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CIGNA Corporation 10-Q 2008 SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period endedJune 30,
2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
for the
transition period from _____ to _____
Commission
file number 1-08323
CIGNA
Corporation
(Exact
name of registrant as specified in its charter)
Two
Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania
19192
(Address
of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code (215)
761-1000
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
_
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated
filer”, “accelerated filer”, and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
_ No x
As
of July 18, 2008, 274,856,896 shares of the issuer's common stock were
outstanding.
CIGNA
CORPORATION
INDEX
As used
herein, “CIGNA” or the “Company” refers to one or more of CIGNA Corporation and
its consolidated subsidiaries.
Part I. FINANCIAL INFORMATION
Item
1. Financial Statements
1
2
3
4
5
CIGNA CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of CIGNA Corporation, its
significant subsidiaries, and variable interest entities of which CIGNA
Corporation is the primary beneficiary, which are referred to collectively as
“the Company.” Intercompany transactions and accounts have been
eliminated in consolidation. These consolidated financial statements
were prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP).
The
interim consolidated financial statements are unaudited but include all
adjustments (including normal recurring adjustments) necessary, in the opinion
of management, for a fair statement of financial position and results of
operations for the periods reported. The interim consolidated
financial statements and notes should be read in conjunction with the
Consolidated Financial Statements and Notes in the Company’s Form 10-K for the
year ended December 31, 2007.
The
preparation of interim consolidated financial statements necessarily relies
heavily on estimates. This and certain other factors, such as the
seasonal nature of portions of the health care and related benefits business as
well as competitive and other market conditions, call for caution in estimating
full year results based on interim results of operations.
Certain
reclassifications have been made to prior period amounts to conform to the
presentation of 2008 amounts.
Discontinued
operations for the second quarter of 2008
included a loss of $1 million after-tax related to the sale of the Brazilian
life insurance operations. Discontinued operations for the six months ended
June 30, 2008 also included a gain of $3 million after-tax from the settlement
of certain issues related to a past divestiture.
Discontinued
operations for the second quarter and six months ended June 30, 2007 reflected
an impairment loss associated with the sale of the Chilean insurance operations,
which was completed in the third quarter of 2007, and realized gains from the
disposition of certain directly-owned real estate investments.
Unless
otherwise indicated, amounts in these Notes exclude the effects of discontinued
operations.
NOTE
2 – ACQUISITIONS AND DISPOSITIONS
The
Company may from time to time acquire or dispose of assets, subsidiaries or
lines of business. Significant transactions are described
below.
In
accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, “Business
Combinations”, the total purchase price has been allocated to the tangible and
intangible net assets acquired based on management’s estimates of their fair
values and may change as appraisals are finalized and as additional information
becomes available. Accordingly, approximately $290 million was
allocated to intangible assets, primarily customer relationships and
internal-use software. The weighted average amortization period for these
intangible assets is currently estimated at eight years. The remainder, net
of tangible net assets acquired, is goodwill which is currently estimated
at $1.1 billion. Substantially all of the goodwill is tax deductible and will be
amortized over the next 15 years for federal income tax
purposes.
During
the next several months, the Company will complete its fair value analysis of
Great-West Healthcare’s tangible and intangible net assets and finalize
integration plans. The effect on tangible and intangible net assets
and net income from these initiatives will continue to be refined and updated
through March 31, 2009.
6
The
results of Great-West Healthcare are included in the Company’s Consolidated
Financial Statements from the date of acquisition.
The
following supplemental information presents selected unaudited pro forma
information for the Company assuming the acquisition had occurred as of January
1, 2007. The pro forma information does not purport to represent what
the Company’s actual results would have been if the acquisition had occurred as
of the date indicated or what such results would be for any future
periods.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
Fair value
measurements. >Effective January 1, 2008, the Company adopted
SFAS No. 157, “Fair Value Measurements.” This standard expands
disclosures about fair value measurements and clarifies how to measure fair
value by focusing on the price that would be received when selling an asset or
paid to transfer a liability (exit price). See Note
7 for information on the Company’s fair value measurements including new
required disclosures.
The
Company carries certain financial instruments at fair value in the financial
statements including approximately $13 billion in invested assets at June 30,
2008. The Company also carries derivative instruments at fair value,
including assets and liabilities for reinsurance contracts covering guaranteed
minimum income benefits (GMIB) under certain variable annuity contracts issued
by other insurance companies and related retrocessional contracts. The Company
also reports separate account assets at fair value; however, changes in the fair
values of these assets accrue directly to policyholders and are not included in
the Company’s revenues and expenses. At the adoption of SFAS No. 157,
there were no effects to the Company’s measurements of fair values for financial
instruments other than for assets and liabilities for reinsurance contracts
covering guaranteed minimum income benefits discussed below.
At
adoption, the Company was required to change certain assumptions used to
estimate the fair values of assets and liabilities for reinsurance contracts
covering guaranteed minimum income benefits. As a result, the Company
recorded a charge of $131 million after-tax, net of reinsurance ($202 million
pre-tax), in Run-off Reinsurance. This charge did not have an impact
on the Company’s cash flows.
Because
there is no market for these contracts, the assumptions used to estimate their
fair values at adoption were determined using a hypothetical market
participant's view of an exit price. The Company considered the following
in determining the view of a hypothetical market participant:
7
At
adoption, the assumptions used to estimate the fair value of these contracts
were determined using a hypothetical market participant’s view of an exit price
rather than using historical market data and actual experience to establish the
Company’s future expectations. For many of these assumptions, there
is limited or no observable market data so determining an exit price requires
the Company to exercise significant judgment and make critical accounting
estimates.
The
Company considers the various assumptions used to estimate fair values of these
contracts in two categories: capital markets and future annuitant and
retrocessionaire behavior assumptions. Estimated components of the
charge by category (net of reinsurance) are described below, including how these
updated assumptions differ from those used historically to estimate fair values
for these contracts.
The
Company’s results of operations related to this business are expected to
continue to be volatile in future periods both because underlying assumptions
will be based on current market-observable inputs which will likely change each
period and because the recorded liabilities, net of receivables from
reinsurers, are higher after adoption of SFAS No. 157. See Note 7 for additional information.
The
Financial Accounting Standards Board (FASB) deferred the effective date of SFAS
No. 157 until the first quarter of 2009 for non-financial assets and liabilities
(such as intangible assets, property and equipment and goodwill) that are
required to be measured at fair value on a periodic basis (such as at
acquisition or impairment). The FASB expects to address
implementation issues during this delay. Accordingly, the Company
will adopt SFAS No. 157 for non-financial assets and liabilities in the first
quarter of 2009 and will evaluate the effects of adoption when the FASB provides
implementation guidance.
8
NOTE
4 – EARNINGS PER SHARE
Basic and
diluted earnings per share were computed as follows:
9
The
following outstanding employee stock options were not included in the
computation of diluted earnings per share because their effect would have
increased diluted earnings per share (antidilutive) as their exercise price was
greater than the average share price of the Company's common stock for the
period.
The
Company held 75,590,075 shares of common stock in Treasury as of June 30, 2008,
and 67,502,238 shares as of June 30, 2007.
NOTE 5 – HEALTH CARE MEDICAL CLAIMS PAYABLE
Medical
claims payable for the Health Care segment reflects estimates of the ultimate
cost of claims that have been incurred but not yet reported, those which have
been reported but not yet paid (reported claims in process) and other medical
expense payable, which primarily comprises accruals for provider incentives and
other amounts payable to providers. Incurred but not yet reported comprises the
majority of the reserve balance as follows:
Activity
in medical claims payable was as follows:
Reinsurance
and other amounts recoverable reflect amounts due from policyholders to cover
incurred but not reported and pending claims for minimum premium products and
certain administrative services only business where the right of offset does not
exist.
10
For the
six months ended June 30, 2008, actual experience differed from the Company’s
key assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $54 million, or 0.8% of the current year incurred
claims as reported for the year ended December 31, 2007. Actual completion
factors resulted in a reduction in medical claims payable of $19 million, or
0.3% of the current year incurred claims as reported for the year ended December
31, 2007 for the insured book of business.
Actual medical cost trend resulted in a reduction in medical claims payable of
$35 million, or 0.5% of the current year incurred claims as reported for the
year ended December 31, 2007 for the insured book of
business.
For the
year ended December 31, 2007, actual experience differed from the Company's key
assumptions, resulting in favorable incurred claims rela | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||