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CIGNA Corporation 10-K 2007 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For
the transition period from ______________ to
______________
Commission
file number 1-8323
CIGNA
Corporation
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code (215) 761-1000
Securities
registered pursuant to section 12(b) of the Act:
Securities
registered pursuant to section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
X
No
__
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
__ No
X
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes X
No
__
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer [X]
Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes _ No X
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006, was approximately $10.5 billion.
As
of
January 31, 2007, 97,472,470 shares of the registrant’s Common Stock were
outstanding.
Parts
I
and II of this Form 10-K incorporate by reference information from the
registrant’s annual report to shareholders for the year ended December 31, 2006.
Part III of this Form 10-K incorporates by reference information from the
registrant’s proxy statement to be dated on or about March 22, 2007.
TABLE
OF CONTENTS
Page
Item
1. BUSINESS
A. Description
of Business
CIGNA
Corporation had consolidated shareholders’ equity of $4.3 billion and assets of
$42.4 billion as of December 31, 2006, and revenues of $16.5 billion for the
year then ended. CIGNA Corporation and its subsidiaries constitute one of the
largest investor-owned health care and related benefits 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, including
health care products and services, group disability, life and accident
insurance, and disability and workers’ compensation case management and related
services. CIGNA’s major insurance subsidiary, Connecticut General Life Insurance
Company (“CG Life”), traces its origins to 1865. CIGNA Corporation was
incorporated in the State of Delaware in 1981.
As
used
in this document, “CIGNA” and the “Company” may refer to CIGNA Corporation
itself, one or more of its subsidiaries, or CIGNA Corporation and its
consolidated subsidiaries. CIGNA Corporation is a holding company and is not
an
insurance company. Its subsidiaries conduct various businesses, which are
described in this Form 10-K.
CIGNA’s
revenues are derived principally from premiums, fees, other revenues and
investment income. The financial results of CIGNA’s businesses are reported in
the following segments:
Investment
results produced by CIGNA Investments on behalf of CIGNA’s insurance operations
are reported in each segment.
Available
Information
CIGNA’s
Internet address is http://www.cigna.com. CIGNA’s annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports are available through CIGNA’s website as soon as reasonably
practicable after the filing or furnishing of such material with the Securities
and Exchange Commission. See “Code of Ethics and Other Corporate Governance
Disclosures” in Part III, Item 10 on page 42 of this
Form 10-K for additional available information.
The
financial information included in the tables that follow is presented in
conformity with accounting principles generally accepted in the United States
of
America (“GAAP”), unless otherwise indicated. Certain reclassifications have
been made to prior years’ financial information to conform to the 2006
presentation. Industry rankings and percentages set forth below are for the
year
ended December 31, 2005, unless otherwise indicated. Unless otherwise noted,
statements set forth in this document concerning CIGNA’s rank or position in an
industry or particular line of business have been developed internally, based
on
publicly available information.
Financial
data for each of CIGNA’s business segments is set forth in Note 19 to the
Financial Statements included in CIGNA’s 2006 Annual Report.
3
C. Health
Care
CIGNA’s
Health Care operations offer insured and self-funded medical, dental, behavioral
health, prescription drug and other products and services that may be integrated
to support consumer-focused health care programs. These operations also provide
disability and life insurance products which were historically sold in
connection with certain experience-rated medical products. These
products and services are provided and administered by subsidiaries of CIGNA
Corporation.
Industry
and Strategic Overview
CIGNA
believes that the health care business model is evolving to one that focuses
more directly on the role of the health care consumer. Engaging
consumers more closely in health care decisions can result in improved health
care outcomes and remove unnecessary costs from the system.
Consumerism represents a transition from a cost-based business model to a
value-based model. Using this model, CIGNA seeks to provide actionable
information about provider quality and cost, customer support tools and
services, and health advocacy support, to assist consumers in making
more
informed choices regarding their health care and in achieving better health
outcomes.
CIGNA
has
developed products, educational resources and customer support tools for
consumers and capabilities to
provide information to employers about the health needs of their plan
participants.
CIGNA
believes that its capabilities in consumerism, health advocacy and providing
useful information to consumers, employers, and providers positions the Company
to meet the emerging market need.
CIGNA
continually evaluates potential acquisitions and other transactions that present
opportunities to enhance its product capabilities and provide a basis for lower
medical costs. As part of that strategy, in 2006 CIGNA:
Products
and Services
The
customers of CIGNA’s Health Care operations range in size from some of the
largest United States corporations to small enterprises, and include employers,
multiple employer groups, unions, and governmental entities. Products are
marketed in all 50 states, the District of Columbia, Puerto Rico, the U.S.
Virgin Islands and Canada.
Medical
CIGNA
provides a wide array of products and services to meet the needs of employers
and other sponsors of health benefit plans and the employees and dependents
participating in these plans, including consumer-directed health plans,
health
maintenance organizations (“HMOs”), network only (“Network”) and
point-of-service (“POS”) medical plans, preferred provider plans (“PPOs”), and
traditional medical indemnity coverage.
CIGNA
offers a modular product portfolio, including CIGNATURE®,
CareAlliesSM, and
CIGNA
Choice Fund®
solutions, which offer a choice of benefit, participating provider network,
funding, medical management, consumerism and health advocacy options for
employers and consumers. Through its CareAlliesSM
brand,
CIGNA provides medical management, disease
4
management,
and health advocacy services to large plan sponsors that allow their employees
to choose from among multiple health care vendors. CareAlliesSM
offers a
consistent set of services to address the clinical and administrative
inconsistencies that are inherent in the multi-vendor approach.
To
improve health outcomes and reduce unnecessary costs, it is CIGNA's goal to
provide customers who purchase more than one product (including any
combination of medical, dental, behavioral health, pharmacy and medical
care management features) with: (1) a holistic and integrated approach
toward members' health that promotes consistent case management; and
(2) the integration of health care information through predictive modeling
and
other tools, to provide targeted outreach and health advocacy by CIGNA's
clinical professionals.
As
part
of its commitment to help members anticipate and manage their health care costs
and to address provider debt concerns, CIGNA will pilot a new payment process
in
limited locations in 2007. The process is designed to allow members and
providers to obtain a real-time treatment cost estimate reflecting the member’s
actual co-pays and deductibles, and facilitate payment to providers from sources
such as the member’s health savings account or line of credit.
CIGNA
strengthened its presence in the voluntary benefits marketplace with the
acquisition of the Star HRGSM
voluntary health insurance business and the creation of the Fundamental
CareSM
product
offering for companies with 51 or more eligible employees. This product is
designed to be more affordable than traditional major medical coverage.
Fundamental CareSM meets the need for a voluntary medical product for
the working uninsured that provides higher coverage levels than limited benefit
plans.
CIGNA
is
also developing technology tools to assist employers in choosing product designs
to achieve better health outcomes for their plan participants. For example,
CIGNA’s Hi Score®
tool
aggregates employee plan participant data (not identifiable by individual)
in
four categories: (1) frequency and type of health care services provided; (2)
level of employee engagement in health care decisions; (3) effectiveness of
existing incentives in meeting employee population objectives; and (4)
opportunities for outreach to employees. Hi Score®
ranks
the employer in each of these categories to show the employer’s current
performance compared to the original baseline and the employer’s industry peer
group, with the goal of enabling employers to modify actions to potentially
improve employee health outcomes and, consequently, cost trends.
Consumer-Directed
Health Plans. CIGNA
offers customers the CIGNA Choice Fund® suite of consumer-directed
health plan products. The
CIGNA
Choice Fund®
includes
health reimbursement arrangement (“HRA”) and
health
savings account (“HSA”) options. The HRA combines flexible benefit plan designs
and the ability of employers to allow roll over reimbursement accounts from
year
to year with enhanced decision support tools and consumer incentive programs.
The HSA combines a high deductible payment feature for the health plan with
a
tax-preferred account offering mutual fund investment options. Funds in the
HSA
can be used to pay the deductible and for other eligible tax-deductible
medical
expenses.
In
2006,
CIGNA enhanced its portfolio of offerings to provide more flexible versions
of
the standard HRA. CIGNA introduced the “Healthy Rewards®
HRA,”
which facilitates the deposit of financial incentives to reward healthy
activities, and the “Healthy Futures HRA,” a retirement HRA. Additionally, CIGNA
expanded the availability of its HRA plans to businesses with 51-200 employees
in eight additional states, so that these plans are now available to small
businesses in a total of 30 states. Working with JPMorgan Chase Bank, mutual
fund investment options are made available to CIGNA's HSA accountholders as
a
means of investing HSA funds.
HMOs.
HMOs
are
required by law to provide coverage for all basic health services. They use
various tools to facilitate the appropriate use of health care services by
members and providers and control unit costs through provider contracts. Members
typically choose a primary care physician from CIGNA’s provider network who is
responsible for the member’s primary
medical
and preventive care.
Members
may be required to obtain referrals from their primary care physicians to
receive covered non-emergency services from
5
participating
specialists or facilities. CIGNA also offers an open access HMO product that
allows members to obtain covered services without the requirement of a referral
from the primary care physician.
Other
than CIGNA HealthCare of Arizona, Inc., a staff model HMO which employs some
physicians and other providers, all CIGNA HMOs are individual practice
association models using networks of independent physicians, hospitals and
other
health care providers that have directly or indirectly contracted with the
HMO.
Currently,
many contracted providers are compensated by CIGNA on a discounted
fee-for-service or other service-specific basis (such as hospital per diems
or
case rates) for covered health care services provided to members. Certain
contracted providers agree to provide covered services in consideration for
receiving a monthly predetermined fee (capitation) from CIGNA. Capitation
arrangements shift some of the financial risk from CIGNA to the providers.
In
some
cases, capitated providers subcontract with other providers for certain health
care services. In the event that the capitated provider is paid but fails to
pay
its subcontracted providers, the subcontracted providers or regulators may
look
to CIGNA for payment.
CIGNA
contracts with the federal Centers for Medicare and Medicaid Services (“CMS”) to
provide Medicare HMO coverage for eligible individuals in Arizona. The contract
provides for a fixed, per member per month, premium from CMS, based upon a
formula that calculates the projected cost of providing services for each
Medicare member. Premium amounts are updated annually. Members generally receive
enhanced benefits over standard Medicare fee-for-service coverage, including
prescription drug and vision coverage, and pay lower, fixed co-payments for
services used. Depending on the plan benefits selected, members may be required
to pay an additional premium to CIGNA for their HMO coverage.
Network
and POS Medical Products. CIGNA
offers Network products that cover non-emergency services provided only by
CIGNA
participating providers and emergency services provided by participating and
non-participating providers. CIGNA also offers POS medical plans that cover
health care services provided by participating and non-participating health
care
providers. This allows participants to determine at the “point of service”
(“POS”) whether to obtain covered services from a CIGNA participating provider
(“In-Network” services) or from a non-participating provider (“Out-of-Network”
services). Participants in POS plans generally pay a fixed co-payment or
co-insurance amount for In-Network covered services. Reimbursement for
Out-of-Network covered services is subject to deductibles and coinsurance,
which
result in a higher cost to participants than In-Network services. CIGNA offers
POS products that allow access to In-Network specialty care without the
requirement of a referral from the primary care physician.
Some
of
CIGNA’s POS products require that the participant receive a referral from a
primary care physician participating in the CIGNA provider network for coverage
of non-emergency specialty care services. As part of this product, the
participant selects a primary care physician and the higher In-Network
reimbursement for specialty care services is available only if the participant
has a referral from his or her primary care physician to a specialty care
provider in the CIGNA network.
PPO
Medical Products. CIGNA
also offers exclusive provider organization (“EPO”) and PPO plans. EPO and PPO
plans are similar to HMO and POS plans, respectively, except
the
network of CIGNA participating providers is national, rather than defined by
geographical areas and is larger than the HMO and POS participating provider
network. An EPO plan does not generally provide for out-of-network coverage
for
non-emergent care. For PPO plans, the participant’s coinsurance obligation is
greater for Out-of-Network services than it is for In-Network
services.
Traditional
Medical Indemnity Products. Traditional
medical indemnity products provide reimbursement for covered services without
regard to whether the provider of the covered service participates in the CIGNA
provider network. Participants are responsible for sharing in the cost of their
care by paying deductibles and coinsurance, subject to annual out-of-pocket
maximums.
6
CIGNA
HealthCare of Arizona, Inc. is also a participating provider in the
fee-for-service Medicare program, furnishing outpatient care to Medicare
beneficiaries. Reimbursement for inpatient and outpatient services is made
by
CMS pursuant to laws and regulations governing the Medicare program. Currently,
CMS reimburses outpatient services in accordance with payment classification
groups based on historical cost information filed by CIGNA HealthCare of
Arizona, Inc.
Dental
CIGNA
offers a variety of dental care products including managed care, dental
preferred provider organization (“DPPO”), dental exclusive provider organization
(“DEPO”) and traditional indemnity products. Customers can purchase CIGNA dental
products as stand-alone products or integrated with CIGNA medical products.
Customers have access to live service representatives and on-line assistance
through CIGNA's secure member website, myCIGNA.com.
Managed
dental care products are offered in 36 states and the District of Columbia
through a network of independent providers that have contracted with CIGNA
to
provide dental services to members. Most dentists in the CIGNA network receive
a
monthly predetermined fee (capitation) for each covered member in their patient
panel. Network dentists may also receive additional fees for certain services.
Generally, members are responsible for a fixed co-payment for certain covered
services provided by a network dentist. Members typically choose a primary
care
dentist from CIGNA's provider network. Members are generally required to obtain
referrals from their primary care general dentist to receive covered
non-emergency services from participating specialists.
CIGNA
also offers DPPO products similar to the medical PPO products described above.
As of December 31, 2006, CIGNA’s national DPPO network had approximately 46,800
(42,400 as of December 31, 2005) participating dentists with approximately
87,600 (70,200 as of December 31, 2005) contracted access points.
In
addition, CIGNA offers DEPO products that generally offer in-network only
benefit coverage. DEPO plans do not require the selection of a primary care
general dentist and do not require referrals to in-network specialists.
Traditional
dental indemnity products also operate in a manner consistent with that
described with respect to medical indemnity products, above.
Behavioral
Health
CIGNA
provides behavioral health care benefit products, behavioral health care
management, employee assistance programs, and work/life programs to employer
sponsored benefit plans, HMOs, governmental entities and disability insurers.
CIGNA focuses on integrating its programs and services to provide the consumer
with customized, holistic care through such products as:
As
of
December 31, 2006, CIGNA's behavioral care national network had approximately
55,200 access points to independent psychiatrists, psychologists and clinical
social workers and approximately 5,000 facilities and clinics that are paid
on a
contracted fee-for-service basis. As of December 31, 2005, CIGNA's behavioral
care national network had approximately 53,700 access points to independent
psychiatrists, psychologists and clinical social workers and approximately
5,000
facilities and clinics that are paid on a contracted fee-for-service basis.
Pharmacy
CIGNA
offers to its insured and self-funded customers prescription drug plans both
in
conjunction with its medical products described above and on a stand alone
basis. CIGNA has a nationwide network of approximately 57,400 contracted
pharmacies that it uses in connection
7
with
its
HMO, Network, POS, PPO and Choice Fund products. In addition, CIGNA provides
managed pharmacy benefit programs in connection with its HMO and POS products
as
wells as Pharmacy Outcome Improvement programs that take a holistic approach
to
helping improve outcomes for members and managing medical costs for customers.
CIGNA
also offers cost-effective mail order, telephone and on-line pharmaceutical
fulfillment services through its CIGNA Tel-Drug®
operation.
In 2006, CIGNA launched new preventive prescription drug plan options to promote
medication compliance by providing a higher level of benefits coverage to
members enrolled in high-deductible plans who need certain medications to
prevent illness or to address specified chronic health care
conditions. In
addition, CIGNA has made available on-line pharmacy decision support tools
including:
In
2005,
CIGNA introduced CIGNATURE Rx SM,
its
Medicare Part D prescription drug program, which provides a number of plan
options as well as service and information support. CIGNATURE Rx
SM
is
provided in alliance with NationsHealth, Inc., and combines CIGNA's pharmacy
product capabilities with NationsHealth’s service and distribution capabilities.
CIGNATURE Rx
SM
is
available in all 50 states and the District of Columbia.
Care
Management
CIGNA
strives to help consumers make more informed health care decisions by providing
a number of care management and health advocacy programs and information support
tools that are designed to help improve health and cost outcomes. Some of these
include:
CIGNA
has
developed a range of consumer decision support tools including:
8
Quality
CIGNA's
commitment to promoting quality care is reflected in a variety of activities,
including: the credentialing of medical providers and facilities that
participate in CIGNA's managed care and PPO networks; the development of the
CIGNA Care Network®
described below, a national externally accredited Quality Program, that includes
clinical interventions and quality measurement; and participation in initiatives
that provide hospital and physician profiling information to members for more
educated decision making.
Participating
Provider Network.
CIGNA
has
an extensive national network of participating health care providers, which
as
of December 31, 2006 consisted of approximately 5,000 hospitals and
approximately 518,600 providers as well as other facilities, pharmacies and
vendors of health care services and supplies. As of December 31, 2005, CIGNA's
national network of participating health care providers consisted of
approximately 4,800 hospitals and approximately 500,700 providers.
In
most
instances, a CIGNA subsidiary contracts directly with the participating provider
to provide covered services to members at agreed-upon rates of reimbursement.
In
some instances, however, CIGNA companies contract with third parties for access
to their provider networks. In addition, CIGNA has entered into strategic
alliances with several regional managed care organizations (Tufts Health Plan,
HealthPartners, Inc., Health Alliance Plan, and MVP Health Plan) to gain access
to their market leading provider networks and discounts.
CIGNA
Care Network®.
CIGNA
Care Network® is a benefit design option available for CIGNA plans in 62 service
areas across the country. CIGNA
Care Network®
is a
subset of participating physicians in certain specialties who are designated
as
CIGNA Care Network®
providers based on specific quality and efficiency selection criteria. Consumers
pay reduced co-payments or co-insurance when they receive care from a specialist
designated as a CIGNA Care Network®
provider. CIGNA participating specialists
are evaluated annually for the CIGNA Care Network®
designation.
Provider
Credentialing. CIGNA
credentials physicians, hospitals and other health care providers in its
participating provider networks using quality criteria which meets or exceeds
the standards of external accreditation or state regulatory agencies, or both.
Typically, most providers are recredentialed every three years.
To
be
credentialed, CIGNA requires the medical facilities with which it contracts
to
have an unrestricted state license, no sanctions by the Department of Health
and
Human Services, accreditation by an approved accrediting organization and
adequate malpractice and general liability coverage. Typically, medical
facilities are recredentialed every three years.
NCQA
Accreditation. Accreditation
by the National Committee for Quality Assurance (“NCQA”) of CIGNA’s medical HMOs
validates CIGNA’s quality program. The NCQA is a nationally recognized
independent, not-for-profit organization dedicated to assessing, measuring
and
reporting on the quality of managed care plans.
As
of
December 31, 2006, 96% of CIGNA’s U.S. plan locations are NCQA accredited and,
as of January, 2007, 100% of these accredited plans have received Excellent
or
Commendable accreditation for HMO and POS products.
HEDIS®
Measures. In
addition, CIGNA participates in NCQA’s Health Plan Employer Data and Information
Set (“HEDIS”) Quality Compass Report. HEDIS Effectiveness of Care measures are a
standard set of metrics to evaluate the effectiveness of managed care
organization clinical programs. CIGNA’s national results compare favorably to
industry averages.
Markets
and Distribution
CIGNA
the
following targeted market segments for its products:
9
To
date,
the national and regional account markets have comprised a significant amount
of
CIGNA's Health Care business. CIGNA intends to grow its business in the small
business, individual, government, Taft-Hartley, seniors and emerging markets.
CIGNA
employs group sales representatives to distribute the products and services
of
the markets listed above through insurance brokers, insurance consultants and
directly to employers. CIGNA also employs representatives to sell medical cost
containment, managed behavioral health care and employee assistance services
directly to insurance companies, HMOs, third party administrators and employer
groups. As of December 31, 2006, the field sales force for the products and
services of this segment consisted of approximately 800 sales representatives
in
67 field locations.
Funding
Arrangements
The
segment’s health care products and services are offered through guaranteed cost,
retrospectively experience-rated, administrative services only (“ASO”) and
minimum premium funding arrangements.
Under
guaranteed cost funding arrangements, CIGNA charges a fixed premium and bears
the risk for claims and costs that exceed the premium.
Under
retrospectively experience-rated funding arrangements, a premium that typically
includes a margin to partially protect against adverse claim fluctuations is
determined at the beginning of the policy period. CIGNA generally bears the
risk
if claims and expenses exceed premiums, but has the potential to recover these
deficits from margins in future years if coverage is renewed. For additional
discussion, see “Pricing, Reserves and Reinsurance” below.
Under
ASO
funding arrangements, the employer or other plan sponsor self-funds, or assumes
the risk for, all of its claims and assumes the risk for claim costs incurred.
CIGNA makes available to ASO plans its participating provider network and
typically provides claims processing and other services and programs, including:
quality management, utilization management; cost containment; health advocacy;
24-hour help line; case management; disease management; pharmacy benefit
management; behavioral health care management services (through its provider
networks); or a combination of the above, in exchange for administrative service
fees. The employer/plan sponsor is responsible for self-funding all claims,
but
may purchase stop-loss insurance from CIGNA or other insurers for claims in
excess of some predetermined amount in total, for specific individuals, the
entire group in aggregate, or both.
Minimum
premium funding arrangements combine insurance protection with an element of
self-funding. The policyholder is responsible for funding all claims up to
a
predetermined aggregate, maximum amount, and CIGNA bears the risk for claim
costs incurred in excess of that amount. CIGNA has the potential to recover
this
deficit from margins in future years if the policy is renewed. Accordingly,
minimum premium funding arrangements have a risk profile similar to
retrospectively experience-rated insurance arrangements.
Pricing,
Reserves and Reinsurance
Premiums
and fees charged for most insured health care products and for disability and
life insurance products are generally set in advance
10
of
the
policy period and are guaranteed for one year.
Premium
rates are established either on a guaranteed cost basis or on a retrospectively
experience-rated basis.
Charges
to customers established on a guaranteed cost basis at the beginning of the
policy period cannot be adjusted to reflect actual claim experience during
the
policy period. A guaranteed cost pricing methodology reflects assumptions about
future claims, expenses, credit risk, enrollment mix, investment returns, and
profit margins. Claim and expense assumptions may be based in whole or in part
on prior experience of the account or on a pool of accounts, depending on the
group size and the statistical credibility of the experience. Generally,
guaranteed cost groups are smaller and less statistically credible than
retrospectively experience-rated groups. In addition, pricing for health care
products that use networks of contracted providers reflects assumptions about
the impact of provider contracts on future claims. Premium rates may vary among
accounts to reflect the anticipated contract mix, family size, industry, renewal
date, and other cost-predictive factors. In some states, premium rates must
be
approved by the state insurance departments, and state laws may restrict or
limit the use of rating methods.
Premiums
established for retrospectively experience-rated business may be adjusted for
the actual claim and administrative cost experience of the account through
an
experience settlement process subsequent to the policy period. To the extent
that the cost experience is favorable in relation to the prospectively
determined premium rates, a portion of the initial premiums may be credited
to
the policyholder as an experience refund. If claim experience is adverse in
relation to the initial premiums, CIGNA may recover the resulting experience
deficit, according to contractual provisions, through future premiums and
experience settlements, provided the policy remains in force.
CIGNA
contracts on an ASO basis with customers who fund their own claims. CIGNA
charges these customers administrative fees based on the expected cost of
administering their self-funded programs. In some cases, CIGNA provides
performance guarantees related to identified performance. If these standards
are
not met, CIGNA may be financially at risk up to a percentage of the contracted
fee or a stated dollar amount.
In
addition to paying current benefits and expenses under insurance policies and
HMO service agreements, CIGNA establishes reserves in amounts estimated to
be
sufficient to settle reported claims not yet paid, as well as claims incurred
but not yet reported. Also, liabilities are established for estimated experience
refunds based on the results of retrospectively experience-rated policies and
applicable contract terms.
As
of
December 31, 2006, approximately $1.1 billion, or 39% of the reserves of CIGNA's
Health Care operations comprise liabilities that are likely to be paid within
one year, primarily for medical and dental claims, as well as certain group
disability and life insurance claims. Of the reserve amount expected to be
paid
within one year, $250 million relates to amounts recoverable from certain ASO
customers and from minimum premium policyholders, and is offset by a receivable.
The remaining reserves related primarily to liabilities that are short term
with
a long tail and include liabilities for group long-term disability insurance
benefits and group life insurance benefits for disabled and retired individuals,
benefits paid in the form of both life and non-life contingent annuities to
survivors and contract holder deposit funds.
CIGNA
credits interest on fund balances to retrospectively experience-rated
policyholders through rates that are set at CIGNA’s discretion taking investment
performance and market rates into consideration. Generally, for
interest-crediting rates set at CIGNA’s discretion, higher rates are credited to
funds with longer terms reflecting the fact that higher yields are generally
available on investments with longer maturities. For 2006, the rates of interest
credited ranged from 2.5% to 4.4%, with a weighted average rate of
3.4%.
The
profitability of CIGNA's fully insured health care products depends on the
adequacy of premiums charged relative to claims and expenses. For medical and
dental products, profitability reflects the accuracy of cost projections for
health care (unit costs and utilization), the adequacy of fees charged for
administration and risk assumption and effective medical cost and utilization
management.
11
CIGNA
reduces its exposure to large catastrophe losses under group life, disability
and accidental death contracts by purchasing reinsurance from unaffiliated
reinsurers.
Competition
CIGNA's
health care businesses are subject to intense competition, and industry
consolidation has created an even more competitive business environment. While
no one competitor or small number of competitors dominates the health care
market, CIGNA expects a continuing trend of consolidation in the industry with
the emergence of consumerism intensifying this trend.
In
certain geographic locations some health care companies may have significant
market share positions. A large number of health care companies and other
entities compete in offering similar products. Competition in the health care
market exists both for employer-policyholders and for the employees in those
instances where the employer offers its employees the choice of products of
more
than one health care company. Most group policies are subject to annual review
by the policyholder, who may seek competitive quotations prior to renewal.
The
principal competitive factors are: quality of service; scope; cost-effectiveness
and quality of provider networks; effectiveness of medical care management;
product responsiveness to the needs of customers and their employees;
cost-containment services; technology; price; and effectiveness of marketing
and
sales. In addition, financial strength of the insurer, as indicated by ratings
issued by nationally recognized rating agencies, is also a competitive factor.
For more information concerning insurance ratings, see “Ratings” in Section K
beginning on page 28. CIGNA believes that its national
scope, integrated approach to consumerism, product breadth, clinical care and
medical management capabilities and funding options are strategic competitive
advantages. These advantages allow CIGNA to respond to the diverse needs of
its
customer base in each market in which it operates.
The
principal competitors of CIGNA’s health care businesses are:
Competition
also arises from smaller regional or specialty companies with strength in a
particular geographic area or product line, administrative service firms and,
indirectly, self-insurers. In addition to these traditional competitors, a
new
group of competitors is emerging. These new competitors are focused on
delivering employee benefits and services through Internet-enabled technology
that allow consumers to take a more active role in the management of their
health. This is accomplished primarily through financial incentives and access
to enhanced medical quality data. The
effective use of web-based information tools and technology are critical to
success in the health care industry, and CIGNA believes they will be competitive
differentiators. Management
believes that it has the capabilities and appropriate strategy to allow it
to
compete against both traditional and new competitors.
Financial
information regarding premiums and fees is presented on page 19 in the MD&A
section, included in CIGNA's 2006 Annual Report, which is incorporated herein
by
reference. Other financial information about the Health Care segment is
presented elsewhere in the MD&A section and Note 19 to CIGNA's 2006
Financial Statements included in its 2006 Annual Report, which are incorporated
herein by reference.
12
Principal
Products and Markets
CIGNA's
Disability and Life operations provide the following insurance products and
their related services: long-term and short-term disability insurance,
disability and workers’ compensation case management, group life insurance, and
accident and specialty insurance. These products and services are provided
by
subsidiaries of CIGNA Corporation. CIGNA markets these group insurance products
and services to employers, employees, professional and other associations and
other groups.
The
following table sets forth the net premiums and fees for this segment by its
principal products.
Life
Insurance
Group
life insurance products include group term life and group universal life. CIGNA
no longer markets group variable universal life insurance, but continues to
administer the product for existing policyholders. Group term life insurance
may
be employer-paid basic life insurance or employee-paid supplemental life
insurance.
Group
universal life insurance is a voluntary life insurance product in which the
owner may accumulate cash value. The cash value earns interest at rates declared
from time to time, subject to a minimum guaranteed rate, and may be borrowed,
withdrawn, or used to fund future life insurance coverage. With group variable
universal life insurance, the cash value varies directly with the performance
of
the underlying investments and neither the return nor the principal is
guaranteed.
Approximately
5,700 group life insurance policies covering approximately 5.8 million lives
were outstanding as of December 31, 2006.
Disability
Insurance
CIGNA
markets group long-term and short-term disability insurance products and
services in all states and statutorily required disability insurance plans
in
certain states. These products and services generally provide a fixed level
of
income to replace a portion of wages lost because of disability. They also
provide assistance to the employee in returning to work and assistance to the
employer in managing the cost of employee disability. Group disability coverage
is typically employer-paid, but may also be employee-paid or a combination
of
employer and employee-paid.
CIGNA
also provides case management and related services to workers’ compensation
insurers and employers who self-fund workers’ compensation and disability
benefits.
CIGNA’s
disability insurance products may be coordinated with behavioral programs,
workers’ compensation, medical programs, social security advocacy, and the
Family and Medical Leave Act and leave of absence administration. CIGNA believes
this integration provides customers with increased efficiency and effectiveness
in disability claims management. CIGNA may receive fees for providing
integration services to clients.
Other,
Including Voluntary
CIGNA
offers personal accident insurance coverage, which consists primarily of
accidental death and dismemberment and travel accident insurance to employers.
Group accident insurance may be employer-paid or employee-paid.
CIGNA
also offers specialty insurance services that consist primarily of life,
accident and disability insurance to professional associations, financial
institutions, schools and participant organizations.
13
CIGNA
enhanced its voluntary benefits offering in September 2006. Voluntary benefits
are principally paid by the employee and are offered at the employers’ worksite.
CIGNA plans provide, among other services, flexible enrollment options, list
billing, medical underwriting, and individual record keeping. CIGNA designed
this voluntary platform to offer employers a complete and simple way to manage
their benefits, including personalized enrollment communication and full program
administration.
Distribution
CIGNA
employs group sales representatives to distribute the products and services
of
this segment through insurance brokers and consultants. As of December 31,
2006,
the field sales force for the products and services of this segment consisted
of
approximately 200 sales representatives in 27 field locations.
Pricing,
Reserves and Reinsurance
Premiums
and fees charged for disability and life insurance products are generally
established in advance of the policy period and are often guaranteed for two
to
three years, but contracts may be subject to termination.
Premium
rates reflect assumptions about future claims, expenses, credit risk, investment
returns and profit margins. Claim and expense assumptions may be based in whole
or in part on prior experience of the account or on a pool of accounts,
depending on the group size and the statistical credibility of the experience.
Fees
for
universal life insurance products consist of mortality, administrative and
surrender charges assessed against the contractholder’s fund balance. Interest
credited and mortality charges for universal life, and mortality charges on
variable universal life, may be adjusted prospectively to reflect expected
interest and mortality experience.
In
addition to paying current benefits and expenses, CIGNA establishes reserves
in
amounts estimated to be sufficient to settle reported claims not yet paid,
as
well as claims incurred but not yet reported. For liabilities with longer-term
pay-out periods such as long-term disability, reserves represent the present
value of future expected payments. CIGNA
discounts these reserves based on interest rate assumptions. The annual
effective interest rate assumption used in determining reserves for most of
the
long-term disability insurance business is 4.75% for claims that were incurred
in 2006 and 5.00% for claims that were incurred in 2005. For
universal life insurance, CIGNA establishes reserves for deposits received
and
interest credited to the contractholder, less mortality and administrative
charges assessed against the contractholder’s fund balance.
The
profitability of this segment’s products depends on the adequacy of premiums
charged relative to claims and expenses. Effectiveness of return to work
programs as well as adequate return on invested assets impact the profitability
of disability insurance products. For life insurance products, the degree to
which future experience deviates from mortality, morbidity and expense
assumptions affects profitability.
CIGNA
reduces its exposure to large individual and catastrophe losses under group
life, disability and accidental death contracts by purchasing
reinsurance.
Competition
The
principal competitive factors that affect the products of the Disability and
Life segment are underwriting and pricing, relative operating efficiency,
distribution methodologies and producer relations, the variety of products
and
services offered, and the quality of customer service and claims
management.
For
certain products with longer-term liabilities, such as group long-term
disability insurance, the financial strength of the insurer, as indicated by
ratings issued by nationally recognized rating agencies, is also a competitive
factor. For more information concerning insurance ratings, see “Ratings” in
Section K beginning on page 28.
The
principal competitors of CIGNA’s group disability, life and accident businesses
are other large and regional insurance companies that market and distribute
these products.
As
of
December 31, 2006, CIGNA is one of the top five providers of group disability,
life and accident insurance, based on premiums.
14
CIGNA’s
international operations offer life, accident and supplemental health insurance
products and international health care products and services. These products
and
services are provided by subsidiaries of CIGNA Corporation, including foreign
operating entities.
The
following table sets forth the two principal lines of business of CIGNA
International and their related net earned premiums and fees.
Principal
Products and Markets
Life,
Accident and Supplemental Health Insurance
CIGNA
International’s life, accident and supplemental health insurance products
generally provide simple, affordable coverage of risks for the health and
financial security of individuals. These products
are marketed primarily through distribution partners with whom the individual
has an affinity relationship. Supplemental health products provide a specified
payment for a variety of health risks and include personal accident, accidental
death, critical illness, hospitalization, cancer and other dread disease
coverages. CIGNA International’s life, accident and supplemental health
insurance operations are located in South Korea, Taiwan, Hong Kong, New Zealand,
Indonesia, People’s Republic of China, Thailand, the European Union, and Chile.
In the third quarter of 2006, CIGNA entered into negotiations to sell its
Brazilian life insurance business which is in run-off. The sale is expected
to
close in 2007.
International
Health Care Benefits
CIGNA
International’s health care operations primarily consist of an array of products
and services to meet the needs of multinational companies and their expatriate
employees and dependents. These expatriate benefits include medical, dental,
vision, life, accidental death and dismemberment and disability products, as
well as primary medical and dental benefits for international business travelers
and expatriates. The customers of CIGNA International’s expatriate benefits
business are multinational companies headquartered in the United States, Canada,
Europe and the Middle East. The expatriate benefits products and services are
offered through guaranteed cost, experience-rated, administrative services
only,
and minimum premium funding arrangements. For definitions of guaranteed cost,
experience-rated, and administrative services only funding arrangements, see
“Funding Arrangements” in Section C on page
10.
CIGNA
International’s health care operations also include medical and some life
insurance products, which are provided through group benefits programs in the
UK, Spain, Chile and Guatemala. These products are primarily medical indemnity
insurance coverage, with some offerings having managed care or administrative
service aspects. These products generally provide an alternative or supplement
to government programs.
15
Distribution
CIGNA
International’s life, accident and supplemental health insurance products are
distributed primarily through direct marketing channels, such as outbound
telemarketing, in-branch bancassurance, and direct response television.
Marketing campaigns are conducted through these channels under a variety of
arrangements with affinity partners. These affinity partners include banks,
credit card companies and other financial institutions.
CIGNA
International’s health care products are distributed through independent brokers
and consultants as well as CIGNA International’s own sales
personnel.
Pricing,
Reserves and Reinsurance
Premiums
for CIGNA International’s life, accident and supplemental health insurance
products are based on assumptions about mortality, morbidity, persistency,
expenses and target profit margins, as well as interest rates. The profitability
of these products is affected by the degree to which future experience deviates
from these assumptions.
Fees
for
variable universal life insurance products consist of mortality, administrative,
asset management and surrender charges assessed against the contractholder’s
fund balance. Mortality charges on variable universal life may be adjusted
prospectively to reflect expected mortality experience.
Premiums
and fees for CIGNA International’s health care products reflect assumptions
about future claims, expenses, investment returns, and profit margins. For
products using networks of contracted providers, premiums reflect assumptions
about the impact of provider contracts and utilization management on future
claims. Most of the premium volume for the medical indemnity business is on
a
guaranteed cost basis. Other premiums are established on an experience-rated
basis. Most contracts permit rate changes at least annually.
The
profitability of health care products is dependent upon the accuracy of
projections for health care inflation (unit cost and utilization), the adequacy
of fees charged for administration and risk assumption and, in the case of
managed care products, effective medical cost management.
In
addition to paying current benefits and expenses, CIGNA International
establishes reserves in amounts estimated to be sufficient to settle reported
claims not yet paid, as well as claims incurred but not yet
reported.
Additionally, for some individual life insurance and supplemental health
insurance products CIGNA International establishes policy reserves which reflect
the present value of expected future obligations less the present value of
expected future premiums. CIGNA
International defers acquisition costs incurred in the sales of long-duration
life, accident and supplemental health products. These costs are amortized
in
proportion to premium revenue recognized, except that those incurred in relation
to sales of variable universal life products are amortized in proportion to
expected gross profits.
CIGNA
International reduces its exposure to large and/or multiple losses arising
out
of a single occurrence by purchasing reinsurance from unaffiliated
reinsurers.
Competition
Competitive
factors in CIGNA International’s life, accident and supplemental health
operations include product innovation and differentiation, efficient management
of the direct marketing process, commission levels paid to distribution
partners, and quality of claims and policyholder services.
The
principal competitive factors that affect CIGNA International’s health care
operations are underwriting and pricing, relative operating efficiency, relative
effectiveness in medical cost management, product innovation and
differentiation, producer relations, and the quality of claims and policyholder
services. In most overseas markets, perception of financial strength is also
an
important competitive factor.
For
the
life, accident and supplemental health insurance line of business, locally
based
competitors are primarily indigenous insurance companies, including insurance
subsidiaries of banks. However, insurance company competitors in this segment
primarily focus on traditional product distribution, with direct marketing
being
a secondary objective.
16
For
the
expatriate benefits business, CIGNA International’s primary competitors include
U.S.-based and European health insurance companies with global expatriate
benefits operations. For the health care operations in the UK, Spain, Chile
and
Guatemala, the primary competitors are regional and local insurers.
CIGNA
International expects that the competitive environment will intensify as U.S.
and Europe-based insurance and financial services providers pursue global
expansion opportunities.
CIGNA
International conducts some of its international health care benefits operations
and all of its life, accident and supplemental health insurance operations
through foreign operating entities which maintain assets and liabilities in
local currencies. This reduces the exposure to economic loss resulting from
unfavorable exchange rate movements. For information on the effect of foreign
exchange exposure, see “Market Risk” in the MD&A section, and Note 2R to
CIGNA’s 2006 Financial Statements included in CIGNA's 2006 Annual
Report.
CIGNA
International’s health care benefits products and life, accident and
supplemental health insurance products include coverage for employees and
individuals who may be exposed to acts of terrorism, the events of a war zone
or
natural disasters.
South
Korea represents the single largest geographic market for CIGNA International’s
businesses. In 2006, South Korea generated 29% of CIGNA International’s revenues
and 41% of its segment earnings. CIGNA International’s business in South Korea
would be vulnerable to adverse consumer credit conditions in that country.
In
addition, geopolitical and economic events in South Korea could have a
significant impact on CIGNA International as well as on CIGNA's consolidated
results.
17
Other
Operations consists of:
The
products and services related to these operations are offered by subsidiaries
of
CIGNA Corporation.
CIGNA
sold its individual life insurance and annuity business in 1998. A portion
of
the gain was deferred because the principal agreement to sell this business
was
an indemnity reinsurance arrangement. The deferred portion is being recognized
at the rate that earnings from the sold business would have been expected to
emerge, primarily over 15 years on a declining basis. Because it was an
indemnity reinsurance transaction, CIGNA is not relieved of primary liability
for the reinsured business.
CIGNA
sold its retirement business in 2004, but retained the corporate life insurance
business previously reported in that segment. Corporate life insurance products
are permanent life insurance contracts sold to corporations to provide coverage
on the lives of certain of their employees. Permanent life insurance, which
is
non-participating, provides coverage that when adequately funded does not expire
after a term of years and builds a cash value that may equal the full policy
amount if the insured is alive on the policy maturity date. Non-participating
insurance does not pay dividends, but deviations from assumed experience may
be
reflected in future policy values.
Corporate
life insurance products include universal life and variable universal life.
Universal
life policies typically provide flexible coverage and flexible premium payments.
Universal life cash values fluctuate with the amount of the premiums paid,
mortality and expense charges made, and interest credited to the policy.
Variable universal life policies are universal life contracts where the cash
values vary directly with the performance of the investments underlying the
policy.
Interest
is credited on most nonvariable universal life products at a declared rate
equal
to or above a minimum guaranteed rate. Credited interest rates vary with the
characteristics of each product and the anticipated investment results of the
assets backing these products. Where the credited interest rate exceeds the
guaranteed rate, the excess is used to purchase additional insurance or increase
cash values. Credited interest rates on these products for 2006 ranged from
3.19% to 5.30%, with a weighted average rate of 4.40%, compared with a range
from 2.33% to 5.44% and a weighted average of 4.61% for 2005.
In
lieu
of credited interest rates, holders of certain nonvariable universal life
contracts may select the option of receiving credited income based on changes
in
an equity index, such as the S&P 500®.
No such
elections have been made since 2004. If such an equity index is used, CIGNA
may
purchase derivative options to minimize the effect of the income credited for
such contracts.
Federal
legislation enacted in 1996 eliminated the tax deduction for policy loan
interest for most leveraged corporate life insurance products. There have been
no sales of this product since 1997. As a result of an Internal Revenue Service
initiative to settle tax disputes regarding these products, some customers
have
surrendered their policies and management expects earnings associated with
these
products to continue to decline.
CIGNA’s
settlement annuity business is a run-off block of contracts. These contracts
are
primarily liability settlements with approximately half of the payments
guaranteed and not contingent on survivorship.
18
CIGNA’s
investment operations provide investment management and related services in
the
United States primarily for CIGNA’s corporate invested assets and the
insurance-related invested assets in its General Account ("Invested Assets").
CIGNA acquires or originates, directly or through intermediaries, various
investments including private placements, public securities, mortgage loans,
real estate and short-term investments. CIGNA’s Invested Assets are managed
primarily by CIGNA subsidiaries and external managers with whom CIGNA's
subsidiaries contract.
Assets
Under Management
CIGNA’s
Invested Assets under management at December 31, 2006 totaled $18.3 billion.
As
of
December 31, 2006, CIGNA's separate account funds consisted of:
CIGNA
also managed, as of December 31, 2006, $96 million in customer assets for which
the customer retains title. These customer assets, together with separate
account assets managed directly by CIGNA, are referred to as “Advisory Portfolio
Assets.” The income, gains and losses for Advisory Portfolio Assets generally
accrue to contractholders and are not included in CIGNA's revenues and expenses,
although the assets in separate accounts and related liabilities are separately
presented on CIGNA's balance sheet.
Domestic
Employee Benefits Investments
The
major
portfolios under management in CIGNA’s General Account consist of the combined
assets of the Health Care, Disability and Life, Other Operations, Run-off
Retirement and Run-off
Reinsurance segments
(collectively, “Domestic Employee Benefits portfolios”). As of December 31, 2006
the Domestic Employee Benefits portfolios had $16.9 billion in Invested
Assets.
CIGNA
generally manages the characteristics of these assets to reflect the underlying
characteristics of related insurance and contractholder liabilities, as well
as
regulatory and tax considerations pertaining to those liabilities. CIGNA’s
domestic insurance and contractholder liabilities as of December 31, 2006,
excluding liabilities of businesses sold through use of reinsurance, were
associated with the following products: fully guaranteed annuity, 20%;
interest-sensitive life insurance, 31%; and other life and health, 49%. These
products, and the investment assets supporting them, are described
below.
Fully
guaranteed products primarily include settlement annuities. Because these
products generally do not permit withdrawal by policyholders prior to maturity,
the amount and timing of future benefit cash flows can be reasonably estimated.
Funds supporting these products are invested in fixed income investments that
generally match the aggregate duration of the investment portfolio with that
of
the related benefit cash flows. As of December 31, 2006, the duration of assets
that supported these liabilities was approximately 13 years.
Interest-sensitive
products primarily consist of corporate life insurance products. Invested assets
supporting these products are primarily fixed income investments and policy
loans. Fixed income investments emphasize investment yield while meeting the
liquidity requirements of the related liabilities.
Other
life and health insurance products consist of various group and individual
life,
health and disability insurance products and guaranteed minimum death benefits.
The supporting invested assets are structured to emphasize investment income,
and the necessary liquidity is provided through cash flow, short-term and fixed
maturity investments. Assets supporting longer-term group disability insurance
benefits and group life waiver of premium benefits are generally managed to
an
aggregate duration similar to that of the related benefit cash
flows.
19
Investment
Strategy
Investment
strategy and results are affected by the amount and timing of cash available
for
investment, competition for investments (especially in private asset classes),
economic conditions, interest rates and asset allocation decisions.
CIGNA
routinely monitors and evaluates the status of its investments in light of
current economic conditions, trends in capital markets and other factors. Such
factors include industry sector considerations for fixed maturity investments,
and geographic and property-type considerations for mortgage loan and real
estate investments.
Types
of Investments
CIGNA
invests in a broad range of asset classes, including domestic and international
fixed maturities and common stocks, mortgage loans, real estate and short-term
investments. Fixed maturity investments include publicly traded and private
placement corporate bonds, government bonds, publicly traded and private
placement asset-backed securities, and redeemable preferred stocks. In
connection with CIGNA's investment strategy to enhance investment yields by
selling senior participations of mortgage loans, as of December 31, 2006
mortgage loans includes $124 million of mortgage loans originated with the
intent to sell. These mortgage loans held for sale are carried at the lower
of
cost or market with any resulting valuation allowance reported in realized
investment gains and losses.
For
the
International portfolios, CIGNA invests primarily in publicly traded fixed
maturites, short term investments and time deposits denominated in the currency
of the relevant liabilities and surplus.
Fixed
Maturities
As
of
December 31, 2006, fixed maturity investments constituted 64% of the Domestic
Employee Benefits portfolios.
CIGNA
invests primarily in investment grade fixed maturities rated by rating agencies
(for public investments) and by CIGNA (for private investments). For information
about below investment grade holdings, see “Investment Assets” in the MD&A
section of CIGNA’s 2006 Annual Report.
Mortgages
and Real Estate
Mortgage
loan investments constituted 24% of the Domestic Employee Benefits portfolios
as
of December 31, 2006. Mortgage loan investments are subject to underwriting
criteria addressing loan-to-value ratio, debt service coverage, cash flow,
tenant quality, leasing, market, location and borrower’s financial strength.
Such investments consist primarily of first mortgage loans on commercial
properties and are diversified by property type, location and borrower. CIGNA
invests primarily in mortgages on fully completed and substantially leased
commercial properties. Virtually all of CIGNA’s mortgage loans are balloon
payment loans, under which all or a substantial portion of the loan principal
is
due at the end of the loan term.
CIGNA
enters into joint ventures with local partners to develop, lease and manage
commercial real estate to maximize investment returns. CIGNA's portfolio of
real
estate investments consist of properties under development and stabilized
properties, and are diversified relative to property type and location. CIGNA
also acquires real estate through foreclosure of mortgage loans. CIGNA
rehabilitates, re-leases and sells foreclosed properties, a process that usually
takes from two to four years unless management considers a near-term sale
preferable. Additionally, CIGNA invests in third party sponsored real estate
equity funds to maximize investment returns and to maintain diversity with
respect to its real estate related exposure. CIGNA sold $9 million of foreclosed
properties in 2006. Real estate investments were not a significant portion
of
CIGNA’s Domestic Employee Benefits portfolios as of December 31, 2006, although
CIGNA realized gains of $252 million from sales of equity real estate
investments in 2006.
Derivative
Instruments
CIGNA
generally uses derivative financial instruments to minimize its exposure to
certain market risks. CIGNA has also written derivative instruments to minimize
insurance customers’ market risks. In addition, to enhance investment returns,
CIGNA may invest in indexed credit default swaps or other credit derivatives
from
20
time
to
time. For information about CIGNA’s use of derivative financial instruments, see
Notes 2(B) and 10(F) to CIGNA’s 2006 Financial Statements
included in its 2006 Annual Report.
See
“Investment Assets” in the MD&A section of, and Notes 2, 10, and 11 to the
Financial Statements included in CIGNA’s 2006 Annual Report for additional
information about CIGNA’s investments.
Other
Investments
In
addition to the Domestic Employee Benefits portfolios, CIGNA has a portfolio
that primarily includes the investments of the International segment.
The
investment portfolios under management in the International segment contain
assets backing the liabilities and surplus of subsidiaries operating in the
countries and territories where CIGNA International has business presence.
Collectively, these are referred to as the “International portfolios.” As of
December 31, 2006 the International portfolios had $1.4 billion in Invested
Assets. The International portfolios are primarily managed by external managers
with whom CIGNA's subsidiaries contract.
The
characteristics of these assets are generally managed to reflect the underlying
characteristics of related insurance and contractholder liabilities, as well
as
regulatory and tax considerations in the countries where CIGNA's subsidiaries
operate. Assets are generally invested in the currency of related liabilities,
typically the currency in which the subsidiaries operate. CIGNA's investment
policy allows the investment of subsidiary assets in U.S. dollars to the extent
permitted by regulation. CIGNA's international invested assets as of December
31, 2006 were held in support of statutory surplus and liabilities associated
with the following types of insurance products:
Accident
and health insurance consists of various individual group and individual life,
accident and health products. The duration of related liabilities is typically
less than one year. Investment assets supporting surplus and accident and health
liabilities are structured to emphasize investment income, and the necessary
liquidity is provided through cash flow, short term and fixed maturity
investments.
Interest
sensitive products primarily consist of “return of premium” products in which
the nominal amount of premiums paid for a multi-year accident and health policy
are paid back to the policyholder at the end of the contract period. Invested
assets supporting these products are fixed income investments that generally
match the aggregate duration of the investment portfolio with that of the
related benefit cash flows.
Unit
linked investment products are insurance contracts in which a portion of the
policyholder’s premium is used to purchase shares in investment funds for which
the policyholder bears the investment risk and return.
Fully
guaranteed products primarily include single premium immediate annuities.
Because these products have defined payment obligations to policyholders, the
amount and timing of future benefit cash flows can be reasonably estimated.
Funds supporting these products are invested in fixed income investments that
to
the extent possible match the cash flows of the investment portfolio with the
benefit cash flows.
21
On
April
1, 2004, CIGNA sold its retirement benefits businesses. CIGNA no longer sells
the products related to the sold businesses. For additional information about
the sale transaction, see “Sale of Retirement Benefits Business” in the MD&A
section, and Note 3 to CIGNA’s 2006 Financial Statements included in its 2006
Annual Report.
The
sale
of CIGNA's retirement benefits business was primarily in the form of a
reinsurance arrangement. Upon the sale, CIGNA reinsured with the buyer of the
retirement business $16.0 billion of general account contractholder liabilities
under an indemnity reinsurance arrangement and $35.3 billion of insurance,
contractholder and separate account liabilities under modified coinsurance
arrangements, including $32.0 billion in separate account liabilities and $2.0
billion related to the single premium annuity business described
below.
Since
the
sale in 2004, the buyer of the retirement business has entered into agreements
with most of the insured party contractholders relieving CIGNA of any remaining
contractual obligations to those parties (“novation agreements”). As a result,
CIGNA reduced reinsurance recoverables, contractholder deposit funds, and
separate account balances for these obligations.
Single
Premium Annuity Business
The
single premium annuity business consists primarily of single premium annuities
that were supported by CIGNA's general account. Initially, this business was
reinsured on a modified coinsurance basis for the first two years following
the
sale.
Effective
April 1, 2006, the buyer converted this modified coinsurance arrangement to
an
indemnity reinsurance structure and took ownership of the assets. CIGNA
transferred invested assets to the buyer and recorded a reinsurance recoverable
of approximately $1.6 billion, which corresponds to the liabilities for the
single premium annuity business held by CIGNA as of March 31, 2006.
Ceded
Business Trust
The
buyer
deposited assets associated with the reinsurance of general account contracts
into a trust (the "Ceded Business Trust") and assets associated with the single
premium annuity business into a second trust (the “Guaranteed Cost Trust”),
which both provide security to CIGNA for the related reinsurance recoverables.
The buyer is permitted to withdraw assets from the Ceded Business Trust or
the
Guaranteed Cost Trust equal to the reduction in CIGNA's reserves whenever a
reduction occurs. For example, reductions will occur when the buyer enters
into
additional novation agreements and directly assumes liability to the insured
party. As of December 31, 2006, assets totaling $3.9 billion remained in the
combined Ceded Business Trust and Guaranteed Cost Trust.
22
Principal
Products and Markets
Until
June 2000, CIGNA offered reinsurance coverage for part or all of the risks
written by other insurance companies under life and annuity policies (both
group
and individual); accident policies (personal accident, catastrophe and workers
compensation coverages); and health policies. These products were sold
principally in North America and Europe through a small sales force and through
intermediaries.
In
2000,
CIGNA sold its U.S. individual life, group life and accidental death reinsurance
business. CIGNA placed its remaining reinsurance businesses (including its
accident, domestic health, international life and health, and annuity
reinsurance businesses) into run-off as of June 1, 2000, and stopped
underwriting new reinsurance business.
For
the
run-off reinsurance business, CIGNA has established policy reserves that reflect
the present value of expected future obligations less the present value of
expected premiums. In addition, CIGNA establishes loss reserves for claims
received, but not yet paid based on the amount of the claim received, and for
losses incurred but not reported based on prior claim experience and other
relevant factors.
CIGNA's
reserves for reinsurance risks assumed by CIGNA and for amounts recoverable
from
its retrocessionaires are considered appropriate as of December 31, 2006 based
on current information. However, it is possible that future developments could
have a material adverse effect on CIGNA's consolidated results of operations,
and, in certain situations, could have a material adverse effect on CIGNA's
financial condition. CIGNA 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 CIGNA.
Guaranteed
Minimum Death Benefit Contracts
CIGNA’s
reinsurance operations reinsured guaranteed minimum death benefits under certain
variable annuities issued by other insurance companies. These variable annuities
are essentially investments in mutual funds combined with a death benefit.
CIGNA
has equity and other market exposures as a result of this product.
For
additional information about guaranteed minimum death benefit contracts, see
“Other Matters” under “Run-off Reinsurance” in the MD&A section of, and Note
7 to CIGNA's 2006 Financial Statements included in its 2006 Annual Report.
Guaranteed
Minimum Income Benefit Contracts
CIGNA’s
reinsurance operations also reinsured minimum income benefits under certain
variable annuities issued by other insurance companies. When annuitants elect
to
receive these minimum income benefits, CIGNA may be required to make payments
based on changes in underlying mutual fund values and interest rates. CIGNA
purchased retrocessional reinsurance which covers 55% of the exposures on these
contracts.
For
additional information about guaranteed minimum income benefit contracts, see
“Other Matters” under “Run-off Reinsurance” and “Guaranteed minimum income
benefit contracts” under “Guarantees and Contractual Obligations” in the
MD&A section of, and Note 20C to CIGNA's 2006 Financial Statements included
in its 2006 Annual Report.
Workers
Compensation and Personal Accident
CIGNA
reinsured workers compensation and other personal accident business in the
United States and in the London market. This included participation in a workers
compensation reinsurance pool formerly managed by Unicover Managers, Inc. CIGNA
purchased extensive retrocessional reinsurance for the Unicover contracts
(through the pool) and also purchased retrocessional coverage for its other
workers compensation and personal accident assumed risks. Although CIGNA is
involved in certain retrocessional enforcement arbitrations, most of the
disputes concerning retrocessional contracts have been resolved. For more
information regarding these disputes, see “Legal Proceedings” in Item 3 on pages 37 and 38.
CIGNA's
payment obligations under these workers compensation and personal accident
contracts are based on ceding companies’ claim payments relating to accidents
and injuries.
23
These
claim payments can in some cases extend many years into the future, and the
amount of the
ceding companies’ ultimate claims, and therefore the amount of CIGNA's ultimate
payment obligations and ultimate collections from its retrocessionaires, may
not
be known with certainty for some time. For more information see
“Run-off Reinsurance” in the MD&A section of, and Note 8 to CIGNA's 2006
Financial Statements included in, CIGNA’s 2006 Annual Report.
24
J. Regulation
CIGNA
and
its subsidiaries are subject to federal, state and international regulations
and
CIGNA has established policies and procedures to comply with applicable
requirements.
CIGNA's
insurance and HMO subsidiaries must be licensed by the jurisdictions in which
they conduct business. These subsidiaries are subject to numerous state and
federal regulations related to their business operations, including, but not
limited to:
CIGNA
also complies with regulations in international jurisdictions where foreign
insurers are, in many countries, faced with greater restrictions than their
domestic competitors. These restrictions may include discriminatory licensing
procedures, compulsory cessions of reinsurance, required localization of records
and funds, higher premium and income taxes, and requirements for local
participation in an insurer’s ownership.
Other
types of regulatory oversight are described below.
Financial
Reporting
Regulators
closely monitor the financial condition of licensed insurance companies and
HMOs. States regulate the form and content of statutory financial statements
and
the type and concentration of permitted investments. CIGNA's insurance and
HMO
subsidiaries are required to file periodic financial reports with regulators
in
most of the jurisdictions in which they do business, and their operations and
accounts are subject to examination by such agencies at regular
intervals.
Guaranty
Associations, Indemnity Funds, Risk Pools and Administrative
Funds
Most
states and certain non-U.S. jurisdictions require insurance companies to support
guaranty associations or indemnity funds, which are established to pay claims
on
behalf of insolvent insurance companies. In the United States, these
associations levy assessments on member insurers licensed in a particular state
to pay such claims.
Several
states also require HMOs to participate in guaranty funds, special risk pools
and administrative funds. For additional information about guaranty fund and
other assessments, see Note 20 to CIGNA’s 2006 Financial Statements included in
its 2006 Annual Report.
Some
states also require health insurers and HMOs to participate in assigned risk
plans, joint underwriting authorities, pools or other residual market mechanisms
to cover risks not acceptable under normal underwriting standards.
Solvency
and Capital Requirements
Many
states have adopted some form of the 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.
25
In
addition, various non-U.S. jurisdictions prescribe minimum surplus requirements
that are based upon solvency, liquidity and reserve coverage measures. During
2006, CIGNA’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. The NAIC is considering changing statutory reserving rules for
variable annuities. Any changes would apply to CIGNA's reinsurance contracts
covering guaranteed minimum death benefits and guaranteed minimum income
benefits, and would impact CIGNA's overall surplus level.
Holding
Company Laws
CIGNA's
domestic insurance companies and certain of its HMOs are subject to state laws
regulating subsidiaries of insurance holding companies. Under such laws, certain
dividends, distributions and other transactions between an insurance or HMO
subsidiary and its affiliates may require notification to, or approval by,
one
or more state insurance commissioners.
Oversight
of Marketing, Advertising and Broker Compensation
State
and/or federal regulatory scrutiny of life and health insurance company and
HMO
marketing and advertising practices, including the adequacy of disclosure
regarding products and their administration, may result in increased regulation.
Products offering limited benefits, such as those issued in connection with
the
Star-HRG business acquired in 2006, may attract increased regulatory scrutiny.
States have responded to concerns about the marketing, advertising and
administration of insurance and HMO products and administrative practices by
increasing the number and frequency of market conduct examinations and imposing
larger penalties for violations of applicable laws and regulations.
In
recent
years, perceived abuses in broker compensation practices have been the focus
of
greatly heightened regulatory scrutiny. This increased regulatory focus may
lead
to legislative or regulatory changes that would affect the manner in which
CIGNA
and its competitors compensate brokers. For more information regarding general
governmental inquiries relating to CIGNA companies, see “Legal Proceedings” in
Item 3 on pages 37 and 38.
Claim
Administration, Utilization Review and Related Services
CIGNA
subsidiaries contract for the provision of claim administration, utilization
management and other related services with respect to the administration of
self-insured benefit plans. These CIGNA subsidiaries are subject to state
licensing requirements and regulation.
Employment
Retirement Income Security Act
CIGNA
sells most of its products and services to sponsors of employee benefit plans
that are governed by the federal Employment Retirement Income Security Act
(“ERISA”). CIGNA companies may be subject to requirements imposed by ERISA on
plan fiduciaries and parties in interest, including regulations affecting claim
and appeals procedures for health, dental, disability, life and accident plans.
Federal
Regulations
Medicare
Regulations. Several
CIGNA subsidiaries engage in businesses that are subject to federal Medicare
regulations such as:
Federal
Audits
Participation
in government sponsored health care programs subjects CIGNA to a variety of
federal laws and regulations and risks associated with audits conducted under
the programs (which may occur in years subsequent to provision by CIGNA of
the
relevant services under audit). These risks may include reimbursement claims
as
well as potential fines and penalties. For example, the
federal government requires Medicare and Medicaid providers to file detailed
cost reports for health care services provided. These reports may be audited
in
26
subsequent
years. CIGNA
HMOs that contract to provide community-rated coverage to participants in the
federal Employees Health Benefit Plan may be required to reimburse the federal
government if, following an audit, it is determined that a federal employee
group did not receive the benefit of a discount offered by a CIGNA HMO to one
of
the two groups closest in size to the federal employee group. See “Health Care”
in Section C beginning on page 4 for additional
information about CIGNA’s participation in government health-related
programs.
Privacy
and Information Disclosure and Portability Regulations
The
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes
requirements for guaranteed issuance (for groups with 50 or fewer lives),
electronic data security standards, and renewal and portability, on health
care
insurers and HMOs. In addition, HIPAA regulations require the assignment of
a
unique national identifier for providers by May, 2007. The federal government
and states (as well as an increasing number of non-U.S. jurisdictions) impose
requirements regarding the use and disclosure of identifiable information about
individuals and, in an effort to deal with the growing threat of identity theft,
the handling of privacy and security incidents.
Antitrust
Regulations
CIGNA
companies are also engaged in activities that may be scrutinized under federal
and state antitrust laws and regulations. These activities include the
administration of strategic alliances with competitors, information sharing
with
competitors and provider contracting.
Anti-Money
Laundering Regulations
Certain
CIGNA lines of business are subject to United States Department of the Treasury
anti-money laundering regulations. Those lines of business have implemented
anti-money laundering policies designed to insure their affected products comply
with the regulations.
Investment-Related
Regulations
Depending
upon their nature, CIGNA's investment management activities are subject to
U.S.
federal securities laws, ERISA, and other federal and state laws governing
investment related activities. In many cases, the investment management
activities and investments of individual insurance companies are subject to
regulation by multiple jurisdictions.
Legislative
and Regulatory Developments
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. In the growing area
of
consumer-driven plans, health savings accounts and health reimbursement accounts
are also regulated by the United States Department of the Treasury and the
Internal Revenue Service. See “Regulatory and Industry Developments” in the
MD&A section of CIGNA’s 2006 Annual Report for additional
information.
Federal
regulation and legislation may affect CIGNA’s operations in a variety of ways.
In addition to proposals discussed above related to increased regulation of
the
health care industry, other proposed federal measures that may significantly
affect CIGNA’s operations include calls for universal health care coverage,
market reforms achieved through state and federal legislation, modifications
of
the Medicare program, and
employee
benefit regulation including modification to the tax treatment of employee
benefits.
The
economic and competitive effects of the legislative and regulatory proposals
discussed above on CIGNA’s business operations will depend upon the final form
of any such legislation or regulation.
27
K.
Ratings
CIGNA
and
certain of its insurance subsidiaries are rated by nationally recognized rating
agencies. The significance of individual ratings varies from agency to agency.
However, companies assigned ratings at the top end of the range have, in the
opinion of the rating agency, the strongest capacity for repayment of debt
or
payment of claims, while companies at the bottom end of the range have the
weakest capacity.
Insurance
ratings represent the opinions of the rating agencies on the financial strength
of a company and its capacity to meet the obligations of insurance policies.
The
principal agencies that rate CIGNA’s insurance subsidiaries characterize their
insurance rating scales as follows:
• A.M.
Best
Company, Inc. (“A.M. Best”), A++ to S (“Superior” to “Suspended”);
• Moody’s
Investors Service (“Moody’s”), Aaa to C (“Exceptional” to “Lowest”);
• Standard
& Poor’s Corp. (“S&P”), AAA to R (“Extremely Strong” to “Regulatory
Action”); and
• Fitch,
Inc. (“Fitch”), AAA to D (“Exceptionally Strong” to “Order of
Liquidation”).
As
of
February 26, 2007, the insurance financial strength ratings for CG Life were
as
follows:
_______________
As
of
February 26, 2007, the insurance financial strength rating for Life Insurance
Company of North America assigned by A.M. Best was A (“Excellent,” 3rd
of 16),
and by Moody’s was A2 (“Good,” 6th
of 21).
Debt
ratings are assessments of the likelihood that a company will make timely
payments of principal and interest. The principal agencies that rate CIGNA’s
senior debt characterize their rating scales as follows:
The
commercial paper rating scales for those agencies are as follows:
28
As
of
February 26, 2007, the debt ratings assigned by the following agencies were
as
follows:
Debt
Ratings(1)
CIGNA
CORPORATION
________________________
(1) Includes
the rating assigned, the agency’s characterization of the rating and the
position of the rating in the applicable agency’s rating scale.
In
December 2006, A.M. Best upgraded the financial strength ratings of certain
CIGNA subsidiaries to “A” from “A-“ and revised the outlook to “Stable” from
“Positive.” In February 2007, Moody's upgraded CIGNA Coproration's senior debt
rating to “Baa2” from “Baa3” and upgraded the financial strength ratings
of CG Life and LINA to “A2” from “A3.” At the same time, Moody's
upgraded the commercial paper rating to “P2” from “P3” and changed
the outlook to stable from positive. CIGNA is committed to maintaining
appropriate levels of capital in its subsidiaries to support ratings of CIGNA
that meet customers’ expectations, and to improving the earnings of the health
care business. Lower ratings at the parent company level increase the cost
to
borrow funds. Lower ratings of CG Life could adversely affect new sales and
retention of current business.
29
Portions
of CIGNA’s insurance business are seasonal in nature. Reported claims under
group health products are generally higher in the first quarter.
CIGNA
and
its principal subsidiaries are not dependent on business from one or a few
customers. No customer accounted for 10% or more of CIGNA’s consolidated
revenues in 2006. CIGNA and its principal subsidiaries are not dependent on
business from one or a few brokers or agents. In addition, CIGNA’s insurance
businesses are generally not committed to accept a fixed portion of the business
submitted by independent brokers and agents, and generally all such business
is
subject to its approval and acceptance.
CIGNA
had
approximately 27,100, 28,000, and 28,600 employees as of December 31, 2006,
2005
and 2004, respectively.
30
CIGNA’s
businesses face risks and
uncertainties, including those discussed below and elsewhere in this report.
These factors represent risks and uncertainties that could have a material
adverse effect on CIGNA’s business, results of operations and financial
condition. These risks and uncertainties are not the only ones CIGNA faces.
Others that CIGNA does not know about now, or that the Company does not now
think are significant, may impair its business or the trading price of its
securities. The following are significant risks identified by CIGNA.
If
CIGNA does not execute on its strategic initiatives, there could be a material
adverse effect on CIGNA’s results of operations and in certain situations,
CIGNA's financial condition.
The
future performance of CIGNA’s business will depend in large part on CIGNA’s
ability to execute effectively and implement its strategic initiatives. These
initiatives include: executing CIGNA's consumerism strategy, including designing
products to meet emerging market trends and ensuring that an appropriate
infrastructure is in place to meet the needs of customers and members;
continuing to reduce medical costs; growing its individual and small business
market and emerging market and further penetration of the specialty markets;
and
further improving the efficiency of operations, including lowering operating
costs and enabling higher value services.
Successful
execution of these initiatives depends on a number of factors including:
Further,
CIGNA’s success will depend upon its ability to develop new systems and enhance
the performance of its existing procedures and processes to adequately support
CIGNA's operations, strategies and business objectives.
If
CIGNA fails to properly maintain the integrity or security of its data or to
strategically implement new information systems, there could be a material
adverse effect on CIGNA’s business.
CIGNA’s
business depends on effective information systems and the integrity and
timeliness of the data it uses to run its business. CIGNA’s business strategy
requires providing members and providers with internet or e-business related
products and information to meet their needs. CIGNA’s ability to adequately
price its products and services, establish reserves, provide effective and
efficient service to its customers, and to timely and accurately report its
financial results also depends significantly on the integrity of the data in
its
information systems. If the information CIGNA relies upon to run its businesses
were found to be inaccurate or unreliable or if CIGNA were to fail to maintain
effectively its information systems and data integrity, the Company could have
problems with, among other things: operational disruptions; determining medical
cost estimates and establishing appropriate pricing; customers, physicians
and
other health care providers; regulators; increases in operating expenses; and
retention and attraction of customers.
If
CIGNA
were unable to maintain the security of any sensitive data residing on the
Company’s systems whether due to our own actions or those of any vendors, our
reputation would be adversely affected and we could be exposed to litigation
or
other actions, fines or penalties, any of which could adversely affect our
business or financial condition.
CIGNA
requires an ongoing commitment of significant resources to maintain, protect
and
enhance existing systems and develop new systems to keep pace with continuing
changes in information processing technology, evolving industry and regulatory
standards, and changing customer preferences. There can be no assurance that
CIGNA’s process of improving existing systems, developing new systems to support
its operations, integrating new systems and improving service levels will not
be
delayed or that additional systems issues will not arise in the future.
31
If
premiums are insufficient to cover the cost of health care services delivered
to
members, or if CIGNA’s estimates of medical claim reserves for its guaranteed
cost and experience-rated businesses based upon estimates of future medical
claims are inadequate, profitability could decline.
CIGNA’s
profitability depends, in part, on its ability to accurately predict and control
future health care costs through underwriting criteria, provider contracting,
utilization management and product design. Premiums in the health benefits
business are generally fixed for one-year periods. Accordingly, future cost
increases in excess of medical cost projections reflected in pricing cannot
generally be recovered in the contract year through higher premiums. Although
CIGNA bases the premiums it charges on its estimate of future health care costs
over the fixed premium period, actual costs may exceed what was estimated and
reflected in premiums. Factors that may cause actual costs to exceed premiums
include: medical cost inflation; the introduction of new or costly treatments
and technology; and membership mix.
CIGNA
records medical claims reserves for estimated future payments. The Company
continually reviews estimates of future payments relating to medical claims
costs for services incurred in the current and prior periods and makes necessary
adjustments to its reserves. However, actual health care costs may exceed what
was estimated.
If
CIGNA fails to manage successfully its outsourcing projects and key vendors,
CIGNA’s financial results could be harmed.
CIGNA
takes steps to monitor and regulate the performance of independent third parties
who provide services or to whom the Company delegates selected functions. These
third parties include information technology system providers, independent
practice associations and specialty service providers.
For
instance, in 2006, CIGNA entered into an agreement with IBM to operate
significant portions of its information technology infrastructure, including
the
provision of services relating to its call center application, enterprise
content management, risk-based capital analytical infrastructure and voice
and
data communications and network in addition to the software applications and
human resource operations support IBM had previously provided pursuant to
several smaller contracts. The 2006 contract with IBM includes several service
level agreements, or SLAs, related to issues such as performance and job
disruption with significant financial penalties if these SLAs
are
not met. However, the Company may not be adequately indemnified against all
possible losses through the terms and conditions of the agreement. In addition,
some of CIGNA’s termination rights are contingent upon payment of a fee, which
may be significant. If CIGNA's relationship with IBM is terminated, the Company
may experience disruption of service to customers, which could affect CIGNA's
business, financial condition, and results of operations.
These
arrangements with key vendors may make CIGNA’s operations vulnerable if those
third parties fail to satisfy their obligations to the Company, due to CIGNA’s
failure to adequately monitor and regulate their performance, changes in their
own operations, financial condition, or other matters outside of CIGNA’s
control. In recent years, certain third parties to whom CIGNA delegated selected
functions, such as specialty services providers, have experienced legal and
other difficulties, which may subject CIGNA to adverse publicity, increased
costs, decline in quality of service and potential network disruptions, and
in
some cases cause the Company to incur increased claims expense. Certain
legislative authorities have in recent periods discussed or proposed legislation
that would restrict outsourcing and, if enacted, could materially increase
CIGNA’s costs. Further, CIGNA may not fully realize on a timely basis the
anticipated economic and other benefits of the outsourcing projects or other
relationships it enters into with key vendors which could result in substantial
costs or other operational or financial problems that could adversely impact
the
Company’s financial results.
A
downgrade in the financial strength ratings of CIGNA’s insurance subsidiaries
could adversely affect new sales and retention of current business, and a
downgrade in CIGNA's debt ratings would increase the cost of borrowed funds.
Financial
strength, claims paying ability and debt ratings by recognized rating
organizations are an important factor in establishing the competitive position
of insurance companies and health benefits companies. Ratings information by
nationally recognized ratings agencies is broadly disseminated and generally
used throughout the industry. CIGNA believes the claims paying ability and
financial strength ratings of its principal insurance subsidiaries are an
important factor in marketing its products to certain of CIGNA’s customers. In
addition, CIGNA Corporation’s debt ratings impact both the cost and availability
of future borrowings, and accordingly, its cost of capital. Each of the rating
agencies reviews CIGNA’s ratings periodically and there can be no assurance that
current ratings will be maintained in
32
the
future. In addition, a downgrade of these ratings could make it more difficult
to raise capital and to support business growth at CIGNA’s insurance
subsidiaries.
As
of
February 26, 2007, the insurance financial strength ratings for CG Life, the
Company’s principal insurance subsidiary, were as follows:
___________
(1)
Includes the rating assigned, the agency’s
characterization of the rating and the position of the rating in the agency’s
rating scale (e.g., CG Life’s rating by A.M. Best is the 3rd highest awarded in
its scale of 16).
A
description of CIGNA Corporation ratings, other subsidiary ratings, as well
as
more information on these ratings, is included in “Ratings” in Section K
beginning on page 28.
Unfavorable
claims experience related to workers’ compensation and personal accident
insurance exposures in CIGNA’s Run-off Reinsurance business could result in
losses.
Unfavorable
claims experience related to workers’ compensation and personal accident
insurance exposures in CIGNA’s run-off reinsurance business is possible and
could result in future losses. Further, CIGNA could have losses attributable
to
its inability to recover amounts from retrocessionaires or ceding companies
either due to disputes with the retrocessionaires or ceding companies or their
financial condition. If CIGNA’s reserves for amounts recoverable from
retrocessionaires or ceding companies, as well as reserves associated with
underlying reinsurance exposures are insufficient, it could result in
losses.
If
CIGNA’s program for its guaranteed minimum death benefits contracts fails to
reduce the risk of stock market declines, it could have a material adverse
effect on the Company’s financial condition.
As
part
of its run-off reinsurance business, CIGNA reinsured a guaranteed minimum death
benefit under certain variable annuities issued by other insurance companies.
CIGNA adopted a program to reduce equity market risks related to these contracts
by selling domestic and foreign-denominated exchange-traded futures contracts
and foreign currency forward contracts. The purpose of this program is to reduce
the adverse effects of potential future domestic and international stock market
declines on CIGNA’s liabilities for these contracts. Under the program,
increases in liabilities under the annuity contracts from a declining market
are
offset by gains on the futures contracts. However, if CIGNA were to have
difficulty in entering into appropriate futures or forward contracts, or stock
market declines expose CIGNA to higher rates of partial
surrender (which are not covered by the program), there could be a material
adverse effect on the Company’s financial condition. See “Run-off Reinsurance”
in Section I on page 23 for more information
on
the
program.
If
actual experience differs significantly from CIGNA’s assumptions used in
estimating CIGNA’s liabilities for reinsurance contracts that guarantee minimum
death benefits or minimum income benefits, it could have a material adverse
effect on CIGNA’s consolidated results of operations, and in certain situations,
could have a material adverse effect on CIGNA's financial condition.
CIGNA’s
management estimates reserves for guaranteed minimum death benefit and minimum
income benefit exposures are based on assumptions regarding lapse, partial
surrender, mortality, interest rates, volatility, reinsurance recoverables,
and,
for minimum income benefit exposures, annuity income election rates. These
estimates are based on CIGNA’s experience and future expectations. CIGNA
monitors actual experience to update these reserve estimates as necessary.
CIGNA
regularly evaluates the assumptions used in establishing reserves and changes
its estimates if actual experience or other evidence suggests that earlier
assumptions should be revised.
33
Significant
stock market declines could result in increased pension plan expenses and the
recognition of additional pension obligations.
CIGNA
has
a pension plan that covers a large number of current employees and retirees.
Unfavorable investment performance due to significant stock market declines
or
changes in estimates of benefit costs, if significant, could adversely affect
CIGNA’s results of operations or financial condition by significantly increasing
its pension plan expenses and obligations.
Significant
changes in market interest rates affect the value of CIGNA's financial
instruments that promise a fixed return and, as such, could have an adverse
effect on CIGNA's results of operations.
As
an
insurer, CIGNA has substantial investment assets that support its policy
liabilities. Generally low levels of interest rates on investments, such as
those experienced in United States financial markets during recent years, have
negatively impacted the level of investment income earned by the Company in
recent periods, and such lower levels of investment income would continue if
these lower interest rates were to continue. Substantially all of the Company’s
investment assets are in fixed interest-yielding debt securities of varying
maturities, fixed redeemable preferred securities, mortgage loans and real
estate. The value of these securities can fluctuate significantly with changes
in market conditions.
CIGNA
faces risks related to litigation and regulatory
investigations.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory audits,
investigations and other legal matters arising in the ordinary course of the
business of administering and insuring employee benefit programs, including
benefit claims, breach of contract actions, tort claims, and disputes regarding
reinsurance arrangements. In addition, CIGNA incurs and likely will continue
to
incur liability for claims related to its health care business, such as failure
to pay for or provide health care, poor outcomes for care delivered or arranged,
provider disputes, including disputes over compensation, and claims related
to
self-funded business. Also, there are currently, and may be in the future,
attempts to bring class action lawsuits against the industry. In addition,
CIGNA
is involved in pending and threatened litigation arising out of its run-off
reinsurance and retirement operations.
Court
decisions and legislative activity may increase CIGNA’s exposure for any of
these types of claims. In some cases, substantial non-economic or punitive
damages may be sought. CIGNA currently has insurance coverage for some of these
potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage or the amount of insurance may not
be
enough to cover the damages awarded. In addition, certain types of damages,
such
as punitive damages, may not be covered by insurance, and insurance coverage
for
all or certain forms of liability may become unavailable or prohibitively
expensive in the future.
A
description of material legal actions in which CIGNA is currently involved
is
included under “Legal Proceedings” in Item 3 on pages 37 and
38, and Note 20 to CIGNA’s 2006 Financial Statements included in its 2006
Annual Report. The outcome of litigation and other legal matters is always
uncertain, and outcomes that are not justified by the evidence can occur. CIGNA
believes that it has valid defenses to the legal matters pending against it
and
is defending itself vigorously. Nevertheless, it is possible that resolution
of
one or more legal matters could result in losses material to CIGNA’s
consolidated results of operations, liquidity or financial
condition.
CIGNA’s
business is subject to substantial government regulation, which, along with
new
regulation, could increase its costs of doing business and could adversely
affect its profitability.
CIGNA’s
business is regulated at the international, federal, state and local levels.
The
laws and rules governing CIGNA’s business and interpretations of those laws and
rules are subject to frequent change. Broad latitude is given to the agencies
administering those regulations. Existing or future laws and rules could force
CIGNA to change how it does business, restrict revenue and enrollment growth,
increase health care, technology and administrative costs including pension
costs and capital requirements, take other actions such as changing our reserve
levels with respect to certain reinsurance contracts, and increase CIGNA’s
liability in federal and state courts for coverage determinations, contract
interpretation and other actions.
CIGNA
must comply with the various regulations applicable to its business. If CIGNA
fails to comply, the Company’s business could be adversely affected. In
addition, CIGNA must obtain and maintain regulatory approvals to market many
of
its products, to increase prices for certain regulated products and to
consummate some of its acquisitions and divestitures. Delays in obtaining or
failure to obtain or maintain these approvals could reduce the Company’s revenue
or increase its costs.
34
For
further information on regulatory matters relating to CIGNA, see “Regulation” in
Section J on page 25 and “Legal Proceedings” in Item 3
on pages 37 and 38, as well as “Regulatory and Industry
Developments” in the MD&A section of CIGNA’s 2006 Annual
Report.
CIGNA
faces competitive pressure, particularly price competition, which could reduce
product margins and constrain growth in CIGNA’s health care businesses.
While
health plans compete on the basis of many factors, including service quality
of
clinical resources, claims administration services and medical management
programs, and quality and sufficiency of provider networks, CIGNA expects that
price will continue to be a significant basis of competition. CIGNA’s customer
contracts are subject to negotiation as customers seek to contain their costs,
and customers may elect to reduce benefits in order to constrain increases
in
their benefit costs. Such an election may result in lower premiums for the
Company’s products, although it may also reduce CIGNA’s costs. Alternatively,
the Company’s customers may purchase different types of products from it that
are less profitable, or move to a competitor to obtain more favorable premiums.
In
addition, significant merger and acquisition activity has occurred in the health
care industry giving rise to speculation and uncertainty regarding the status
of
companies, which potentially can affect marketing efforts and public perception.
Consolidation may make it more difficult for the Company to retain or increase
customers, to improve the terms on which CIGNA does business with its suppliers,
or to maintain its position or increase profitability. Factors such as business
consolidations, strategic alliances, legislative reform and marketing practices
create pressure to contain premium price increases, despite increasing medical
costs. For example, the Gramm-Leach-Bliley Act gives banks and other financial
institutions the ability to affiliate with insurance companies, which may lead
to new competitors with significant financial resources in the insurance and
health benefits fields. If CIGNA does not compete effectively in its markets,
if
the Company sets rates too high in highly competitive markets to keep or
increase its market share, if membership does not increase as it expects, or
if
it declines, or if CIGNA loses accounts with favorable medical cost experience
while retaining or increasing membership in accounts with unfavorable medical
cost experience, CIGNA’s product margins and growth could be adversely
affected.
Public
perception of CIGNA's products and practices as well as of the health benefits
industry, if negative, could reduce enrollment in CIGNA’s health benefits
programs.
The
health benefits industry is subject to negative publicity, which can arise
either from perceptions regarding the industry or CIGNA's business practices
or
products. This risk may be increased as CIGNA offers new products, such as
products with limited benefits or an integrated line of products, targeted
at
market segments, beyond those in which CIGNA traditionally has operated.
Negative publicity may adversely
affect the CIGNA brand and its ability to market its products and services,
which could reduce the number of enrollees in CIGNA's health benefits programs
and
adversely affect CIGNA’s profitability.
Large-scale
public health epidemics, bio-terrorist activity, natural disasters or other
extreme events could cause CIGNA’s covered medical and disability expenses,
pharmacy costs and mortality experience to rise significantly, and in severe
circumstances, could cause operational disruption.
If
widespread public health epidemics such as an influenza pandemic, bio-terrorist
or other attack, or catastrophic natural disaster were to occur, CIGNA’s covered
medical and disability expenses, pharmacy costs and mortality experience
could rise significantly, depending on the government’s actions and the
responsiveness of public health agencies and insurers. In addition, depending
on
the severity of the situation, a widespread outbreak could curtail economic
activity in general, and CIGNA's operations in particular, which could result
in
operational and financial disruption to CIGNA, which among other things may
impact the timeliness of claims and revenue. CIGNA’s business and financial
condition could also be adversely affected if the Company does not maintain
adequate procedures to ensure disaster recovery and business continuity for
its
facilities and operations in the event of a natural disaster.
CIGNA
faces a wide range of risks, and its success depends on its ability to identify,
prioritize and appropriately manage its enterprise risk
exposure.
As
a
large company operating in a complex industry, CIGNA encounters
a variety of risks as identified in this Risk Factor discussion.
CIGNA devotes
resources to developing enterprise-wide risk management processes, in addition
to the risk management processes within its businesses. Failure to appropriately
identify and manage these risks, as well as the failure to identify and take
advantage of
35
appropriate
opportunities, can materially affect CIGNA’s profitability, its ability to
retain or grow business, or, in the event of extreme circumstances, CIGNA’s
financial condition.
CIGNA
faces risks relating to its ability to effectively deploy its
capital.
CIGNA’s
operations have generated significant capital in recent periods and the Company
has significant ability to raise additional capital. In deploying its capital
to
fund its investments in operations, share repurchases, potential acquisitions
or
other capital uses, CIGNA's financial results could be adversely affected if
it
does not appropriately balance its risks and opportunities.
CIGNA
is subject to potential changes in the political environment which affects
public policy and can adversely affect the markets for our
products.
While
it
is not possible to predict when and whether fundamental policy changes would
occur, these could include policy changes on the local, state and federal level
that could fundamentally change the dynamics
of CIGNA’s industry, such as a much larger role of the government in the health
care arena. Changes in public policy could materially affect CIGNA's
profitability, its ability to retain or grow business, or in the event of
extreme circumstances, its financial condition.
36
None.
CIGNA's
headquarters, along with CIGNA Group Insurance, CIGNA International, portions
of
CIGNA HealthCare and CIGNA's staff support operations, are located in
approximately 450,000 square feet of leased office space at Two Liberty Place,
Philadelphia. CIGNA HealthCare is the primary occupant of a complex of buildings
owned by CIGNA, aggregating approximately 1.5 million square feet of office
space, located at 900-950 Cottage Grove Road, Bloomfield, Connecticut. In
addition, CIGNA owns or leases office buildings, or parts thereof, throughout
the United States and in other countries. CIGNA believes its properties are
adequate and suitable for its business as presently conducted. For additional
information concerning leases and property, see Notes 2H and 18 to CIGNA's
2006
Financial Statements included in its 2006 Annual Report. This paragraph does
not
include information on investment properties.
In
re
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 captioned In
re
Managed Care Litigation.
The
consolidated cases include Shane
v. Humana, Inc., et al.
(CIGNA
subsidiaries added as defendants in August 2000), Mangieri
v. CIGNA Corporation
(filed
December 7, 1999 in the United States District Court for the Northern District
of Alabama), Kaiser
and Corrigan v. CIGNA Corporation, et al.
(class
of health care providers certified on March 29, 2001) and Amer.
Dental Ass’n v. CIGNA Corp. et. al. (a
putative class of dental providers).
In
2004,
the Court approved a settlement agreement between the physician class and CIGNA.
A dispute over disallowed claims under the settlement submitted by a
representative of certain class member physicians is proceeding to arbitration.
Separately, in April 2005, the Court approved a settlement between CIGNA and
a
class of non-physician health care providers. Only the Amer.
Dental Ass’n case
remains unresolved. CIGNA's motion to dismiss the case is pending.
In
the
fourth quarter 2006, pursuant to a settlement, CIGNA received a favorable $22
million pre-tax ($14 million after tax) insurance recovery related to this
litigation. There are two additional proceedings seeking to recover insurance
proceeds on account of this litigation. The total insurance recovery that is
being sought in the two proceedings is $20 million.
Broker
Compensation
Beginning
in 2004, CIGNA, other insurance companies and certain insurance brokers received
subpoenas and inquiries from various regulators, including the New York and
Connecticut Attorneys General and the Florida Office of Insurance Regulation
relating to their investigations of insurance broker compensation. CIGNA
received a subpoena from the U.S. Attorney’s Office for the Southern District of
California in October 2005 and the San Diego District Attorney in March 2006
and
is providing information to them about broker, Universal Life Resources (ULR).
In addition, in January 2006, CIGNA received a subpoena from the U.S. Department
of Labor and is providing information to that Office about another broker.
CIGNA
is cooperating with the inquiries and investigations.
On
November 18, 2004, The
People of the State of California by and through John Garamendi, Insurance
Commissioner of the State of California v. Universal Life Resources, et
al.
was
filed in the Superior Court of the State of California for the County of San
Diego alleging that defendants (including CIGNA and several other insurance
holding companies) failed to disclose compensation paid to ULR and that, in
return for the compensation, ULR steered clients to defendants. The plaintiffs
are seeking injunctive relief only. The trial is expected to begin on August
31,
2007.
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
consolidated amended complaint filed in In
re
Insurance Brokerage Antitrust Litigation,
a
multi-district litigation proceeding consolidated in the United States District
Court for the District of New Jersey. The complaint alleges that brokers and
insurers conspired to hide commissions, 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
re
CIGNA Corp. Securities Litigation
In
late
2002, several purported class action lawsuits were filed against CIGNA and
certain of its
37
officers
by individuals seeking to represent a class of purchasers of CIGNA securities
from May 2, 2001 to October 24, 2002. The complaints alleged, among other
things, that the defendants violated Section 10(b) of, and Rule 10b-5 under,
the
Securities Exchange Act of 1934 by misleading CIGNA shareholders with respect
to
the company’s performance during the class period. In 2003, these suits were
consolidated in the United States District Court for the Eastern District of
Pennsylvania as In
re
CIGNA Corp. Securities Litigation.
On
November 7, 2002, a purported shareholder derivative complaint nominally on
behalf of CIGNA was filed in the United States District Court for the Eastern
District of Pennsylvania by Evelyn Hobbs. The complaint alleges breaches of
fiduciary duty by CIGNA’s directors, including, among other things, their
“failure to monitor, investigate and oversee Cigna’s management information
system” and seeks compensatory and punitive damages. A similar complaint, filed
on November 19, 2002 in the New Castle County (Delaware) Chancery Court by
Jack
Scott was dismissed by the plaintiff and refiled in the United States District
Court for the Eastern District of Pennsylvania. The Hobbs
and
Scott
cases
are being coordinated in the United States District Court for the Eastern
District of Pennsylvania by the same judge handling the In
re
CIGNA Corp. Securities Litigation.
In
December 2006, the parties agreed to settle In
re
CIGNA Corp. Securities Litigation
and the
Hobbs
and
Scott
cases.
The In
re
CIGNA Corp. Securities Litigation
settlement, which specifies $93 million to be paid to the plaintiffs, was
preliminarily approved by the court on January 25, 2007. A final fairness
hearing before the court is expected to be held on April 27, 2007, with final
approval expected shortly thereafter. Additionally, the settlement is also
dependent upon a certain level of class participation. Also, CIGNA and its
directors have reached a separate settlement with the plaintiffs in the
Hobbs
and
Scott
cases.
Under the settlement, CIGNA's insurers will deposit and apportion, on behalf
of
the individual defendants, $6 million of the aforementioned $93 million class
action settlement, and have agreed to make a payment of not more than $720,000
for the plaintiff’s attorney’s fees, subject to court approval. On January 25,
2007, the court preliminarily approved the settlement and set a hearing date
on
final approval on April 27, 2007, with final approval expected shortly
thereafter.
Amara
Cash Balance Pension Plan Litigation
On
December 18, 2001, Janice Amara filed a purported class action lawsuit 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. The plaintiffs were granted class certification on December 20, 2002,
and seek equitable relief. A non-jury trial began on September 11-15, 2006.
Due
to the court’s schedule, the proceedings were adjourned and then the trial was
completed on January 25, 2007. The judge has ordered the parties to submit
post-trial briefs in advance of closing arguments to be held on June 4, 2007.
Run-off
Reinsurance Litigation
In
connection with CIGNA's run-off reinsurance operations, described on page 23, CIGNA purchased extensive retrocessional
reinsurance for its Unicover contracts and also for some other segments of
its
non-Unicover business. CIGNA is appealing in court an adverse award in a
retrocessional enforcement arbitration. That appeal, captioned CIGNA
EUROPE INSURANCE COMPANY SA-NV v. John Hancock Life Insurance
Company,
is
pending in the High Court of Justice, Queen’s Bench Division, Commercial Court,
and a hearing is scheduled for March 13-14, 2007. In addition CIGNA recently
commenced another retrocessional enforcement arbitration.
CIGNA
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. 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. CIGNA believes that it has valid defenses to the
legal matters pending against it and is defending itself vigorously.
Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to CIGNA’s
consolidated results of operations, liquidity or financial
condition.
38
None.
All
officers are elected to serve for a one-year term or until their successors
are
elected. Principal occupations and employment during the past five years are
listed.
MICHAEL
W. BELL,
43,
Executive Vice President and Chief Financial Officer of CIGNA beginning December
2002;
Chief
Financial Officer-elect from October 2002 until December 2002; and President
of
CIGNA Group Insurance from July 2000 until October 2002.
DAVID
M.
CORDANI, 41, President,
CIGNA HealthCare beginning July 2005; President, Health Segments, CIGNA
HealthCare from June 2004 until July 2005; Senior Vice President and Chief
Financial Officer, CIGNA HealthCare, from October 2002 until June
2004.
H.
EDWARD
HANWAY,
55,
Chairman of CIGNA since December 2000; Chief Executive Officer of CIGNA since
January 2000; and President and a Director of CIGNA since January 1999.
PAUL
E.
HARTLEY, 50, President of CIGNA International beginning June 2005; and President
and Chief Executive Officer, CIGNA International, Asia Pacific region from
June
1999 to June 2005.
JOHN
M.
MURABITO, 48, Executive
Vice President of CIGNA beginning August 2003, with responsibility for Human
Resources and Services; and Senior Vice President, Human Resources and Corporate
Services from March 2000 until August 2003 at Monsanto Company.
CAROL
ANN
PETREN, 54, Executive Vice President, General Counsel and Public Affairs of
CIGNA beginning May 2006; Senior Vice President and Deputy General Counsel
of
MCI from January 2003 until March 2006; and Deputy General Counsel of Sears,
Roebuck and Company from January 2001 until January 2003.
KAREN
S.
ROHAN, 44, President
of CIGNA Group Insurance beginning November 2005; President of CIGNA Dental
& Vision Care beginning April 2004; President of CIGNA Specialty Companies
from November 2004 until November 2005; Chief Underwriting Officer, CIGNA
HealthCare from January 2003 until April 2004; and Vice President and Business
Financial Officer, CIGNA HealthCare from March 2000 until December
2002.
SCOTT
A.
STORRER, 39, Executive Vice President, CIGNA Service Operations and Information
Technology beginning June 2005; Interim Head of CIGNA Information Technology
from November 2004 until June 2005; Senior Vice President of CIGNA HealthCare
Service Operations and CIGNA Information Technology from October 2002 until
November 2004; and Senior Vice President of Disability Management Solutions
and
Customer Service for CIGNA Group Insurance from May 2001 until October 2002.
39
Item
5. MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The
information under the caption “Quarterly Financial Data--Stock and Dividend
Data” and under the caption “Stock Listing” in CIGNA’s 2006 Annual Report is
incorporated by reference, as is the information from Note 15 to CIGNA’s 2006
Financial Statements, the number of shareholders of record as of December 31,
2006 under the caption “Highlights” and the information presented under the
caption "Performance Graph" in CIGNA’s 2006 Annual Report. CIGNA’s common stock
is listed with, and trades on, the New York Stock Exchange under the symbol
“CI.”
Issuer
Purchases of Equity Securities
The
following table provides information about CIGNA's share repurchase activity
for
the quarter ended December 31, 2006:
______________________
40
The
five-year financial information under the caption “Highlights” in CIGNA’s 2006
Annual Report is incorporated by reference.
The
information contained in the MD&A section of CIGNA’s 2006 Annual Report is
incorporated by reference.
The
information under the caption “Market Risk” in the MD&A section of CIGNA’s
2006 Annual Report is incorporated by reference.
CIGNA’s
Consolidated Financial Statements and the report of its independent registered
public accounting firm in CIGNA’s 2006 Annual Report are incorporated by
reference, as is the unaudited information set forth under the caption
“Quarterly Financial Data--Consolidated Results.”
None.
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.
Management's
Report on Internal Control Over Financial Reporting
CIGNA’s
management report on internal control over financial reporting under the caption
“Management’s Annual Report on Internal Control over Financial Reporting” in
CIGNA's 2006 Annual Report is incorporated by reference.
Attestation
Report of the Registered Public Accounting Firm
The
attestation report of CIGNA’s independent registered public accounting firm, on
management's assessment of the effectiveness of CIGNA’s internal control over
financial reporting and the effectiveness of CIGNA’s internal control over
financial reporting under the caption “Report of Independent Registered Public
Accounting Firm” in CIGNA’s 2006 Annual Report is incorporated by
reference.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in CIGNA’s internal control over financial reporting
identified in connection with the evaluation described in the above paragraph
that have materially affected, or are reasonably likely to materially affect,
CIGNA’s internal control over financial reporting.
None.
Item
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
information under the captions “The Board of Directors’ Nominees for Terms to
Expire in April 2010,” “Directors Who Will Continue in Office,” “Board of
Directors and Committee Meetings, Membership, Attendance and Independence” (as
it relates to Audit Committee disclosure), and “Section 16(a) Beneficial
Ownership Reporting Compliance” in CIGNA’s proxy statement to be dated on or
about March 22, 2007 is incorporated by reference.
41
See
PART
I - “Executive Officers of the Registrant.”
CIGNA’s
Code of Ethics and Compliance is the Company’s code of business conduct and
ethics, and applies to CIGNA’s directors, officers (including the chief
executive officer, chief financial officer and chief accounting officer) and
employees. The Code of Ethics and Compliance policies are posted on the
Corporate Governance section found on the “About Us” page of the Company’s
website, www.cigna.com. In the event the Company substantively amends its Code
of Ethics and Compliance or waives a provision of the Code, CIGNA intends to
disclose the amendment or waiver on the Corporate Governance section of the
Company’s website as well.
In
addition, the Company’s corporate governance guidelines (Board Practices) and
the charters of its board committees (audit, corporate governance, executive,
finance and people resources) are available on the Corporate Governance section
of the Company’s website. These corporate governance documents, as well as the
Code of Ethics and Compliance policies, are available in print to any
shareholder who requests them.
The
information under the captions “Director Compensation,” “Report of the People
Resources Committee,” “Compensation Committee Interlocks and Insider
Participation,” “Compensation Discussion and Analysis” and “Executive
Compensation” in CIGNA’s proxy statement to be dated on or about March 22, 2007
is incorporated by reference.
The
information under the captions “Equity Compensation Plans,” “Stock held by
Directors, Nominees and Executive Officers” and “Largest Security Holders” in
CIGNA's proxy statement to be dated on or about March 22, 2007 is incorporated
by reference.
The
information under the caption “Certain Transactions” in CIGNA’s proxy statement
to be dated on or about March 22, 2007 is incorporated by
reference.
The
information under the captions “Policy for the Pre-Approval of Audit and
Non-Audit services” and “Fees Billed by Independent Auditors” in CIGNA’s proxy
statement to be dated on or about March 22, 2007 is incorporated by
reference.
Item
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
(1)
The following financial statements have been incorporated by reference from
CIGNA’s 2006 Annual Report:
Consolidated
Statements of Income for the years ended December 31, 2006, 2005 and
2004.
Consolidated
Balance Sheets as of December 31, 2006 and 2005.
Consolidated
Statements of Comprehensive Income and Changes in Shareholders’ Equity for the
years ended December 31, 2006, 2005 and 2004.
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005 and
2004.
Notes
to
the Financial Statements.
Report
of
Independent Registered Public Accounting Firm.
(2)
The
financial statement schedules are listed in the Index to Financial Statement
Schedules on page FS-1.
(3)
The
exhibits are listed in the Index to Exhibits beginning on page E-1.
42
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.
Date:
February 28, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
43
44
INDEX
TO FINANCIAL STATEMENT SCHEDULES
Schedules
other than those listed above are omitted because they are not required
or are
not applicable, or the required information is shown in the financial
statements
or notes thereto, which are incorporated by reference from CIGNA's 2006
Annual
Report.
FS-1
Report
of Independent Registered Public Accounting
Firm
On
Financial Statement Schedules
To
the Board of Directors
of
CIGNA Corporation
Our
audits of the consolidated financial statements, of management’s assessment of
the effectiveness of internal control over financial reporting and of
the
effectiveness of internal control over financial reporting referred to
in our
report dated February 28, 2007 appearing in the 2006 Annual Report to
Shareholders of CIGNA Corporation (which report, consolidated financial
statements and assessment are incorporated by reference in this Annual
Report on
Form 10-K) also included an audit of the financial statement schedules
listed in
Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set
forth
therein when read in conjunction with the related consolidated financial
statements.
/s/
PricewaterhouseCoopers, LLP
Philadelphia,
Pennsylvania
February
28, 2007
FS-2
CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
I
SUMMARY
OF INVESTMENTS —
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER
31, 2006
(In
millions)
FS-3 CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II
CONDENSED
FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS
OF INCOME
(In
millions)
See
Notes
to Condensed Financial Statements on pages FS-7
and FS-8
FS-4 CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II
CONDENSED
FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
BALANCE
SHEETS
(In
millions)
See
Notes
to Condensed Financial Statements on pages FS-7
and FS-8.
FS-5 CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II
CONDENSED
FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS
OF CASH FLOWS
(In
millions)
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