operating activities were ~~lower~~higher than net income excluding the non-cash items noted above by ~~$681~~$72 million. ~~This decrease was primarily due to~~Excluding cash outflows of ~~$232~~$45 million associated with the GMDB equity hedge program which did not affect shareholders’ net income, ~~contributions~~cash flows from operating activities were higher than net income by $117 million. This result primarily reflects premium growth in the Health Care segment’s risk businesses due to significant new business in 2010. Since paid claims on new business tend to lag premium collections, cash flow from operating activities was favorably affected by this new business. In addition, the ~~qualified domestic pension plan~~Company was not required to make a federal tax payment in the first quarter. These favorable effects were partially offset by the annual payment of ~~$354 million and increases~~management incentive compensation in ~~receivables.~~the first quarter.

Cash flows from operating activities ~~decreased~~increased by ~~$781~~$322 million compared with the ~~nine~~three months ended ~~September 30, 2008.~~March 31, 2009. Excluding the results of the GMDB equity hedge program (which did not affect shareholders’ net income), cash flows from operating activities ~~decreased~~increased by ~~$431~~$484 million. This ~~decrease~~increase primarily reflects premium growth in the Health Care segment’s risk businesses as noted above, earnings growth in the Disability and Life and International segments as well as lower contributions to the qualified domestic pension plan of ~~$354~~$55 million for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, compared with ~~none~~$300 million for the ~~nine~~three months ended ~~September 30, 2008 as well as increases in receivables in 2009~~March 31, 2009. These favorable effects were partially offset by higher management compensation payments for the three months ended March 31, 2010, compared with ~~decreases in 2008.~~the same period last year.

Investing activities

Cash used in investing activities was ~~$1.1 billion.~~$123 million. This use of cash primarily consisted of net purchases of investments of ~~$856~~$66 million and net purchases of property and equipment of ~~$218~~$52 million.

Financing activities

Cash provided from financing activities primarily consisted of ~~net~~changes in cash overdraft position of $40 million, proceeds from ~~the issuance~~issuances of ~~long-term debt~~common stock from employee benefit plans of ~~$346~~$24 million ~~offset by repayments of short-term debt, principally commercial paper, of $199 million. Financing activities also included~~and net deposits to contractholder deposit funds of ~~$65~~$45 million.

~~2008:~~2009:

Operating activities

For the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, cash flows from operating activities were ~~greater~~less than net income by ~~$547~~$137 million. Net income contains certain after-tax non-cash income and expense items, including:

•		favorable results of the GMIB ~~expense~~business of ~~$222 million;~~

•		~~litigation accruals of $76~~$23 million;

•		depreciation and amortization charges of ~~$118~~$45 million; ~~and~~

•		realized investment losses of ~~$18~~$24 million; and

•		tax benefits related to the IRS examination of $20 million.

Cash flows from operating activities were ~~higher~~lower than net income excluding the non-cash items noted above by ~~$113~~$163 million. This ~~increase~~decrease was primarily due to contributions to the domestic pension plan of $300 million partially offset by cash inflows associated with the GMDB equity hedge program of ~~$118~~$117 million.

Investing activities

~~The Company used net cash of $1.3 billion to fund the acquisition of Great-West Healthcare. Excluding this item, cash~~Cash used in investing activities was ~~$1.0 billion.~~$166 million. This use of cash primarily consisted of net purchases of investments of ~~$812~~$106 million and net purchases of property and equipment of ~~$179~~$60 million.

Financing activities

Cash provided from financing activities primarily consisted of proceeds from the net issuance of short-term debt ~~and long-term debt~~ of ~~$312 million and $297 million, respectively.~~$74 million. These borrowing arrangements were entered into for general corporate ~~purposes, including the financing of the acquisition of Great-West Healthcare.~~purposes. Financing activities also included net deposits to contractholder deposit funds of ~~$88 million and proceeds from the issuance of common stock under the Company’s stock plans of $37 million and dividends on and repurchases of common stock of $354~~$51 million.

Interest Expense

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2009		2008		2009		2008		2010		2009
Interest expense	$	43	$	38	$	122	$	106	$	43	$	38

The increase in interest expense for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 was primarily due to more long-term debt outstanding in 2010, caused by the issuance of debt in ~~connection with~~May, 2009 used for general corporate purposes, including the ~~Great-West~~repayment of some of the Company’s commercial paper issued to finance the acquisition of the Healthcare ~~acquisition.~~division of Great West Life and Annuity, Inc.

Capital Resources

The Company’s capital resources (primarily retained earnings and the proceeds from the issuance of debt and equity securities) provide protection for policyholders, furnish the financial strength to underwrite insurance risks and facilitate continued business growth.

Management, guided by regulatory requirements and rating agency capital guidelines, determines the amount of capital resources that the Company maintains. Management allocates resources to new long-term business commitments when returns, considering the risks, look promising and when the resources available to support existing business are adequate.

The Company prioritizes its use of capital resources to:

•		~~provide capital necessary to support growth and maintain or improve the financial strength ratings of subsidiaries;~~

•		~~consider acquisitions that are strategically and economically advantageous; and~~

•		~~return capital to investors through share repurchase.~~

provide capital necessary to support growth and maintain or improve the financial strength ratings of subsidiaries;

consider acquisitions that are strategically and economically advantageous; and

return capital to investors through share repurchase.

The availability of capital resources will be impacted by equity and credit market conditions. Extreme volatility in credit or equity market conditions may reduce the Company’s ability to issue debt or equity securities. ~~Significant volatility~~

Share Repurchase

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

Through May 6, 2010, the Company has not repurchased any shares during ~~2008 resulted in reduced retained earnings~~2010, and ~~reduced the capital available for growth, acquisitions, and~~did not repurchase any shares during 2009. The total remaining share ~~repurchase.~~repurchase authorization as of May 6, 2010 was $449 million.

7263

On May 4, 2009, the Company issued $350 million of 8.50% Notes ($349 million, net of debt discount, with an effective interest rate of 9.90% per year). The difference between the stated and effective interest rates primarily reflects the effect of a treasury lock. See Note 10 to the Consolidated Financial Statements for further information. Interest is payable on May 1 and November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for general corporate purposes, including the repayment of some of the Company’s outstanding commercial paper. These Notes will mature on May 1, 2019.

On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning September 15, 2008. The proceeds of this debt were used for general corporate purposes, including financing the acquisition of Great-West Healthcare. These Notes will mature on March 15, 2018.

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

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

•		the present value of the remaining principal and interest payments on the Notes being redeemed discounted at the applicable treasury rate plus 50 basis points (8.50% Notes due 2019) or 40 basis points (6.35% Notes due 2018).

On March 14, 2008, the Company entered into a new commercial paper program (“the Program”). Under the Program, the Company is authorized to sell from time to time short-term unsecured commercial paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. The Company uses the credit facility described below 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 (see below) for funding. In October 2008, the Company added an additional dealer to its Program. As of September 30, 2009, the Company had $100 million in commercial paper outstanding, at a weighted average interest rate of 0.53% and remaining maturities ranging from five to 55 days.

Liquidity and Capital Resources Outlook

At ~~September 30, 2009,~~March 31, 2010, there was approximately ~~$210~~$700 million in cash and short-term investments available at the parent company level. For the remainder of ~~2009,~~2010, the parent company’s cash requirements include scheduled interest payments of approximately ~~$50~~$136 million on outstanding long-term debt (including current maturities) of $2.4 billion at ~~September 30, 2009~~March 31, 2010, and expected pre-tax contributions to the pension plan of $157 million, of which $57 million are required. In addition, approximately $100 million of commercial paper ~~that~~ will mature over the next ~~three months. There are no~~2 months and scheduled long-term debt repayments of $222 million are due in ~~2009.~~January of 2011. The parent company expects to fund these cash requirements ~~with~~by using available cash, subsidiary dividends, ~~and~~ by refinancing the maturing commercial paper borrowings with new commercial ~~paper.~~

The Internal Revenue Service recently issued regulations providing relief in measuring pension plan funding obligations for 2009. As a result, only approximately $90 million of the Company’s $354 million in domestic pension plan contributions during the nine months ended September 30, 2009 were necessary to meet minimum funding requirementspaper and the remaining contributions were voluntary. Although not required, the Company may make approximately $55 million of voluntary pre-tax contributions to the domestic qualified pension plan for the remainder of 2009. The estimated remaining contributions to the domestic qualified pension plan during 2009 do not include funding requirements related to the litigation matter discussed in Note 17 to the Consolidated Financial Statements, as management does not expect this matter to be resolved in 2009. Future years’ contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates, and funding targets.by issuing new long-term debt, if necessary.

The availability of resources at the parent company level is partially dependent on dividends from the Company’s subsidiaries, most of which are subject to regulatory restrictions and rating agency capital guidelines, and partially dependent on the availability of liquidity from the issuance of debt or equity securities.

The Company expects, based on current projections for cash activity, to have sufficient liquidity to meet its obligations.

However, the Company’s cash projections may not be realized and the demand for funds could exceed available cash if:

•		ongoing businesses experience unexpected shortfalls in earnings;

•		regulatory restrictions or rating agency capital guidelines reduce the amount of dividends available to be distributed to the parent company from the insurance and HMO subsidiaries (including the impact of equity market deterioration and volatility on subsidiary capital);

•		significant disruption or volatility in the capital and credit markets reduces the Company’s ability to raise capital or creates unexpected losses related to the GMDB and GMIB businesses;

•		a substantial increase in funding over current projections is required for the Company’s pension plans; or

•		a substantial increase in funding is required for the Company’s GMDB equity hedge program.

In those cases, the Company expects to have the flexibility to satisfy liquidity needs through a variety of measures, including intercompany borrowings and sales of liquid investments. The parent company may borrow up to ~~$400~~$600 million from Connecticut General Life Insurance Company ~~(CGLIC)~~(“CGLIC”) without prior state approval. As of ~~September 30, 2009,~~March 31, 2010, the parent company had no outstanding borrowings from CGLIC.

In addition, the Company may use short-term borrowings, such as the commercial paper program and the committed ~~line~~revolving credit and letter of credit agreement of up to $1.75 billion subject to the maximum debt leverage covenant in its line of credit agreement. This agreement permits up to $1.25 billion to be used for letters of credit. As of ~~September 30, 2009,~~March 31, 2010, there were two letters totaling $107 million issued out of the credit facility. As of March 31, 2010, the Company had an additional ~~$1.275~~$1.64 billion of borrowing capacity ~~within~~under the ~~maximum debt leverage covenant in the line of~~ credit ~~agreement in addition to the $2.5 billion of debt outstanding as of September 30, 2009.~~facility.

Though the Company believes it has adequate sources of liquidity, continued significant disruption or volatility in the capital and credit markets could affect the Company’s ability to access those markets for additional borrowings or increase costs associated with borrowing funds.

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

In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. During 2008, the Company’s HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with applicable RBC and non-U.S. surplus rules.

In 2008, the NAIC adopted Actuarial Guideline VACARVM, which will be effective December 31, 2009 for the Company’s principal life insurance subsidiary Connecticut General Life Insurance Company (CGLIC). VACARVM is applicable to CGLIC’s statutory reserves for GMDB and GMIB contracts totaling $1.6 billion as of September 30, 2009. Upon implementation, it is anticipated that statutory reserves for these contracts will increase and statutory surplus for CGLIC will be reduced. The Actuarial Guideline states that a company may request a grade-in period, not to exceed three years from the Domiciliary Commissioner. The actual impact on these reserves and surplus, as of December 31, 2009 will depend on equity market and interest rate levels at the time of implementation, whether a grade-in period is granted, and how that grade-in is implemented. As of September 30, 2009, management estimates that the implementation of VACARVM would increase these statutory reserves by up to 10%, assuming no grade-in. Management continues to evaluate the impact on CGLIC’s surplus from this reserving change, as well as from potential further regulatory and/or IRS guidance. Though still evaluating, management does not anticipate that this implementation will have a material impact on the amount of dividends expected to be paid by CGLIC to the parent company in 2010.

Guarantees and Contractual Obligations

The Company, through its subsidiaries, is contingently liable for various contractual obligations entered into in the ordinary course of business. See Note 17 to the Consolidated Financial Statements for additional information.

~~Contractual obligations.~~~~The Company has updated its contractual obligations previously provided on page 71 of the Company’s 2008 Form 10-K for certain items as follows:~~

•		~~other long-term liabilities associated with GMIB contracts primarily as a result of increasing interest rates, as well as equity market improvements during 2009;~~

•		~~future policy benefit liabilities associated with GMDB contracts as a result of improvements in the equity market environment during 2009;~~

•		~~short-term debt, primarily as a result of maturing commercial paper. See Note 13 to the Consolidated Financial Statements for additional information; and~~

•		~~long-term debt, primarily due to the issuance of new debt in the second quarter of 2009, see Note 13 to the Consolidated Financial Statements for additional information.~~

Less
than 1 1-3 4-5 After 5
(In millions, on an undiscounted basis) Total year years years years
On-Balance Sheet:

Future policy benefits $ 11,479 $ 483 $ 890 $ 771 $ 9,335
Short-term debt $ 103 $ 103 $ — $ — $ —
Long-term debt $ 4,772 $ 150 $ 782 $ 281 $ 3,559
Other long-term liabilities $ 1,673 $ 847 $ 374 $ 166 $ 286

7564

INVESTMENT ASSETS

The Company’s investment assets do not include separate account assets. Additional information regarding the Company’s investment assets and related accounting policies is included in Notes 2, 7, 8, 9, 10 and 14 to the Consolidated Financial Statements. More detailed information about the fixed maturities and mortgage loan portfolios by type of issuer, maturity dates, and, for mortgages by property type and location is included in Note 98 to the Consolidated Financial Statements and Notes 2, 11, 12 13 and 1617 to the Consolidated Financial Statements in the Company’s ~~2008~~2009 Form 10-K.

As of ~~September 30, 2009,~~March 31, 2010, the Company’s mix of investments and their primary characteristics have not materially changed since December 31, ~~2008.~~2009. The Company’s fixed maturity portfolio ~~continues to be~~is diversified by issuer and industry type, with no single industry constituting more than 10% of total invested assets as of ~~September 30, 2009.~~March 31, 2010. The Company’s commercial mortgage ~~loans continue to be~~loan portfolio is diversified by property type, location and borrower to reduce exposure to potential losses.

Fixed Maturities

Investments in fixed maturities (bonds) include publicly traded and privately placed debt securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor and trading securities. Fixed maturities and equity securities include hybrid securities. 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.

The Company performs ongoing analyses onof prices used to ~~conclude~~value the Company’s invested assets to determine that they represent ~~reasonable~~appropriate estimates of fair value. This process involves quantitative and qualitative analysis including reviews of pricing methodologies, judgments of valuation inputs, the significance of any unobservable inputs, pricing statistics and istrends. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. These procedures are overseen by the Company’s investment professionals. ~~This process also includes review of pricing methodologies, pricing statistics and trends and backtesting recent trades.~~

The value of the Company’s fixed maturity portfolio increased ~~$728~~$156 million in ~~2009~~the first quarter of 2010 driven by a decline in market yields. Although overall asset values ~~have improved significantly,~~are well in excess of amortized cost, there are specific securities with amortized cost in excess of fair value by ~~$147 million.~~$84 million as of March 31, 2010.

As of ~~September 30, 2009,~~March 31, 2010, approximately ~~64%~~63% or ~~$1,653~~$1,597 million of the Company’s total investments in state and local government securities of ~~$2,566~~$2,523 million were guaranteed by monoline bond insurers. The quality ratings of these investments with and without this guaranteed support as of ~~September 30, 2009~~March 31, 2010 were as follows:


		As of					As of
		September 30,					March 31,
		2009					2010
		Fair Value					Fair Value
				Without			With		Without
(In millions)	Quality Rating	With Guarantee		Guarantee		Quality Rating	Guarantee		Guarantee
State and local governments	Aaa	$	67	$	56	Aaa	$	66	$	64
	Aa1-Aa3		1,157		977	Aa1-Aa3		1,116		946
	A1-A3		360		467	A1-A3		354		463
	Baa1-Baa3		29		36	Baa1-Baa3		61		69
	Not available		40		117	Not available		—		55

Total state and local governments		$	1,653	$	1,653		$	1,597	$	1,597

7665

As of ~~September 30, 2009,~~March 31, 2010, approximately ~~80%~~81% or ~~$445~~$450 million of the Company’s total investments in other asset-backed securities of ~~$555~~$559 million were guaranteed by monoline bond insurers. All of these securities had quality ratings of Baa2 or better. Quality ratings without considering the guarantees for these other asset-backed securities were not available.

As of ~~September 30, 2009,~~March 31, 2010, the Company had no direct investments in monoline bond insurers. Guarantees provided by various monoline bond insurers for certain of the Company’s investments in state and local governments and other asset-backed securities as of ~~September 30, 2009~~March 31, 2010 were:

As of

September 30,

March 31,

(In millions)

Guarantor

2009

2010

Guarantor

Quality Rating

Indirect Exposure

Quality Rating

Indirect Exposure

AMBAC

Caa2

205

Caa2

196

MBIA, Inc.

Baa1

1,249

Financial Security Assurance

Aa3

604

National Public Finance Guarantee (formerly MBIA, Inc.)

Baa1

1,222

Assured Guaranty Municipal Corp (formerly Financial Security Assurance)

Aa3

590

Financial Guaranty Insurance Co.

Total

2,098

2,047

The Company continues to underwrite investments in these securities focusing on the underlying issuer’s credit quality, without regard for guarantees. As such, this portfolio of state and local government securities, guaranteed by monoline bond insurers is of high quality with approximately ~~91%~~92% rated A3 or better without their guarantees.

Commercial Mortgage Loans

The Company’s commercial mortgage loans are ~~made exclusively to commercial borrowers; therefore the Company has no exposure to either prime or sub-prime residential mortgages. These~~ fixed rate loans, ~~are~~ diversified by property type, location and borrower to reduce exposure to potential losses. Loans are secured by the related property and are generally made at less than 75% of the property’s value at origination of the loan. In addition to property value, debt service coverage, which is the ratio of the estimated cash flows from the property to the required loan payments (principal and interest), is an important underwriting consideration.

The Company completed anits annual in depth review of its commercial mortgage loan portfolio in ~~July~~the third quarter of 2009. This review included an analysis of each property’s ~~audited~~ financial statements as of December 31, 2008, rent rolls and operating plans and budgets for 2009, a physical inspection of the property and other pertinent factors. Based on ~~each property’s value determined during~~property values and cash flows estimated as part of this review, along with updates for certain loans where material changes were subsequently identified, the portfolio’s average ~~loan to value~~loan-to-value ratio increased from 64% as of December 31, 2008 to 77% at September 30, 2009, driven by an average decline in property values of 16% since completion of the previous review during the third quarter of 2008. This 16% decrease is less than reported declines in commercial real estate values of 20% to 30% from peak prices achieved in late 2006March 31, 2010 and into early 2007. This is driven by management’s decision to not fully reflect peak prices in prior valuations, along with declines in value recognized during the Company’s 2008 portfolio review. In 2009, the overall estimated cash flows from the portfolio’s properties ~~exceed~~exceeded their required debt payments by approximately 50% (debt service coverage) which was unchanged since the 2008 portfolio review. This debt service coverage improved in 2009 from increased occupancy in properties previously under rehabilitation (predominantly apartments) and from foreclosure and removalas of a non-performing office loan during the second quarter of 2009. This improvement during 2009 was largely offset by modest increases in vacancy rates and declines in rental rates for most loans secured by stabilized properties across all property types, with more significant changes for loans secured by hotel properties.March 31, 2010.

7766

The following table reflects the commercial mortgage loan portfolio as of March 31, 2010 summarized by ~~loan to value~~loan-to-value ratio based on the annual loan review completed in July, 2009.


Loan to Value Distribution
Loan-to-Value Distribution										Loan-to-Value Distribution
Loan-to-Value Ratios											Amortized Cost						% of Mortgage Loans
	Amortized Cost										Senior		Subordinated		Total
Loan to Value Ratios	Senior		Subordinated		Total		% of Mortgage Loans
Below 50%	$	221	$	152	$	373		10	%		$	197	$	159	$	356		10	%
50% to 59%		285		—		285		8	%			296		—		296		9	%
60% to 69%		415		38		453		13	%			421		37		458		13	%
70% to 79%		526		72		598		17	%			487		76		563		16	%
80% to 89%		885		47		932		26	%			846		43		889		25	%
90% to 99%		719		17		736		20	%			595		17		612		18	%
100% or above		215		15		230		6	%			304		15		319		9	%

Totals	$	3,266	$	341	$	3,607		100	%		$	3,146	$	347	$	3,493		100	%

As summarized above, ~~$341~~$347 million or ~~9.5%~~10% of the commercial mortgage loan portfolio is comprised of subordinated notes and loans, including ~~$320~~$313 million of loans secured by first mortgages, which were fully underwritten and originated by the Company using its standard underwriting procedures. Senior interests in these first mortgage loans were then sold to other institutional investors. This strategy allowed the Company to effectively utilize its origination capabilities to underwrite high quality loans with strong borrower sponsorship, limit individual loan exposures, and achieve attractive risk adjusted yields. In the event of a default, the Company would pursue remedies up to and including foreclosure jointly with the holders of the senior ~~interests,~~interest, but would receive repayment only after satisfaction of the senior interest.

There are nine loans where the aggregate carrying value of the mortgage loans exceeds the value of the underlying properties by ~~$23~~$25 million. Six of these loans have current debt service coverage of ~~1.0x~~1.0 or greater and three with debt service coverage below ~~1.0x~~1.0 have other mitigating factors including strong borrower sponsorship. The decline in property values and current underwater position are better than management expectations reflecting a combination of factors including prior year property values not fully reflecting peak market pricing, a more modest allocation to the more depressed property types such as retail and hotel and the overall quality of the Company’s portfolio.

Although the property value declines increased the ~~portfolio loan to value~~portfolio’s loan-to-value ratios, all but ~~four~~six of the ~~184~~approximately 180 loans that comprise ~~our~~the Company’s total mortgage loan portfolio continue to perform under their contractual terms, and the actual aggregate default rate is ~~2.8%~~5%. Given the quality and diversity of the underlying real estate, positive debt service coverage, significant borrower cash investment averaging nearly 30%, and only ~~$143~~$219 million of loans maturing in the next twelve months, the Company remains confident that the vast majority of borrowers will continue to perform as ~~required~~required.

Commercial real estate fundamentals and values continued to decline after completion of the ~~mortgage loan~~ portfolio ~~will perform~~review in mid-year 2009. While the vast majority of loans in the Company’s portfolio have positive debt service coverage of at least 1.0, the Company expects declines in debt service coverage to reflect further deterioration in fundamentals (higher vacancy rates and lower rental rates) resulting from ongoing weak economic conditions. Management’s current view is that property values have fallen by approximately 10% on average from values estimated as part of the 2009 portfolio review. This means that approximately 20% of the portfolio’s loans would have carrying values in excess of their underlying properties’ fair values totaling approximately $95 million. However, the value of well ~~competitively.~~located, well leased, institutional quality real estate demonstrated signs of stabilization during the fourth quarter of 2009 and has continued to stabilize, and in some instances increase, during the first quarter of 2010.

Other Long-term Investments

The Company’s ~~Other~~other long-term investments include ~~$556~~$562 million in private equity and real estate funds as well as direct investments in real estate joint ventures. The funds typically invest in mezzanine debt or equity of privately held companies and equity real ~~estate partnerships.~~estate. Because these investments have a subordinate position in the capital structure, the Company assumes a higher level of risk for higher expected returns. Many of these entities have experienced a decline in value over the last several quarters due to economic weakness and the disruption in the capital ~~markets.~~markets, particularly in the commercial real estate market. These total asset values exceeded their carrying values as of March 31, 2010. However, the fair value of the Company’s ownership interest in certain funds (those carried at cost) was less than its carrying value by $59 million. The Company believes these declines in value are temporary and expects to recover its carrying value over the remaining lives of the funds. To mitigate risk, these investments are diversified across approximately 5560 separate partnerships, and approximately 35 general partners who manage one or more of ~~those~~these partnerships. Also, the funds’ underlying investments are diversified by industry sector, property type, and geographic region. No single partnership investment exceeds 7%8% of the Company’s private equity and real estate partnership portfolio. Given the current ~~weak~~ economic ~~conditions there continues to be downward pressure on asset values that could result in~~environment, future ~~losses but~~impairments are possible; however, management does not expect ~~any~~those losses to have a material ~~adverse~~ effect on the Company’s ~~liquidity or~~ financial condition.

7867

Problem and Potential Problem Investments

“Problem” bonds and commercial mortgage loans are either delinquent by 60 days or more or have been restructured as to terms (interest rate or maturity date). “Potential problem” bonds and commercial mortgage loans are considered current (no payment more than 59 days past due), but management believes they have certain characteristics that increase the likelihood that they may become problems. ~~These~~The characteristics management considers include, but are not limited to, the following:

•		~~request from the borrower for restructuring;~~

•		~~principal or interest payments past due by more than 30 but fewer than 60 days;~~

•		~~downgrade in credit rating;~~

•		~~collateral losses on asset-backed securities; and~~

•		~~for commercial mortgages, deterioration of debt service coverage below 1.0x and/or value declines resulting in estimated loan-to-value ratios increasing to 100% or above.~~

request from the borrower for restructuring;

principal or interest payments past due by more than 30 but fewer than 60 days;

downgrade in credit rating;

collateral losses on asset-backed securities; and

for commercial mortgages, deterioration of debt service coverage below 1.0 or value declines resulting in estimated loan-to-value ratios increasing to 100% or more.

The Company recognizes interest income on problem bonds and commercial mortgage loans only when payment is actually received because of the risk profile of the underlying investment. The additional amount that would have been reflected in net income if interest on non-accrual investments had been recognized in accordance with the original terms was not significant for the ~~nine~~first three months ~~ended September 30, 2009 and 2008.~~of 2010 or 2009.

The following table shows problem and potential problem investments at amortized cost, net of valuation reserves and write-downs:


(In millions)								March 31, 2010							December 31, 2009
September 30, 2009	Gross		Reserve			Net
								Gross		Reserve			Net		Gross		Reserve			Net
Problem bonds	$	128	$	(73	)	$	55	$	102	$	(49	)	$	53	$	103	$	(49	)	$	54
Potential problem bonds	$	117	$	(5	)	$	112
Problem commercial mortgage loans	$	100	$	—		$	100		202		(28	)		174		169		(11	)		158
Potential problem commercial mortgage loans	$	241	$	(2	)	$	239
Foreclosed real estate	$	59	$	—		$	59		95		—			95		59		—			59
December 31, 2008
Problem bonds	$	94	$	(59	)	$	35

Total problem investments								$	399	$	(77	)	$	322	$	331	$	(60	)	$	271


Potential problem bonds	$	140	$	(14	)	$	126	$	42	$	(10	)	$	32	$	94	$	(10	)	$	84
Potential problem commercial mortgage loans	$	92	$	—		$	92		254		—			254		245		(6	)		239

Total potential problem investments								$	296	$	(10	)	$	286	$	339	$	(16	)	$	323

~~Potential~~Net problem investments represent 1.7% of total investments excluding policy loans. Net problem investments increased $51 million during the first quarter of 2010 primarily reflecting the reclassification of two mortgage loans totaling $53 million from potential problem loans to problem loans.

Net potential problem investments represent 1.5% of total investments excluding policy loans. Net potential problem investments decreased $37 million during the first quarter of 2010 primarily reflecting improved bond performance and the reclassification of two commercial mortgage loans ~~represent 7%~~to problem investments, offset by the addition of the total loan portfolio. These increased $147 million from December 31, 2008 to September 30, 2009, primarily reflecting the results of management’s in-depth portfolio loan review. As a result of this review, management added ninethree commercial mortgage loans totaling ~~$169~~$81 million to the potential problem loan list that ~~are~~were exhibiting signs of distress such as an elevated ~~loan to value~~loan-to-value ratio or a low or negative debt service coverage. These loans ~~were~~are all performing according to their original contractual terms as of ~~September 30, 2009 and although they are showing signs of stress, most of these~~March 31, 2010.

Commercial mortgage loans are ~~well collateralized. Given~~considered impaired when it is probable that the ~~current economic environment, future impairments~~Company will not collect amounts due according to the terms of the original loan agreement. In the above table, problem commercial mortgage loans totaling $174 million, at March 31, 2010 are ~~possible; however, management does not expect those losses~~considered impaired. During the first quarter of 2010, the Company recorded an $11 million pre-tax ($7 million after-tax) increase to ~~have a material effect~~valuation reserves on ~~the Company’s financial condition.~~impaired commercial mortgage loans.

7968

Summary

The Company recorded after-tax realized investment losses for investment asset write-downs and changes in valuation reserves as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2009		2008		2009		2008		2010		2009
Credit related⁽¹⁾	$	12	$	15	$	47	$	17
Credit-related⁽¹⁾									$	16	$	7
Other⁽²⁾		2		26		8		42		1		7

Total(3)	$	14	$	41	$	55	$	59	$	17	$	14


(1)		Credit-related losses include other-than-temporary declines in value of fixed maturities and equity securities, and impairments of commercial mortgage loans and real estate entities. The amount related to credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income was not significant.

(2)		Prior to adoption of new GAAP guidance for other-than-temporary impairments on April 1, 2009, Other primarily represented the impact of rising market yields on investments where the Company could not demonstrate the intent and ability to hold until recovery.

(3)		Includes other-than-temporary impairments on debt securities of $1 million in the first quarter of 2010 and $11 million in the first quarter of 2009. These impairments are included in the other category in 2010 and in both the credit related and other categories in 2009.

The financial markets ~~experienced a significant rally in~~were generally stable to improving during the ~~second and third quarters~~first quarter of ~~2009.~~2010. Both investment grade and below investment grade corporate credit indices ~~reported significantly lower credit spreads~~remained fairly consistent with the fourth quarter of 2009 and the S&P 500 posted a return of ~~30%~~approximately 5% during this period. While credit spreads ~~eased in 2009~~ and asset values ~~increased significantly,~~were stable in the first quarter of 2010, substantial uncertainty remains concerning the economic environment, along with increasing default rates and the potential for rising treasury rates. Commercial real estate fundamentals continued to weaken as the struggling economy negatively impacted occupancy levels and rental rates for all major property types. The corporate and commercial real estate debt and equity markets are expected to remain challenging until economic stability returns.environment. As a result of this economic environment, risks in the Company’s investment portfolio, while declining, remain elevated.

Continued economic weakness for an extended period could cause ~~the Company~~default rates to ~~recognize~~increase and recoveries to decline resulting in additional impairment losses ~~if default rates increase and/or recoveries decline.~~for the Company. Future realized and unrealized investment results will be impacted largely by market conditions that exist when a transaction occurs or at the reporting date. These future conditions are not reasonably predictable. Management believes that the vast majority of the Company’s fixed maturity investments will continue to perform under their contractual terms, and that declines in their fair values below carrying value are temporary. Based on the ~~Company’s~~ strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, ~~it has both~~ the ~~intent and ability~~Company expects to hold a significant portion of these assets ~~to recovery. Therefore, future~~for the long term. Future credit-related losses are not expected to have a material adverse effect on the Company’s liquidity or financial condition.

While ~~the results of the portfolio loan review were better than expected, and~~ management believes the commercial mortgage loan portfolio is positioned to perform ~~competitively~~ well due to the solid aggregate loan to value ratio, strong debt service coverage and minimal underwater position, the commercial real estate market continues to exhibit significant signs of ~~stress~~distress and if these conditions remain for an extended period or worsen substantially, it could result in an increase in problem and potential problem loans. Given the current economic environment, future impairments are possible; however, management does not expect those losses to have a material effect on the Company’s financial condition.

8069

MARKET RISK

Financial Instruments

The Company’s assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. The Company’s primary market risk exposures are interest-rate risk, foreign currency exchange rate risk and equity price risk.

The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce the effect of equity market changes on certain reinsurance contracts that guarantee minimum death benefits based on unfavorable changes in underlying variable annuity account values. The hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX (Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to the Japanese yen, British pound and euro would have been a decrease of approximately ~~$110~~$90 million in the fair value of the futures contracts outstanding under this program as of ~~September 30, 2009.~~March 31, 2010. A corresponding decrease in liabilities for GMDB contracts would result from the hypothetical 10% increase in these equity indices and 10% weakening in the U.S. dollar. See Note 76 to the Consolidated Financial Statements for further discussion of this program and related GMDB contracts.

Stock Market Performance

The performance of equity markets can have a significant effect on the Company’s businesses, including on:

•		~~risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial Statements) and GMIB contracts (see Note 8 to the Consolidated Financial Statements); and~~

•		pension liabilities since equity securities comprise a significant portion of the assets of the Company’s employee pension plans. See “Liquidity and Capital Resources” section of the MD&A beginning on page 70 for further information.

risks and exposures associated with GMDB (see Note 6 to the Consolidated Financial Statements) and GMIB contracts (see Note 7 to the Consolidated Financial Statements); and

pension liabilities since equity securities comprise a significant portion of the assets of the Company’s employee pension plans. See “Liquidity and Capital Resources” section of the MD&A beginning on page 61 for further information.

8170

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Company and its representatives may from time to time make written and oral forward-looking statements, including statements contained in press releases, in the Company’s filings with the Securities and Exchange Commission, in its reports to shareholders and in meetings with analysts and investors. Forward-looking statements may contain information about financial prospects, economic conditions, trends and other uncertainties. These forward-looking statements are based on management’s beliefs and assumptions and on information available to management at the time the statements are or were made. Forward-looking statements include but are not limited to the information concerning possible or assumed future business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, trends and, in particular, the Company’s productivity initiatives, litigation and other legal matters, operational improvement in the health care operations, and the outlook for the Company’s full year ~~2009 and~~ 2010 results. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe”, “expect”, “plan”, “intend”, “anticipate”, “estimate”, “predict”, “potential”, “may”, “should” or similar expressions.

You should not place undue reliance on these forward-looking statements. The Company cautions that actual results could differ materially from those that management expects, depending on the outcome of certain factors. Some factors that could cause actual results to differ materially from the forward-looking statements include:

1.		increased medical costs that are higher than anticipated in establishing premium rates in the Company’s ~~Health Care~~health care operations, including increased use and costs of medical services;

2.		increased medical, administrative, technology or other costs resulting from new legislative and regulatory requirements imposed on the Company’s employee benefits businesses;

3.		challenges and risks associated with implementing operational improvement initiatives and strategic actions in the ongoing operations of the businesses, including those related to: (i) growth in targeted geographies, product lines, buying segments and distribution channels, (ii) offering products that meet emerging market needs, ~~(ii)~~(iii) strengthening underwriting and pricing effectiveness, ~~(iii)~~(iv) strengthening medical cost and medical membership results, ~~(iv)~~(v) delivering quality member and provider service using effective technology solutions, ~~(v)~~(vi) lowering administrative costs and ~~(vi)~~(vii) transitioning to an integrated operating company model, including operating efficiencies related to the transition;

4.		risks associated with pending and potential state and federal class action lawsuits, disputes regarding reinsurance arrangements, other litigation and regulatory actions challenging the Company’s businesses, including disputes related to payments to providers, government investigations and proceedings, and tax audits and related litigation;

5.		heightened competition, particularly price competition, which could reduce product margins and constrain growth in the Company’s businesses, primarily the Health Care business;

6.		risks associated with the Company’s mail order pharmacy business which, among other things, includes any potential operational deficiencies or service issues as well as loss or suspension of state pharmacy licenses;

7.		significant changes in interest rates and deterioration in the loan to value ratios of commercial real estate investments for a sustained period of time;

8.		downgrades in the financial strength ratings of the Company’s insurance subsidiaries, which could, among other things, adversely affect new sales and retention of current business as well as the downgrade in the financial strength ratings of reinsurers which could result in increased statutory reserve or capital requirements;

9.		limitations on the ability of the Company’s insurance subsidiaries to dividend capital to the parent company as a result of downgrades in the subsidiaries’ financial strength ratings, changes in statutory reserve or capital requirements or other financial constraints;

10.		the inability of the hedge program adopted by the Company to substantially reduce equity market risks for reinsurance contracts that guarantee minimum death benefits under certain variable annuities (including possible market difficulties in entering into appropriate futures contracts and in matching such contracts to the underlying equity risk);

11.		adjustments to the reserve assumptions (including lapse, partial surrender, claim mortality, interest rates and volatility) used in estimating the Company’s liabilities for reinsurance contracts covering guaranteed minimum death benefits under certain variable annuities;

12.

adjustments to the assumptions (including annuity election rates and amounts collectible from reinsurers) used in estimating the Company’s assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits under certain variable annuities;

13.		significant stock market declines, which could, among other things, result in increased expenses for guaranteed minimum income benefit contracts, guaranteed minimum death benefit contracts and the Company’s pension ~~plans~~plan in future periods as well as the recognition of additional pension obligations;

14.		unfavorable claims experience related to workers’ compensation and personal accident exposures of the run-off reinsurance business, including losses attributable to the inability to recover claims from retrocessionaires;

15.		significant deterioration in economic conditions and significant market volatility, which could have an adverse effect on the Company’s operations, investments, liquidity and access to capital markets;

16.		significant deterioration in economic conditions and significant market volatility, which could have an adverse effect on the businesses of our customers (including the amount and type of ~~health care~~healthcare services provided to their ~~workforce, loss in~~ workforce and our customers’ ability to pay receivables) and our vendors (including their ability to provide services);

17.

adverse changes in ~~public policy and in the political environment, which could affect~~ state and federal law, including ~~legislative and regulatory proposals related to health care issues (including~~ health care reform legislation ~~that~~and regulation which could, ~~include,~~ among other items, ~~a broad based public sector alternative and/or alternative assessments and tax increases specific to~~affect the ~~Company’s industry), which could~~way the Company does business, increase cost, limit the ability to effectively estimate, price for and manage medical costs, and affect ~~the market for~~ the Company’s health care products, services, technology and ~~services; and~~ processes;

18.

amendments to income tax laws, which could affect the taxation of employer provided benefits and certain insurance products such as corporate-owned life insurance;


~~18.~~19.		potential public health epidemics and bio-terrorist activity, which could, among other things, cause the Company’s covered medical and disability expenses, pharmacy costs and mortality experience to rise significantly, and cause operational disruption, depending on the severity of the event and number of individuals affected;


~~19.~~20.		risks associated with security or interruption of information systems, which could, among other things, cause operational disruption;


~~20.~~21.		challenges and risks associated with the successful management of the Company’s outsourcing projects or key vendors, including the agreement with IBM for provision of technology infrastructure and related services;


~~21.~~22.		the ability to successfully integrate and operate the businesses acquired from Great-West by, among other things, renewing insurance and administrative services contracts on competitive terms, retaining and growing membership, realizing revenue, expense and other synergies, successfully leveraging the information technology platform of the acquired businesses, and retaining key personnel; and


~~22.~~23.		the ability of the Company to execute its growth plans by successfully managing Great-West Healthcare’s outsourcing projects and leveraging the Company’s capabilities and those of the ~~business~~businesses acquired from Great-West to further enhance the combined organization’s network access position, underwriting effectiveness, delivery of quality member and provider service, and increased penetration of its membership base with differentiated product offerings.

This list of important factors is not intended to be exhaustive. Other sections of the Company’s ~~2008~~2009 Annual Report on Form 10-K, including the “Risk Factors” section ~~the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009,~~ and other documents filed with the Securities and Exchange Commission include both expanded discussion of these factors and additional risk factors and uncertainties that could preclude the Company from realizing the forward-looking statements. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

8372

~~Item 3.~~


Item 3.		*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Information responsive to this item is contained under the caption “Market Risk” in Item 2 above, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

8473

Item 4.

~~Item 4.~~CONTROLS AND PROCEDURES

Based on an evaluation of the effectiveness of CIGNA’s disclosure controls and procedures conducted under the supervision and with the participation of CIGNA’s management, CIGNA’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, CIGNA’s disclosure controls and procedures are effective to ensure that information required to be disclosed by CIGNA in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

During the period covered by this report, there have been no changes in CIGNA’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, CIGNA’s internal control over financial reporting.

Part II.OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
~~The information contained under “Litigation and Other Legal Matters” in Note 17 to the Consolidated Financial Statements is incorporated herein by reference.~~
86

The information contained under “Litigation and Other Legal Matters” in Note 17 to the Consolidated Financial Statements is incorporated herein by reference.

Item 1A.RISK FACTORS

CIGNA’s Annual Report on Form 10-K for the year ended December 31, 2009 includes a detailed description of its risk factors.

~~Item 1A.~~~~RISK FACTORS~~

~~The risk factor set forth below updates and should be read together with the risk factors reported in CIGNA’s Annual Report on Form 10-K for the year ended December 31, 2008.~~

~~CIGNA is subject to potential changes in the political environment, which could adversely affect the markets for its products.~~

Policy changes on the local, state and federal level, such as the expansion of the government’s role in the health care arena and alternative assessments and tax increases specific to the health care insurance industry or health care insurance products as part of federal health care reform initiatives, could fundamentally change the dynamics of CIGNA’s industry. While private health care plans may be solicited to provide administrative services to an expanded national public plan, this business opportunity may be less profitable and favor larger and lower cost competitors.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about CIGNA’s share repurchase activity for the quarter ended March 31, 2010:

Issuer Purchases of Equity Securities
Total # of Approximate dollar value of shares that
shares Average price paid Total # of shares purchased as part may yet be purchased as part of publicly
Period purchased (1) per share of publicly announced program (2) announced program (3)
January 1-31, 2010 294,790 $ 35.80 0 $ 448,919,605
February 1-28, 2010 53,602 $ 33.21 0 $ 448,919,605
March 1-31, 2010 177,790 $ 34.06 0 $ 448,919,605

Total 526,182 $ 34.95 0 N/A

(1)

Includes shares tendered by employees as payment of ~~Equity Securities by~~taxes withheld on the ~~Issuer~~exercise of stock options and ~~Affiliated Purchasers~~

the vesting of restricted stock granted under the Company’s equity compensation plans. Employees tendered 294,790 shares in January, 53,602 shares in February and 177,790 shares in March.

(2)

CIGNA has had a repurchase program for many years, and has had varying levels of repurchase authority and activity under this program. The ~~following table provides information about CIGNA’s share repurchase~~program has no expiration date. CIGNA suspends activity ~~for~~under this program from time to time and also removes such suspensions, generally without public announcement. Remaining authorization under the ~~quarter ended September 30, 2009:~~

Issuer Purchases of Equity Securities
Total # of Approximate dollar value of shares that
shares Average price paid Total # of shares purchased as part may yet be purchased as part of publicly
Period purchased(1) per share of publicly announced program (2) announced program (3)
July 1-31, 2009 3,650 $ 25.38 0 $ 448,919,605
August 1-31, 2009 2,089 $ 27.85 0 $ 448,919,605
September 1-30, 2009 0 $ 0 0 $ 448,919,605

Total 5,739 $ 20.30 0 N/A

program was approximately $449 million as of March 31, 2010 and May 6, 2010.


(3)		Approximate dollar value of shares is as of the last date of the applicable month.
~~(1)~~		Includes shares tendered by employees as payment of taxes withheld on the exercise of stock options and the vesting of restricted stock granted under the Company’s equity compensation plans. Employees tendered 3,650 shares in July and 2,089 shares in August.

~~(2)~~		CIGNA has had a repurchase program for many years, and has had varying levels of repurchase authority and activity under this program. The program has no expiration date. CIGNA suspends activity under this program from time to time, generally without public announcement. Remaining authorization under the program was approximately $449 million as of September 30, 2009 and November 5, 2009.

~~(3)~~		~~Approximate dollar value of shares is as of the last date of the applicable month.~~

Item 6. EXHIBITS
~~(a) See Exhibit Index~~
89

(a) See Exhibit Index

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CIGNA CORPORATION
	By:	/s/ Annmarie T. Hagan
		Annmarie T. Hagan
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May 6, 2010

INDEX TO EXHIBITS

		~~CIGNA CORPORATION~~
Number			Description	Method of Filing

	3.1		Restated Certificate of Incorporation of the registrant as last amended April 23, 2008	Filed as Exhibit 3.1 to the registrant’s Form 10-Q for the period ended March 31, 2008 and incorporated herein by reference.

	3.2		By-Laws of the registrant as last amended and restated October 28, 2009	Filed as Exhibit 3.2 to the registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference.

	4.1		Indenture dated August 16, 2006 between CIGNA Corporation and U.S. Bank National Association	Filed as Exhibit 4.1 to the registrant’s Form S-3ASR on August 17, 2006 and incorporated herein by reference.

	4.2		Indenture dated January 1, 1994 between CIGNA Corporation and Marine Midland Bank	Filed as Exhibit 4.2 to the registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference.

	4.3		Indenture dated June 30, 1988 between CIGNA Corporation and Bankers Trust	Filed as Exhibit 4.3 to the registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference.

	10.1		Description of Strategic Performance Share Program	Filed herewith.

	10.2		CIGNA Long-Term Incentive Plan as amended and restated effective April 28, 2010	Filed herewith.

	10.3		CIGNA Corporation Directors Equity Plan	Filed herewith.

	12		Computation of Ratio of Earnings to Fixed Charges	Filed herewith.

	31.1		Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934	Filed herewith.

	31.2		Certification of Chief Financial Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934	Filed herewith.

	32.1		Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350	Furnished herewith.

		~~By:~~	~~/s/ Annmarie T. Hagan~~ ~~Annmarie T. Hagan~~ ~~Executive Vice President and~~ ~~Chief Financial Officer~~ ~~(Principal Financial Officer)~~

~~Date: November 5, 2009~~

~~INDEX TO EXHIBITS~~


~~Number~~	~~Description~~	~~Method of Filing~~

~~3.1~~	~~Restated Certificate of Incorporation of the registrant as last amended April 23, 2008~~	~~Filed as Exhibit 3.1 to the registrant’s Form 10-Q for the period ended March 31, 2008 and incorporated herein by reference.~~

~~3.2~~	~~By-Laws of the registrant as last amended and restated October 28, 2009~~	~~Filed herewith.~~

~~10.1~~	~~CIGNA Corporation Compensation Program for Independent Vice Chairman/Chairman of the Board of Directors~~	~~Filed herewith.~~

12	~~Computation of Ratio of Earnings to Fixed Charges~~	~~Filed herewith.~~

~~31.1~~	~~Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934~~	~~Filed herewith.~~

~~31.2~~	~~Certification of Chief Financial Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934~~	~~Filed herewith.~~

~~32.1~~	~~Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350~~	~~Furnished herewith.~~

32.2	Certification of Chief Financial Officer of CIGNA Corporation pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350	Furnished herewith.

E-1


	Unaudited
	Nine Months Ended September 30,
(In millions)	2009			2008
Cash Flows from Operating Activities
Net income	$	974		$	503
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations		(1	)		(3	)
Income attributable to noncontrolling interest		(2	)		(2	)
Insurance liabilities		(271	)		185
Reinsurance recoverables		(1	)		47
Deferred policy acquisition costs		(60	)		(74	)
Premiums, accounts and notes receivable		(72	)		16
Other assets		350			(425	)
Accounts payable, accrued expenses and other liabilities		(1,126	)		717
Current income taxes		(29	)		(5	)
Deferred income taxes		279			(54	)
Realized investment losses		40			28
Depreciation and amortization		207			181
Gains on sales of businesses (excluding discontinued operations)		(24	)		(28	)
Proceeds from sales of mortgage loans held for sale		1			—
Other, net		4			(36	)

Net cash provided by operating activities		269			1,050

Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities		655			1,123
Equity securities		21			5
Commercial mortgage loans		23			48
Other (primarily short-term and other long-term investments)		485			279
Investment maturities and repayments:
Fixed maturities		791			660
Commercial mortgage loans		44			31
Investments purchased:
Fixed maturities		(2,257	)		(2,237	)
Equity securities		(8	)		(18	)
Commercial mortgage loans		(121	)		(359	)
Other (primarily short-term and other long-term investments)		(489	)		(344	)
Property and equipment purchases		(218	)		(179	)
Acquisition of Great-West Healthcare, net of cash acquired		—			(1,301	)
Other (primarily other acquisitions/dispositions)		—			(12	)

Net cash used in investing activities		(1,074	)		(2,304	)

Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds		1,011			989
Withdrawals and benefit payments from contractholder deposit funds		(946	)		(901	)
Change in cash overdraft position		82			(3	)
Net change in short-term debt		(199	)		312
Net proceeds on issuance of long-term debt		346			297
Repayment of long-term debt		(2	)		—
Repurchase of common stock		—			(340	)
Issuance of common stock		9			37
Common dividends paid		(11	)		(14	)

Net cash provided by financing activities		290			377

Effect of foreign currency rate changes on cash and cash equivalents		9			(15	)

Net decrease in cash and cash equivalents		(506	)		(892	)
Cash and cash equivalents, beginning of period		1,342			1,970

Cash and cash equivalents, end of period	$	836		$	1,078

Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	171		$	267
Interest paid	$	107		$	96


	(Unaudited)
	Nine Months Ended
	September 30,
(In millions, except per share amounts)	2008
Total revenues	$	14,652
Shareholders’ income from continuing operations	$	526
Shareholders’ net income	$	529
Earnings per share:
Shareholders’ income from continuing operations
Basic	$	1.89
Diluted	$	1.87
Shareholders’ net income
Basic	$	1.90
Diluted	$	1.88


			Effect of
(In millions, except per share amounts)	Basic		Dilution			Diluted
Three Months Ended September 30,
2009
Shareholders’ income from continuing operations	$	329	$	—		$	329

Shares (in thousands):
Weighted average		274,398		—			274,398
Options		—		1,732			1,732

Total shares		274,398		1,732			276,130

EPS	$	1.20	$	(0.01	)	$	1.19

2008
Shareholders’ income from continuing operations	$	170	$	—		$	170

Shares (in thousands):
Weighted average		275,141		—			275,141
Options		—		1,665			1,665

Total shares		275,141		1,665			276,806

EPS	$	0.62	$	—		$	0.62


	Three Months Ended September 30, 2008
	Basic				Diluted
	As originally				As originally
	reported		As adjusted		reported		As adjusted
Shareholders’ income from continuing operations	$	0.62	$	0.62	$	0.62	$	0.62


	Nine Months Ended September 30, 2008
	Basic				Diluted
	As originally				As originally
	reported		As adjusted		reported		As adjusted
Shareholders’ income from continuing operations	$	1.80	$	1.79	$	1.78	$	1.77


	As of September 30, 2009		Realized Investment (Losses)
	Other Long-Term		Three Months Ended		Nine Months Ended
	Investments		September 30, 2009		September 30, 2009
Interest rate swaps	$	4	$	—	$	(1	)


				Tax
				(Expense)			After-
(In millions)	Pre-Tax			Benefit			Tax
Three Months Ended September 30, 2009
Net unrealized appreciation, securities:
Net unrealized appreciation on securities arising during the period	$	479		$	(168	)	$	311
Reclassification adjustment for (gains) included in shareholders’ net income		(18	)		6			(12	)

Net unrealized appreciation, securities	$	461		$	(162	)	$	299

Net unrealized depreciation, derivatives	$	(9	)	$	3		$	(6	)

Net translation of foreign currencies	$	46		$	(17	)	$	29

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	(3	)	$	2		$	(1	)

Net postretirement benefits liability adjustment	$	(3	)	$	2		$	(1	)


Three Months Ended September 30, 2008
Net unrealized depreciation, securities:
Net unrealized depreciation on securities arising during the period	$	(290	)	$	104		$	(186	)
Reclassification adjustment for losses included in shareholders’ net income		87			(32	)		55

Net unrealized depreciation, securities	$	(203	)	$	72		$	(131	)

Net unrealized appreciation, derivatives	$	23		$	(9	)	$	14

Net translation of foreign currencies	$	(85	)	$	29		$	(56	)

Postretirement benefits liability adjustment:
Reclassification adjustment for amortization of net losses from past experience and prior service costs	$	6		$	(3	)	$	3

Net postretirement benefits liability adjustment	$	6		$	(3	)	$	3


	Pre-Tax			After-Tax
	Benefit			Benefit
(In millions)	(Charge)			(Charge)
Three Months Ended September 30,
2009
Cost reduction charge	$	(10	)	$	(7	)

Nine Months Ended September 30,
2009
Curtailment gain	$	46		$	30
Cost reduction charge		(24	)		(16	)
Completion of IRS examination		(9	)		20

Total	$	13		$	34

2008
Charges related to litigation matters	$	(117	)	$	(76	)


FINANCIAL SUMMARY
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In millions)	2009			2008		2009			2008
Premiums and fees	$	2,812		$	2,991	$	8,578		$	8,760
Net investment income		52			54		132			154
Mail order pharmacy revenues		316			300		944			882
Other revenues		66			66		201			199

Segment revenues		3,246			3,411		9,855			9,995

Mail order pharmacy cost of goods sold		255			238		762			704
Benefits and other expenses		2,681			2,892		8,243			8,549

Benefits and expenses		2,936			3,130		9,005			9,253

Income before taxes		310			281		850			742
Income taxes		110			94		301			260

Segment earnings	$	200		$	187	$	549		$	482

Realized investment gains (losses), net of taxes	$	(1	)	$	15	$	(17	)	$	23

Special items (after-tax) included in segment earnings:
Curtailment gain	$	—		$	—	$	25		$	—
Cost reduction charge	$	(4	)	$	—	$	(12	)	$	—
Completion of IRS examination	$	—		$	—	$	1		$	—
Charge related to litigation matters	$	—		$	—	$	—		$	(24	)


			Less
			than 1		1-3		4-5		After 5
(In millions, on an undiscounted basis)	Total		year		years		years		years
On-Balance Sheet:
Future policy benefits	$	11,479	$	483	$	890	$	771	$	9,335
Short-term debt	$	103	$	103	$	—	$	—	$	—
Long-term debt	$	4,772	$	150	$	782	$	281	$	3,559
Other long-term liabilities	$	1,673	$	847	$	374	$	166	$	286


Item 2.		*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS*


Issuer Purchases of Equity Securities
	Total # of						Approximate dollar value of shares that
	shares		Average price paid		Total # of shares purchased as part		may yet be purchased as part of publicly
Period	purchased (1)		per share		of publicly announced program (2)		announced program (3)
January 1-31, 2010		294,790	$	35.80		0	$	448,919,605
February 1-28, 2010		53,602	$	33.21		0	$	448,919,605
March 1-31, 2010		177,790	$	34.06		0	$	448,919,605

Total		526,182	$	34.95		0		N/A