Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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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)
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Delaware
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06-1059331 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
Two Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania 19192
(Address of principal executive offices) (Zip Code)
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ
No o
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.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 17, 2009, 272,704,706 shares of the issuers 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
CIGNA Corporation
Consolidated Statements of Income
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Unaudited |
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Unaudited |
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Three Months Ended |
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Six Months Ended |
|
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June 30, |
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June 30, |
|
(In millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
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|
|
|
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|
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|
Premiums and fees |
|
$ |
4,013 |
|
|
$ |
4,218 |
|
|
$ |
8,064 |
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|
$ |
8,069 |
|
Net investment income |
|
|
260 |
|
|
|
265 |
|
|
|
489 |
|
|
|
530 |
|
Mail order pharmacy revenues |
|
|
316 |
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|
|
286 |
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|
628 |
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|
582 |
|
Other revenues |
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|
(83 |
) |
|
|
113 |
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|
134 |
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|
256 |
|
Realized investment gains (losses): |
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|
|
|
|
|
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|
|
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Other than temporary impairments on debt securities, net |
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|
(9 |
) |
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|
(9 |
) |
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|
(26 |
) |
|
|
(26 |
) |
Other realized investment gains (losses) |
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|
(9 |
) |
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(10 |
) |
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(28 |
) |
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21 |
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|
|
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|
|
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Total realized investment losses |
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(18 |
) |
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(19 |
) |
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(54 |
) |
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|
(5 |
) |
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|
|
|
|
|
|
|
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Total revenues |
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4,488 |
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|
4,863 |
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|
9,261 |
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|
9,432 |
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|
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|
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Benefits and Expenses |
|
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|
|
|
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|
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Health Care medical claims expense |
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1,748 |
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|
1,917 |
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|
3,528 |
|
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|
3,661 |
|
Other benefit expenses |
|
|
689 |
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|
|
900 |
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|
1,797 |
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|
1,828 |
|
Mail order pharmacy cost of goods sold |
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|
255 |
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227 |
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|
507 |
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|
466 |
|
Guaranteed minimum income benefits (income) expense |
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(164 |
) |
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(49 |
) |
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(196 |
) |
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|
255 |
|
Other operating expenses |
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1,330 |
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|
1,455 |
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|
2,722 |
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|
2,735 |
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|
|
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|
|
|
|
|
|
|
|
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|
Total benefits and expenses |
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3,858 |
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|
4,450 |
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|
8,358 |
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|
8,945 |
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|
|
|
|
|
|
|
|
|
|
|
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Income from Continuing Operations before Income Taxes |
|
|
630 |
|
|
|
413 |
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|
|
903 |
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|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefits): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current |
|
|
155 |
|
|
|
132 |
|
|
|
70 |
|
|
|
209 |
|
Deferred |
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|
40 |
|
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|
8 |
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|
190 |
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(51 |
) |
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Total taxes |
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195 |
|
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|
140 |
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|
|
260 |
|
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|
158 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Income from Continuing Operations |
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435 |
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|
273 |
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|
643 |
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|
329 |
|
Income (Loss) from Discontinued Operations, Net of Taxes |
|
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|
(1 |
) |
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|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net Income |
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|
435 |
|
|
|
272 |
|
|
|
644 |
|
|
|
331 |
|
Less: Net Income Attributable to Noncontrolling Interest |
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1 |
|
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|
1 |
|
|
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Shareholders Net Income |
|
$ |
435 |
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|
$ |
272 |
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|
$ |
643 |
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$ |
330 |
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Basic Earnings Per Share: |
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Shareholders income from continuing operations |
|
$ |
1.59 |
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$ |
0.97 |
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$ |
2.35 |
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$ |
1.17 |
|
Shareholders income from discontinued operations |
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|
|
|
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|
0.01 |
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Shareholders net income |
|
$ |
1.59 |
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$ |
0.97 |
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$ |
2.35 |
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$ |
1.18 |
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Diluted Earnings Per Share: |
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Shareholders income from continuing operations |
|
$ |
1.58 |
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|
$ |
0.97 |
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|
$ |
2.34 |
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|
$ |
1.16 |
|
Shareholders income (loss) from discontinued operations |
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|
(0.01 |
) |
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|
0.01 |
|
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|
|
|
|
|
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Shareholders net income |
|
$ |
1.58 |
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|
$ |
0.96 |
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|
$ |
2.34 |
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|
$ |
1.17 |
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|
|
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|
Dividends Declared Per Share |
|
$ |
|
|
|
$ |
|
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|
$ |
0.040 |
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|
$ |
0.040 |
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|
Amounts Attributable to CIGNA: |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Shareholders income from continuing operations |
|
$ |
435 |
|
|
$ |
273 |
|
|
$ |
642 |
|
|
$ |
328 |
|
Shareholders income (loss) from discontinued operations |
|
|
|
|
|
|
(1 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Net Income |
|
$ |
435 |
|
|
$ |
272 |
|
|
$ |
643 |
|
|
$ |
330 |
|
|
|
|
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|
|
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The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
1
CIGNA Corporation
Consolidated Balance Sheets
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|
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Unaudited |
|
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|
|
|
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|
As of |
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As of |
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|
June 30, |
|
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December 31, |
|
(In millions, except per share amounts) |
|
|
|
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|
2009 |
|
|
|
|
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
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|
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|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost, $12,166; $11,492) |
|
|
|
|
|
$ |
12,495 |
|
|
|
|
|
|
$ |
11,781 |
|
Equity securities, at fair value (cost, $124; $140) |
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
112 |
|
Commercial mortgage loans |
|
|
|
|
|
|
3,578 |
|
|
|
|
|
|
|
3,617 |
|
Policy loans |
|
|
|
|
|
|
1,570 |
|
|
|
|
|
|
|
1,556 |
|
Real estate |
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
53 |
|
Other long-term investments |
|
|
|
|
|
|
595 |
|
|
|
|
|
|
|
632 |
|
Short-term investments |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
|
|
|
|
18,558 |
|
|
|
|
|
|
|
17,987 |
|
Cash and cash equivalents |
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
1,342 |
|
Accrued investment income |
|
|
|
|
|
|
229 |
|
|
|
|
|
|
|
225 |
|
Premiums, accounts and notes receivable, net |
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,407 |
|
Reinsurance recoverables |
|
|
|
|
|
|
6,782 |
|
|
|
|
|
|
|
6,973 |
|
Deferred policy acquisition costs |
|
|
|
|
|
|
835 |
|
|
|
|
|
|
|
789 |
|
Property and equipment |
|
|
|
|
|
|
805 |
|
|
|
|
|
|
|
804 |
|
Deferred income taxes, net |
|
|
|
|
|
|
1,285 |
|
|
|
|
|
|
|
1,617 |
|
Goodwill |
|
|
|
|
|
|
2,876 |
|
|
|
|
|
|
|
2,878 |
|
Other assets, including other intangibles |
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
1,520 |
|
Separate account assets |
|
|
|
|
|
|
6,537 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
41,649 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder deposit funds |
|
|
|
|
|
$ |
8,555 |
|
|
|
|
|
|
$ |
8,539 |
|
Future policy benefits |
|
|
|
|
|
|
8,267 |
|
|
|
|
|
|
|
8,754 |
|
Unpaid claims and claim expenses |
|
|
|
|
|
|
4,042 |
|
|
|
|
|
|
|
4,037 |
|
Health Care medical claims payable |
|
|
|
|
|
|
947 |
|
|
|
|
|
|
|
924 |
|
Unearned premiums and fees |
|
|
|
|
|
|
406 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance and contractholder liabilities |
|
|
|
|
|
|
22,217 |
|
|
|
|
|
|
|
22,668 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
5,831 |
|
|
|
|
|
|
|
6,869 |
|
Short-term debt |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
301 |
|
Long-term debt |
|
|
|
|
|
|
2,435 |
|
|
|
|
|
|
|
2,090 |
|
Nonrecourse obligations |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
16 |
|
Separate account liabilities |
|
|
|
|
|
|
6,537 |
|
|
|
|
|
|
|
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
37,151 |
|
|
|
|
|
|
|
37,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies Note 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (par value per share, $0.25; shares issued, 351) |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
Additional paid-in capital |
|
|
|
|
|
|
2,506 |
|
|
|
|
|
|
|
2,502 |
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
100 |
|
|
|
|
|
|
$ |
(147 |
) |
|
|
|
|
Net unrealized appreciation, equity securities |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
|
(21 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
Net translation of foreign currencies |
|
|
(46 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
Postretirement benefits liability adjustment |
|
|
(877 |
) |
|
|
|
|
|
|
(861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(837 |
) |
|
|
|
|
|
|
(1,074 |
) |
Retained earnings |
|
|
|
|
|
|
7,986 |
|
|
|
|
|
|
|
7,374 |
|
Less treasury stock, at cost |
|
|
|
|
|
|
(5,254 |
) |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
4,489 |
|
|
|
|
|
|
|
3,592 |
|
Noncontrolling interest |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
4,498 |
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
|
|
|
$ |
41,649 |
|
|
|
|
|
|
$ |
41,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity Per Share |
|
|
|
|
|
$ |
16.46 |
|
|
|
|
|
|
$ |
13.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
2
CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
2009 |
|
|
2008 |
|
|
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
(In millions, except per share amounts) |
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
Three Months Ended June 30 |
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
Common Stock, June 30 |
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, April 1 |
|
|
|
|
|
|
2,505 |
|
|
|
|
|
|
|
2,488 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, June 30 |
|
|
|
|
|
|
2,506 |
|
|
|
|
|
|
|
2,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), April 1 |
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
|
|
38 |
|
Implementation effect of FASB FSP No. 115-2 |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
212 |
|
|
|
212 |
|
|
$ |
(111 |
) |
|
|
(111 |
) |
Net unrealized appreciation (depreciation), equity securities |
|
|
2 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on securities |
|
|
214 |
|
|
|
|
|
|
|
(112 |
) |
|
|
|
|
Net unrealized depreciation, derivatives |
|
|
(19 |
) |
|
|
(19 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Net translation of foreign currencies |
|
|
42 |
|
|
|
42 |
|
|
|
(17 |
) |
|
|
(17 |
) |
Postretirement benefits liability adjustment |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
217 |
|
|
|
|
|
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, June 30 |
|
|
|
|
|
|
(837 |
) |
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, April 1 |
|
|
|
|
|
|
7,536 |
|
|
|
|
|
|
|
7,142 |
|
Shareholders net income |
|
|
435 |
|
|
|
435 |
|
|
|
272 |
|
|
|
272 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
Implementation effect of FASB FSP No. 115-2 |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, June 30 |
|
|
|
|
|
|
7,986 |
|
|
|
|
|
|
|
7,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, April 1 |
|
|
|
|
|
|
(5,262 |
) |
|
|
|
|
|
|
(4,942 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
Other, primarily issuance of treasury stock for employee
benefit plans |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, June 30 |
|
|
|
|
|
|
(5,254 |
) |
|
|
|
|
|
|
(5,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Comprehensive Income and Shareholders Equity |
|
|
652 |
|
|
|
4,489 |
|
|
|
150 |
|
|
|
4,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, April 1 |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Accumulated other comprehensive income attributable to noncontrolling interest |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, June 30 |
|
|
2 |
|
|
|
9 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income and Total Equity |
|
$ |
654 |
|
|
$ |
4,498 |
|
|
$ |
150 |
|
|
$ |
4,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
3
CIGNA Corporation
Consolidated Statements of Comprehensive Income and Changes in Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
2009 |
|
|
2008 |
|
|
|
Compre- |
|
|
|
|
|
|
Compre- |
|
|
|
|
(In millions, except per share amounts) |
|
hensive |
|
|
Total |
|
|
hensive |
|
|
Total |
|
Six Months Ended June 30 |
|
Income |
|
|
Equity |
|
|
Income |
|
|
Equity |
|
Common Stock, June 30 |
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
$ |
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, January 1 |
|
|
|
|
|
|
2,502 |
|
|
|
|
|
|
|
2,474 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital, June 30 |
|
|
|
|
|
|
2,506 |
|
|
|
|
|
|
|
2,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), January 1 |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
51 |
|
Implementation effect of FASB FSP No. 115-2 |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation), fixed maturities |
|
$ |
265 |
|
|
|
265 |
|
|
$ |
(115 |
) |
|
|
(115 |
) |
Net unrealized appreciation, equity securities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on securities |
|
|
265 |
|
|
|
|
|
|
|
(114 |
) |
|
|
|
|
Net unrealized depreciation, derivatives |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
Net translation of foreign currencies |
|
|
14 |
|
|
|
14 |
|
|
|
(23 |
) |
|
|
(23 |
) |
Postretirement benefits liability adjustment |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
255 |
|
|
|
|
|
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, June 30 |
|
|
|
|
|
|
(837 |
) |
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, January 1 |
|
|
|
|
|
|
7,374 |
|
|
|
|
|
|
|
7,113 |
|
Shareholders net income |
|
|
643 |
|
|
|
643 |
|
|
|
330 |
|
|
|
330 |
|
Effects of stock issuance for employee benefit plans |
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
(20 |
) |
Implementation effect of FASB FSP No. 115-2 |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
Common dividends declared (per share: $0.04; $0.04) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings, June 30 |
|
|
|
|
|
|
7,986 |
|
|
|
|
|
|
|
7,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, January 1 |
|
|
|
|
|
|
(5,298 |
) |
|
|
|
|
|
|
(4,978 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
Other, primarily issuance of treasury stock for employee
benefit plans |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, June 30 |
|
|
|
|
|
|
(5,254 |
) |
|
|
|
|
|
|
(5,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Comprehensive Income and Shareholders Equity |
|
|
898 |
|
|
|
4,489 |
|
|
|
195 |
|
|
|
4,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, January 1 |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Net income attributable to noncontrolling interest |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Accumulated other comprehensive income attributable to noncontrolling interest |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest, June 30 |
|
|
3 |
|
|
|
9 |
|
|
|
1 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income and Total Equity |
|
$ |
901 |
|
|
$ |
4,498 |
|
|
$ |
196 |
|
|
$ |
4,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
4
CIGNA Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Six Months Ended June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
644 |
|
|
$ |
331 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
(1 |
) |
|
|
(2 |
) |
Income attributable to noncontrolling interest |
|
|
(1 |
) |
|
|
(1 |
) |
Insurance liabilities |
|
|
(72 |
) |
|
|
62 |
|
Reinsurance recoverables |
|
|
10 |
|
|
|
58 |
|
Deferred policy acquisition costs |
|
|
(38 |
) |
|
|
(54 |
) |
Premiums, accounts and notes receivable |
|
|
(90 |
) |
|
|
28 |
|
Other assets |
|
|
292 |
|
|
|
(284 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(1,076 |
) |
|
|
363 |
|
Current income taxes |
|
|
41 |
|
|
|
(4 |
) |
Deferred income taxes |
|
|
190 |
|
|
|
(51 |
) |
Realized investment losses |
|
|
54 |
|
|
|
5 |
|
Depreciation and amortization |
|
|
145 |
|
|
|
117 |
|
Gains on sales of businesses (excluding discontinued operations) |
|
|
(16 |
) |
|
|
(19 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
1 |
|
|
|
|
|
Other, net |
|
|
29 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
112 |
|
|
|
559 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from investments sold: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
397 |
|
|
|
695 |
|
Equity securities |
|
|
13 |
|
|
|
1 |
|
Commercial mortgage loans |
|
|
18 |
|
|
|
12 |
|
Other (primarily short-term and other long-term investments) |
|
|
432 |
|
|
|
145 |
|
Investment maturities and repayments: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
640 |
|
|
|
351 |
|
Commercial mortgage loans |
|
|
12 |
|
|
|
10 |
|
Investments purchased: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(1,612 |
) |
|
|
(1,676 |
) |
Equity securities |
|
|
|
|
|
|
(17 |
) |
Commercial mortgage loans |
|
|
(51 |
) |
|
|
(202 |
) |
Other (primarily short-term and other long-term investments) |
|
|
(361 |
) |
|
|
(229 |
) |
Property and equipment purchases |
|
|
(136 |
) |
|
|
(128 |
) |
Acquisition of Great-West Healthcare, net of cash acquired |
|
|
|
|
|
|
(1,301 |
) |
Other (primarily other acquisitions/dispositions) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(648 |
) |
|
|
(2,347 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Deposits and interest credited to contractholder deposit funds |
|
|
706 |
|
|
|
673 |
|
Withdrawals and benefit payments from contractholder deposit funds |
|
|
(618 |
) |
|
|
(569 |
) |
Change in cash overdraft position |
|
|
(13 |
) |
|
|
(8 |
) |
Net change in short-term debt |
|
|
(197 |
) |
|
|
425 |
|
Net proceeds on issuance of long-term debt |
|
|
346 |
|
|
|
298 |
|
Repayment of long-term debt |
|
|
(2 |
) |
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
(217 |
) |
Issuance of common stock |
|
|
|
|
|
|
35 |
|
Common dividends paid |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
211 |
|
|
|
623 |
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes on cash and cash equivalents |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(320 |
) |
|
|
(1,165 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,342 |
|
|
|
1,970 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,022 |
|
|
$ |
805 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Information: |
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
33 |
|
|
$ |
205 |
|
Interest paid |
|
$ |
75 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
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
(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 Companys Form 10-K for the year ended December 31, 2008.
The preparation of interim consolidated financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of portions of the health
care and related benefits business as well as competitive and other market conditions, call for
caution in estimating full year results based on interim results of operations.
In preparing these interim consolidated financial statements, the Company has evaluated events that
occurred between the balance sheet date and July 30, 2009.
Certain reclassifications and restatements have been made to prior period amounts to conform to the
presentation of 2009 amounts. In addition, certain restatements have been made in connection with
the adoption of new accounting pronouncements. See Note 2 for further information.
Discontinued operations. Discontinued operations for the six months ended June 30, 2009 primarily
represented a tax benefit associated with a past divestiture related to the completion of the 2005
and 2006 IRS examinations.
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 Company. Discontinued operations for the six
months ended June 30, 2008 also includes a gain of $3 million after-tax from the settlement of
certain issues related to a past divestiture.
Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.
Note 2 Recent Accounting Pronouncements
Other-than-temporary impairments. On April 1, 2009, the Company adopted Financial Accounting
Standards Board (FASB) Staff Position (FSP) No. FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP provides new guidance for evaluating whether an
impairment is other than temporary for fixed maturities with declines in fair value below amortized
cost. It requires assessing the Companys intent to sell or whether it is more likely than not
that the Company will be required to sell such fixed maturities before their fair values recover.
If so, an impairment loss is recognized in net income for the excess of the amortized cost over
fair value. The Company must also determine if it does not expect to recover the amortized cost of
fixed maturities with declines in fair value (even if it does not intend to sell or will not be
required to sell). In this case, the credit portion of the impairment loss is recognized in net
income and the non-credit portion of an impairment loss is recognized in a separate component of
shareholders equity. A reclassification adjustment from retained earnings to accumulated other
comprehensive income is required for previously impaired fixed maturities that have a non-credit
loss as of the date of adoption, less related tax effects.
The cumulative effect of adoption increased the Companys retained earnings with an offsetting
decrease to accumulated other comprehensive income of $18 million, with no overall change to
shareholders equity. See Note 9 for information on the Companys other-than-temporary impairments
including additional required disclosures.
6
Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51, through retroactive restatement of prior
financial statements and reclassified its $6 million of noncontrolling interest as of January 1,
2009 and 2008 from Accounts payable, accrued expenses and other liabilities to Noncontrolling
interest in total equity. In addition, for the six months ended June 30, 2008, net income of $1
million attributable to the noncontrolling interest has been reclassified to be included in net
income, with a reduction to net income to determine net income attributable to the Companys
shareholders (shareholders net income).
Earnings per share. Effective January 1, 2009, the Company adopted FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
This FSP requires unvested restricted stock awards that contain rights to nonforfeitable dividends
to be included in the denominator of both basic and diluted earnings per share (EPS)
calculations. Prior period EPS data have been restated to reflect the adoption of this FSP. See
Note 4 for the effects of this FSP on previously reported EPS amounts.
Business combinations. Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007,
referred to as SFAS No. 141R), Business Combinations. This standard requires fair value
measurements for all future acquisitions, including contingent purchase price and certain
contingent assets or liabilities of the entity to be acquired; requires acquisition related and
restructuring costs to be expensed as incurred and requires changes in tax items after the
acquisition date to be reported in income tax expense. There were no effects to the Companys
Consolidated Financial Statements at adoption.
Derivatives disclosures. Effective January 1, 2009, the Company adopted SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. This standard expands required disclosures
to include the purpose for using derivative instruments, their accounting treatment and related
effects on financial condition, results of operations and liquidity. See Note 10 for information
on the Companys derivative financial instruments including these additional required disclosures.
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). In addition, the FASB amended SFAS No. 157 in 2008 to provide
additional guidance for determining the fair value of a financial asset when the market for that
instrument is not active. See Note 8 for information on the Companys fair value measurements.
The Company carries certain financial instruments at fair value in the financial statements
including approximately $12.7 billion in invested assets at June 30, 2009. The Company also
carries derivative instruments at fair value, including assets and liabilities for reinsurance
contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain
variable annuity contracts issued by other insurance companies and related retrocessional
contracts. The Company also reports separate account assets at fair value; however, changes in the
fair values of these assets accrue directly to policyholders and are not included in the Companys
revenues and expenses. At the adoption of SFAS No. 157, there were no effects to the Companys
measurements of fair values for financial instruments other than for GMIB assets and liabilities
discussed below. In addition, there were no effects to the Companys measurements of financial
assets of adopting the 2008 amendment to SFAS No. 157.
At adoption, the Company was required to change certain assumptions used to estimate the fair
values of GMIB assets and liabilities. Because there is no market for these contracts, the
assumptions used to estimate their fair values at adoption were determined using a hypothetical
market participants view of exit price, rather than using historical market data and actual
experience to establish the Companys 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. On adoption, the Company recorded a
charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off
Reinsurance.
The Companys results of operations related to this business are expected to continue to be
volatile in future periods because underlying assumptions will be based on current
market-observable inputs which will likely change each period. See Note 8 for additional
information.
In the first quarter of 2009, the Company adopted the provisions of SFAS No. 157 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 impairment). The effect on
the Companys periodic fair value measurements for non-financial assets and liabilities was not
material.
7
In addition, the Company adopted recent amendments to SFAS No. 157 that provide additional guidance
in determining fair value when the volume and level of activity for an asset or liability have
significantly decreased and in identifying transactions that are not orderly. There were no
effects to the Companys Consolidated Financial Statements at adoption.
Variable
interest entities. In 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R), which amended existing guidance to require periodic qualitative analyses
to determine whether a variable interest entity must be consolidated by the Company. In addition,
this standard requires the Company to disclose any significant judgments and assumptions made in
determining whether it must consolidate a variable interest entity. Any changes in consolidated
entities resulting from these requirements must be applied through retrospective restatement of
prior financial statements beginning in 2010. The Company is presently evaluating the impact of
these new requirements.
Transfers
of financial assets. In 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140, to provide greater transparency about
transfers of financial assets. This guidance changes the requirements for recognizing the transfer
of financial assets and requires additional disclosures about a transferors continuing involvement
in transferred financial assets. The guidance also eliminates the concept of a qualifying special
purpose entity when assessing transfers of financial instruments. The recognition and measurement
provisions of this guidance must be applied to transfers that occur on or after January 1, 2010.
The Company is presently evaluating the impact of these new requirements.
Note 3 Acquisitions and Dispositions
The Company may from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
Great-West Healthcare Acquisition. On April 1, 2008, the Company acquired the Healthcare division
of Great-West Life and Annuity, Inc. (Great-West Healthcare or the acquired business) through
100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets
and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion
consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and
the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion.
Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage
to select and regional employer groups. Great-West Healthcares offerings also include the
following specialty products: stop loss, life, disability, medical, dental, vision, prescription
drug coverage, and accidental death and dismemberment insurance. The acquisition, which was
accounted for as a purchase, was financed through a combination of cash and the issuance of both
short and long-term debt.
In the first quarter of 2009, the Company completed its allocation of the total purchase price to
the tangible and intangible net assets acquired based on managements estimates of their fair
values without material changes from December 31, 2008.
The results of Great-West Healthcare are included in the Companys Consolidated Financial
Statements from the date of acquisition.
The following table presents selected unaudited pro forma information for the Company assuming the
acquisition had occurred as of January 1, 2008. The pro forma information does not purport to
represent what the Companys actual results would have been if the acquisition had occurred as of
that date or what such results will be for any future periods.
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In millions, except per share amounts) |
|
2008 |
|
Total revenues |
|
$ |
9,800 |
|
Shareholders income from continuing operations |
|
$ |
349 |
|
Shareholders net income |
|
$ |
351 |
|
Earnings per share: |
|
|
|
|
Shareholders income from continuing operations |
|
|
|
|
Basic |
|
$ |
1.24 |
|
Diluted |
|
$ |
1.23 |
|
Shareholders net income |
|
|
|
|
Basic |
|
$ |
1.25 |
|
Diluted |
|
$ |
1.24 |
|
8
Note 4 Earnings Per Share
Basic and diluted earnings per share were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
|
|
|
|
Effect of |
|
|
|
|
Three Months Ended June 30, |
|
Basic |
|
|
Dilution |
|
|
Diluted |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
435 |
|
|
$ |
|
|
|
$ |
435 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
274,086 |
|
|
|
|
|
|
|
274,086 |
|
Options |
|
|
|
|
|
|
969 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
274,086 |
|
|
|
969 |
|
|
|
275,055 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
1.59 |
|
|
$ |
(0.01 |
) |
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
273 |
|
|
$ |
|
|
|
$ |
273 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
280,070 |
|
|
|
|
|
|
|
280,070 |
|
Options |
|
|
|
|
|
|
1,850 |
|
|
|
1,850 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
280,070 |
|
|
|
1,850 |
|
|
|
281,920 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
0.97 |
|
|
$ |
|
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
|
|
|
|
Effect of |
|
|
|
|
Six Months Ended June 30, |
|
Basic |
|
|
Dilution |
|
|
Diluted |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
642 |
|
|
$ |
|
|
|
$ |
642 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
273,342 |
|
|
|
|
|
|
|
273,342 |
|
Options |
|
|
|
|
|
|
623 |
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
273,342 |
|
|
|
623 |
|
|
|
273,965 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
2.35 |
|
|
$ |
(0.01 |
) |
|
$ |
2.34 |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
328 |
|
|
$ |
|
|
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
Shares (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
280,818 |
|
|
|
|
|
|
|
280,818 |
|
Options |
|
|
|
|
|
|
2,220 |
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
280,818 |
|
|
|
2,220 |
|
|
|
283,038 |
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
$ |
1.17 |
|
|
$ |
(0.01 |
) |
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
9
As described in Note 2, effective in 2009, the Company adopted FSP EITF 03-06-1, which
requires the Companys unvested restricted stock awards to be included in weighted average shares
instead of being considered a common stock equivalent. Prior period share information has been
restated as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
|
As originally |
|
|
|
|
|
|
As originally |
|
|
|
|
|
|
reported |
|
|
As adjusted |
|
|
reported |
|
|
As adjusted |
|
Shareholders
income from continuing operations |
|
$ |
0.98 |
|
|
$ |
0.97 |
|
|
$ |
0.98 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
Basic |
|
|
Diluted |
|
|
|
As originally |
|
|
|
|
|
|
As originally |
|
|
|
|
|
|
reported |
|
|
As adjusted |
|
|
reported |
|
|
As adjusted |
|
Shareholders
income from continuing operations |
|
$ |
1.18 |
|
|
$ |
1.17 |
|
|
$ |
1.17 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys
common stock for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Antidilutive options |
|
|
9.9 |
|
|
|
4.9 |
|
|
|
10.6 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company held 78,223,221 shares of common stock in Treasury as of June 30, 2009, and
75,590,075 shares as of June 30, 2008.
Note 5 Health Care Medical Claims Payable
Medical claims payable for the Health Care segment reflects estimates of the ultimate cost of
claims that have been incurred but not yet reported, those which have been reported but not yet
paid (reported claims in process) and other medical expense payable, which primarily comprises
accruals for provider incentives and other amounts payable to providers. Incurred but not yet
reported comprises the majority of the reserve balance as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Incurred but not yet reported |
|
$ |
808 |
|
|
$ |
782 |
|
Reported claims in process |
|
|
116 |
|
|
|
114 |
|
Other medical expense payable |
|
|
23 |
|
|
|
28 |
|
|
|
|
|
|
|
|
Medical claims payable |
|
$ |
947 |
|
|
$ |
924 |
|
|
|
|
|
|
|
|
10
Activity in medical claims payable was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the period ended |
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
924 |
|
|
$ |
975 |
|
Less: Reinsurance and other amounts recoverable |
|
|
211 |
|
|
|
258 |
|
|
|
|
|
|
|
|
Balance at January 1, net |
|
|
713 |
|
|
|
717 |
|
Acquired April 1, 2008 net |
|
|
|
|
|
|
90 |
|
Incurred claims related to: |
|
|
|
|
|
|
|
|
Current year |
|
|
3,563 |
|
|
|
7,312 |
|
Prior years |
|
|
(35 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
Total incurred |
|
|
3,528 |
|
|
|
7,252 |
|
Paid claims related to: |
|
|
|
|
|
|
|
|
Current year |
|
|
2,867 |
|
|
|
6,716 |
|
Prior years |
|
|
625 |
|
|
|
630 |
|
|
|
|
|
|
|
|
Total paid |
|
|
3,492 |
|
|
|
7,346 |
|
Ending Balance, net |
|
|
749 |
|
|
|
713 |
|
Add: Reinsurance and other amounts recoverable |
|
|
198 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
947 |
|
|
$ |
924 |
|
|
|
|
|
|
|
|
Reinsurance and other amounts recoverable reflect amounts due from reinsurers and
policyholders to cover incurred but not reported and pending claims for minimum premium products
and certain administrative services only business where the right of offset does not exist. See
Note 11 for additional information on reinsurance. For the six months ended June 30, 2009, actual
experience differed from the Companys key assumptions resulting in favorable incurred claims
related to prior years medical claims payable of $35 million, or 0.5% of the current year incurred
claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a
reduction in medical claims payable of $15 million, or 0.2% of the current year incurred claims as
reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost
trend resulted in a reduction in medical claims payable of $20 million, or 0.3% of the current year
incurred claims as reported for the year ended December 31, 2008 for the insured book of business.
For the year ended December 31, 2008, actual experience differed from the Companys key
assumptions, resulting in favorable incurred claims related to prior years medical claims payable
of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December
31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29
million, or 0.4% of the current year incurred claims as reported for the year ended December 31,
2007 for the insured book of business. Actual medical cost trend resulted in a reduction of the
medical claims payable of $31 million, or 0.5% of the current year incurred claims as reported for
the year ended December 31, 2007 for the insured book of business.
The favorable impact in 2009 and 2008 relating to completion factors and medical cost trend
variances is primarily due to the release of the provision for moderately adverse conditions, which
is a component of the assumptions for both completion factors and medical cost trend, established
for claims incurred related to prior years. This release was substantially offset by the provision
for moderately adverse conditions established for claims incurred related to the current year.
The corresponding impact of prior year development on shareholders net income was not material for
the three months and six months ended June 30, 2009 and 2008. The change in the amount of the
incurred claims related to prior years in the medical claims payable liability does not directly
correspond to an increase or decrease in the Companys shareholders net income recognized for the
following reasons:
First, due to the nature of the Companys retrospectively experience-rated business, only
adjustments to medical claims payable on accounts in deficit affect shareholders net income. An
increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the
Company and directly impacts shareholders net income. An account is in deficit when the
accumulated medical costs and administrative charges, including profit charges, exceed the
accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue
directly to the policyholder with no impact on the Companys shareholders net income. An account
is in surplus when the accumulated premium received exceeds the accumulated medical costs and
administrative charges, including profit charges.
11
Second, the Company consistently recognizes the actuarial best estimate of the ultimate liability
within a level of confidence, as required by actuarial standards of practice, which require that
the liabilities be adequate under moderately adverse conditions. As the Company establishes the
liability for each incurral year, the Company ensures that its assumptions appropriately consider
moderately adverse conditions. When a portion of the development related to the prior year incurred
claims is offset by an increase deemed appropriate to address moderately adverse conditions for the
current year incurred claims, the Company does not consider that offset amount as having any impact
on shareholders net income.
The determination of liabilities for Health Care medical claims payable required the Company to
make critical accounting estimates. See Note 2(O) to the Consolidated Financial Statements in the
Companys 2008 Form 10-K.
Note 6 Cost Reduction
During the second quarter of 2009, the Company continued its previously announced comprehensive
review of its ongoing businesses. As a result, in the second quarter of 2009 the Company recognized
in other operating expenses a total charge of $14 million pre-tax ($9 million after-tax), for
severance resulting from reductions of 465 positions in its workforce. The Company expects to pay
substantially all of this charge in cash during 2009. The Health Care segment reported
substantially all of this charge.
The following table presents the activity related to the cost reduction initiatives begun in the
fourth quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Severance |
|
|
Real estate |
|
|
Total |
|
Balance, January 1, 2009 |
|
$ |
44 |
|
|
$ |
11 |
|
|
$ |
55 |
|
Less: Payments on 2008 charges |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Subtotal 2008 cost reduction actions |
|
|
23 |
|
|
|
9 |
|
|
|
32 |
|
Add: Second quarter 2009 charge |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
37 |
|
|
$ |
9 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
Note 7 Guaranteed Minimum Death Benefit Contracts
The Companys reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured guaranteed minimum death benefits (GMDB), also known as
variable annuity death benefits (VADBe), under certain variable annuities issued by other insurance
companies. These variable annuities are essentially investments in mutual funds combined with a
death benefit. The Company has equity and other market exposures as a result of this product. In
periods of declining equity markets and in periods of flat equity markets following a decline, the
Companys liabilities for these guaranteed minimum death benefits increase. Conversely, in periods
of rising equity markets, the Companys liabilities for these guaranteed minimum death benefits
decrease.
In order to substantially reduce the equity market exposures relating to guaranteed minimum death
benefit contracts, the Company operates a dynamic hedge program (GMDB equity hedge program), using
exchange-traded futures contracts. The hedge program is designed to substantially offset both
positive and negative impacts of changes in equity markets on the GMDB liability. The hedge
program involves detailed, daily monitoring of equity market movements and rebalancing the futures
contracts within established parameters. While the hedge program is actively managed, it may not
exactly offset changes in the GMDB liability due to, among other things, divergence between the
performance of the underlying mutual funds and the hedge instruments, high levels of volatility in
the equity markets, and differences between actual contractholder behavior and what is assumed.
The performance of the underlying mutual funds compared to the hedge instruments is further
impacted by a time lag, since the data is not reported and incorporated into the required hedge
position on a real time basis. Although this hedge program does not qualify for GAAP hedge
accounting, it is an economic hedge because it is designed and operated to substantially reduce
equity market exposures resulting from this product. The results of the futures contracts are
included in other revenue and amounts reflecting corresponding changes in liabilities for these
GMDB contracts are included in benefits and expenses, consistent with GAAP when a premium
deficiency exists.
12
The GMDB reinsurance business is considered premium deficient because the expected present value of
future claims and expenses exceeds the expected present value of future premiums and investment
income using revised assumptions based on actual and expected experience. The Company performs a
reserve review on a quarterly basis using current market conditions and assumptions. Under premium
deficiency accounting if the recorded reserve is determined insufficient, an increase to the
reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does
not recognize gains on premium deficient long duration products.
The Company had future policy benefit reserves for GMDB contracts of $1.5 billion as of June 30,
2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB
requires the Company to make critical accounting estimates. The Company estimates its liabilities
for GMDB exposures using a complex internal model, run using many scenarios, and based on
assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment
performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity
prior to a contractholders death. Future partial surrender refers to the fact that most
contractholders have the ability to withdraw substantially all of their mutual fund investments
while retaining the death benefit coverage in effect at the time of the withdrawal. Mean
investment performance refers to market rates to be earned over the life of the GMDB equity hedge
program, and market volatility refers to market fluctuation. These assumptions are based on the
Companys experience and future expectations over the long-term period, consistent with the
long-term nature of this product. The Company regularly evaluates these assumptions and changes
its estimates if actual experience or other evidence suggests that assumptions should be revised.
If actual experience differs from the assumptions (including lapse, future partial surrenders,
mortality, interest rates and volatility) used in estimating these liabilities, the result could
have a material adverse effect on the Companys consolidated results of operations, and in certain
situations, could have a material adverse effect on the Companys financial condition.
The following provides information about the Companys reserving methodology and assumptions for
GMDB as of June 30, 2009:
|
|
The reserve represents estimates of the present value of net amounts expected to be paid,
less the present value of net future premiums. Included in net amounts expected to be paid is
the excess of the guaranteed death benefits over the values of the contractholders accounts
(based on underlying equity and bond mutual fund investments). |
|
|
The reserve includes an estimate for future partial surrenders that essentially lock in the
death benefit for a particular policy based on annual election rates that vary from 0-27%
depending on the net amount at risk for each policy and whether surrender charges apply. |
|
|
The mean investment performance assumption is 5% considering the Companys GMDB equity
hedge program using futures contracts. This is reduced by fund fees ranging from 1-3% across
all funds. The results of futures contracts are reflected in the liability calculation as a
component of investment returns. |
|
|
The volatility assumption is based on a review of historical monthly returns for each key
index (e.g. S&P 500) over a period of at least ten years. Volatility represents the
dispersion of historical returns compared to the average historical return (standard
deviation) for each index. The assumption is 16-30%, varying by equity fund type; 4-10%,
varying by bond fund type; and 2% for money market funds. These volatility assumptions are
used along with the mean investment performance assumption to project future return scenarios. |
|
|
The discount rate is 5.75%. |
|
|
The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1%
annual improvement beginning January 1, 2000. |
|
|
The lapse rate assumption is 0-21%, depending on contract type, policy duration and the
ratio of the net amount at risk to account value. |
|
|
The reserve includes a provision for future policy maintenance and hedging expenses. |
13
Although the year to date results include a first quarter charge of $73 million pre-tax ($47
million after-tax) to strengthen GMDB reserves following an analysis of experience, no additional
reserve strengthening was required for GMDB during the second quarter of 2009, primarily due to the
stabilization and recovery of equity markets. The components of the first quarter charge were:
|
|
adverse impacts of overall market declines of $50 million pre-tax ($32 million after-tax).
This is comprised of (a) $39 million pre-tax ($25 million after-tax) primarily related to the
provision for future partial surrenders, and (b) $11 million pre-tax ($7 million after-tax)
related to declines in the values of contractholders non-equity investments such as bond
funds, neither of which is included in the GMDB equity hedge program; |
|
|
adverse volatility-related impacts of $11 million pre-tax ($7 million after-tax) due to
turbulent equity market conditions, including higher than expected claims and the performance
of the diverse mix of equity fund investments held by contractholders being different than
expected; and |
|
|
adverse interest rate impacts of $12 million pre-tax ($8 million after-tax). Interest rate
risk is not covered by the GMDB equity hedge program, and the interest rate returns on the
futures contracts were less than the Companys long-term assumption for mean investment
performance. |
Activity in future policy benefit reserves for the GMDB business was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the period ended |
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
1,609 |
|
|
$ |
848 |
|
Add: Unpaid Claims |
|
|
34 |
|
|
|
21 |
|
Less: Reinsurance and other amounts recoverable |
|
|
83 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Balance at January 1, net |
|
|
1,560 |
|
|
|
850 |
|
Add: Incurred benefits |
|
|
50 |
|
|
|
822 |
|
Less: Paid benefits |
|
|
100 |
|
|
|
112 |
|
|
|
|
|
|
|
|
Ending balance, net |
|
|
1,510 |
|
|
|
1,560 |
|
Less: Unpaid Claims |
|
|
42 |
|
|
|
34 |
|
Add: Reinsurance and other amounts recoverable |
|
|
74 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,542 |
|
|
$ |
1,609 |
|
|
|
|
|
|
|
|
Benefits paid and incurred are net of ceded amounts. Incurred benefits reflect the favorable
or unfavorable impact of a rising or falling equity market on the liability, and include the
charges discussed above. As discussed below, losses or gains have been recorded in other revenues
as a result of the GMDB equity hedge program to reduce equity market exposures.
As of June 30, 2009, the aggregate value of the underlying mutual fund investments was $15.8
billion. The death benefit coverage in force as of that date (representing the amount that the
Company would have to pay if all of the approximately 615,000 contractholders had died on that
date) was $9.6 billion. As of December 31, 2008, the aggregate value of the underlying mutual fund
investments was $16.3 billion. The death benefit coverage in force as of that date (representing
the amount that the Company would have to pay if all of the approximately 650,000 contractholders
had died on that date) was $11.1 billion. The death benefit coverage in force represents the
excess of the guaranteed benefit amount over the value of the underlying mutual fund investments.
As discussed above, the Company operates a GMDB equity hedge program to substantially reduce the
equity market exposures of this business by selling exchange-traded futures contracts, which are
expected to rise in value as the equity market declines and decline in value as the equity market
rises. In addition, the Company uses foreign currency futures contracts to reduce the
international equity market and foreign currency risks associated with this business. The notional
amount of futures contract positions held by the Company at June 30, 2009 was $1.3 billion. The
Company recorded in other revenues pre-tax losses of $188 million for the three months ended June
30, 2009 and $71 million for the six months ended June 30, 2009, and pre-tax gains of $6 million
for the three months ended June 30, 2008 and $48 million for the six months ended June 30, 2008.
The Company has also written reinsurance contracts with issuers of variable annuity contracts that
provide annuitants with certain guarantees related to minimum income benefits (GMIB). All reinsured
GMIB policies also have a GMDB benefit reinsured by the Company. See Note 8 for further
information.
14
Note 8 Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements
including fixed maturities, equity securities, short-term investments and derivatives. Other
financial instruments are periodically measured at fair value, such as when impaired, or, for
commercial mortgage loans, when classified as held for sale.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction
between market participants at the balance sheet date. A liabilitys fair value is defined as the
amount that would be paid to transfer the liability to a market participant, not the amount that
would be paid to settle the liability with the creditor.
Fair values are based on quoted market prices when available. When market prices are not
available, fair value is generally estimated using discounted cash flow analyses, incorporating
current market inputs for similar financial instruments with comparable terms and credit quality.
In instances where there is little or no market activity for the same or similar instruments, the
Company estimates fair value using methods, models and assumptions that the Company believes a
hypothetical market participant would use to determine a current transaction price. These
valuation techniques involve some level of estimation and judgment by the Company which becomes
significant with increasingly complex instruments or pricing models. Where appropriate,
adjustments are included to reflect the risk inherent in a particular methodology, model or input
used.
The Companys financial assets and liabilities carried at fair value have been classified based
upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values
determined using unadjusted quoted prices in active markets for identical assets and liabilities
(Level 1) and the lowest ranking to fair values determined using methodologies and models with
unobservable inputs (Level 3). An assets or a liabilitys classification is based on the lowest
level input that is significant to its measurement. For example, a Level 3 fair value measurement
may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The
levels of the fair value hierarchy are as follows:
|
|
Level 1 Values are unadjusted quoted prices for identical assets and liabilities in
active markets accessible at the measurement date. Active markets provide pricing data for
trades occurring at least weekly and include exchanges and dealer markets. |
|
|
Level 2 Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices from those willing to trade in markets that are not active, or other
inputs that are observable or can be corroborated by market data for the term of the
instrument. Such inputs include market interest rates and volatilities, spreads and yield
curves. An instrument is classified in Level 2 if the Company determines that unobservable
inputs are insignificant. |
|
|
Level 3 Certain inputs are unobservable (supported by little or no market activity) and
significant to the fair value measurement. Unobservable inputs reflect the Companys best
estimate of what hypothetical market participants would use to determine a transaction price
for the asset or liability at the reporting date. |
15
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
The following tables provide information as of June 30, 2009 and December 31, 2008 about the
Companys financial assets and liabilities measured at fair value on a recurring basis. Similar
disclosures for separate account assets, which are also recorded at fair value on the Companys
Consolidated Balance Sheets, are provided separately as gains and losses related to these assets
generally accrue directly to policyholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
June 30, 2009 |
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Financial assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government and agency |
|
$ |
45 |
|
|
$ |
546 |
|
|
$ |
1 |
|
|
$ |
592 |
|
State and local government |
|
|
|
|
|
|
2,478 |
|
|
|
|
|
|
|
2,478 |
|
Foreign government |
|
|
|
|
|
|
960 |
|
|
|
13 |
|
|
|
973 |
|
Corporate |
|
|
|
|
|
|
7,357 |
|
|
|
486 |
|
|
|
7,843 |
|
Federal agency mortgage-backed |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
35 |
|
Other mortgage-backed |
|
|
|
|
|
|
116 |
|
|
|
7 |
|
|
|
123 |
|
Other asset-backed |
|
|
|
|
|
|
52 |
|
|
|
399 |
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1) |
|
|
45 |
|
|
|
11,544 |
|
|
|
906 |
|
|
|
12,495 |
|
Equity securities |
|
|
7 |
|
|
|
69 |
|
|
|
17 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
52 |
|
|
|
11,613 |
|
|
|
923 |
|
|
|
12,588 |
|
Short-term investments |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
105 |
|
GMIB assets (2) |
|
|
|
|
|
|
|
|
|
|
685 |
|
|
|
685 |
|
Other derivative assets (3) |
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value, excluding separate accounts |
|
$ |
52 |
|
|
$ |
11,739 |
|
|
$ |
1,608 |
|
|
$ |
13,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,224 |
|
|
$ |
1,224 |
|
Other derivative liabilities |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities at fair value |
|
$ |
|
|
|
$ |
19 |
|
|
$ |
1,224 |
|
|
$ |
1,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities includes $174 million of net appreciation required to adjust future
policy benefits for run-off settlement annuity business including $4 million of appreciation for
securities classified in Level 3. |
|
(2) |
|
The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place
from two external reinsurers which cover 55% of the exposures on these contracts. The assets are
net of a liability of $14 million for the future cost of reinsurance. |
|
(3) |
|
Other derivative assets includes $17 million of interest rate and foreign currency swaps
qualifying as cash flow hedges and $4 million of interest rate swaps not designated as accounting
hedges. |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
December 31, 2008 |
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Financial assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government and agency |
|
$ |
38 |
|
|
$ |
724 |
|
|
$ |
|
|
|
$ |
762 |
|
State and local government |
|
|
|
|
|
|
2,486 |
|
|
|
|
|
|
|
2,486 |
|
Foreign government |
|
|
|
|
|
|
923 |
|
|
|
21 |
|
|
|
944 |
|
Corporate |
|
|
|
|
|
|
6,526 |
|
|
|
330 |
|
|
|
6,856 |
|
Federal agency mortgage-backed |
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
Other mortgage-backed |
|
|
|
|
|
|
121 |
|
|
|
4 |
|
|
|
125 |
|
Other asset-backed |
|
|
|
|
|
|
57 |
|
|
|
514 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1) |
|
|
38 |
|
|
|
10,874 |
|
|
|
869 |
|
|
|
11,781 |
|
Equity securities |
|
|
8 |
|
|
|
84 |
|
|
|
20 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
46 |
|
|
|
10,958 |
|
|
|
889 |
|
|
|
11,893 |
|
Short-term investments |
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
236 |
|
GMIB assets (2) |
|
|
|
|
|
|
|
|
|
|
953 |
|
|
|
953 |
|
Other derivative assets (3) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value, excluding separate accounts |
|
$ |
46 |
|
|
$ |
11,239 |
|
|
$ |
1,842 |
|
|
$ |
13,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,757 |
|
|
$ |
1,757 |
|
Other derivative liabilities |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities at fair value |
|
$ |
|
|
|
$ |
36 |
|
|
$ |
1,757 |
|
|
$ |
1,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities includes $514 million of net appreciation required to adjust future
policy benefits for run-off settlement annuity business including $111 million of appreciation for
securities classified in Level 3. |
|
(2) |
|
The Guaranteed Minimum Income Benefit (GMIB) assets represent retrocessional contracts in place
from two external reinsurers which cover 55% of the exposures on these contracts. The assets are
net of a liability of $17 million for the future cost of reinsurance. |
|
(3) |
|
Other derivative assets include $40 million of interest rate and foreign currency swaps
qualifying as cash flow hedges and $5 million of interest rate swaps not designated as accounting
hedges. |
Level 1 Financial Assets
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity
securities. Given the narrow definition of Level 1 and the Companys investment asset strategy to
maximize investment returns, a relatively small portion of the Companys investment assets are
classified in this category.
Level 2 Financial Assets and Financial Liabilities
Fixed maturities and equity securities. Approximately 92% of the Companys investments in fixed
maturities and equity securities are classified in Level 2 including most public and private
corporate debt and equity securities, federal agency and municipal bonds, non-government
mortgage-backed securities and preferred stocks. Because many fixed maturities and preferred
stocks do not trade daily, fair values are often derived using recent trades of securities with
similar features and characteristics. When recent trades are not available, pricing models are
used to determine these prices. These models calculate fair values by discounting future cash
flows at estimated market interest rates. Such market rates are derived by calculating the
appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry
and structure of the asset.
Typical inputs and assumptions to pricing models include, but are not limited to, benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, liquidity, benchmark securities, bids,
offers, reference data, and industry and economic events. For mortgage-backed securities, inputs
and assumptions may also include characteristics of the issuer, collateral attributes, prepayment
speeds and credit rating.
17
Short-term investments. Short-term investments are carried at fair value, which approximates cost.
On a regular basis the Company compares market prices for these securities to recorded amounts to
validate that current carrying amounts approximate exit prices. The short-term nature of the
investments and corroboration of the reported amounts over the holding period support their
classification in Level 2.
Other derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as
interest rate and foreign currency swap contracts. Fair values for these instruments are
determined using market observable inputs including forward currency and interest rate curves and
widely published market observable indices. Credit risk related to the counterparty and the
Company is considered when estimating the fair values of these derivatives. However, the Company
is largely protected by collateral arrangements with counterparties, and determined that no
adjustment for credit risk was required as of June 30, 2009 or December 31, 2008. The nature and
use of these other derivatives are described in Note 10.
Level 3 Financial Assets and Financial Liabilities
The Company classifies certain newly issued, privately placed, complex or illiquid securities, as
well as assets and liabilities relating to guaranteed minimum income benefits in Level 3.
Fixed maturities and equity securities. Approximately 7% of fixed maturities and equity securities
are priced using significant unobservable inputs and classified in this category, including:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Mortgage and asset-backed securities |
|
$ |
406 |
|
|
$ |
518 |
|
Primarily private corporate bonds |
|
|
411 |
|
|
|
270 |
|
Subordinated loans and private equity investments |
|
|
106 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
923 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
Fair values of mortgage and asset-backed securities and corporate bonds are determined using
pricing models that incorporate the specific characteristics of each asset and related assumptions
including the investment type and structure, credit quality, industry and maturity date in
comparison to current market indices and spreads, liquidity and economic events. For mortgage and
asset-backed securities, inputs and assumptions to pricing may also include collateral attributes
and prepayment speeds. Recent trades in the subject security or similar securities are assessed
when available, and the Company may also review published research as well as the issuers
financial statements in its evaluation. Subordinated loans and private equity investments are
valued at transaction price in the absence of market data indicating a change in the estimated fair
values.
Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and
assets are affected by equity markets and interest rates but are without significant life insurance
risk and are settled in lump sum payments, the Company reports these liabilities and assets as
derivatives at fair value. The Company estimates the fair value of the assets and liabilities for
GMIB contracts using assumptions regarding capital markets (including market returns, interest
rates and market volatilities of the underlying equity and bond mutual fund investments), future
annuitant and retrocessionaire behavior (including mortality, lapse, annuity election rates and
retrocessional credit), as well as risk and profit charges. At adoption of SFAS No. 157 in 2008,
the Company updated assumptions to reflect those that the Company believes a hypothetical market
participant would use to determine a current exit price for these contracts, and recorded a charge
to shareholders net income as described in Note 2. As certain assumptions used to estimate fair
values for these contracts are largely unobservable, the Company classifies GMIB assets and
liabilities in Level 3. The Company considered the following in determining the view of a
hypothetical market participant:
|
|
that the most likely transfer of these assets and liabilities would be through a
reinsurance transaction with an independent insurer having a market capitalization and credit
rating similar to that of the Company; and |
|
|
that because this block of contracts is in run-off mode, an insurer looking to acquire
these contracts would have similar existing contracts with related administrative and risk
management capabilities. |
18
These GMIB assets and liabilities are estimated using a complex internal model run using many
scenarios to determine the present value of net amounts expected to be paid, less the present value
of net future premiums expected to be received adjusted for risk and profit charges that the
Company estimates a hypothetical market participant would require to assume this business. Net
amounts expected to be paid include the excess of the expected value of the income benefits over
the values of the annuitants accounts at the time of annuitization. Generally, market return,
interest rate and volatility assumptions are based on market observable information. Assumptions
related to annuitant behavior reflect the Companys belief that a hypothetical market participant
would consider the actual and expected experience of the Company as well as other relevant and
available industry resources in setting policyholder behavior assumptions. The significant
assumptions used to value the GMIB assets and liabilities as of June 30, 2009 were as follows:
|
|
The market return and discount rate assumptions are based on the market-observable LIBOR swap curve. |
|
|
|
The projected interest rate used to calculate the reinsured income benefits is indexed to the 7-year Treasury Rate at
the time of annuitization (claim interest rate) based on contractual terms. That rate was 3.19% at June 30, 2009 and
must be projected for future time periods. These projected rates vary by economic scenario and are determined by an
interest rate model using current interest rate curves and the prices of instruments available in the market including
various interest rate caps and zero-coupon bonds. For a subset of the business, there is a contractually guaranteed
floor of 3% for the claim interest rate. |
|
|
|
The market volatility assumptions for annuitants underlying mutual fund investments that are modeled based on the S&P
500, Russell 2000 and NASDAQ Composite are based on the market-implied volatility for these indices for three to seven
years grading to historical volatility levels thereafter. For the remaining 57% of underlying mutual fund investments
modeled based on other indices (with insufficient market-observable data), volatility is based on the average
historical level for each index over the past 10 years. Using this approach, volatility ranges from 16% to 35% for
equity funds, 4% to 11% for bond funds and 1% to 2% for money market funds. |
|
|
|
The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January
1, 2000. |
|
|
|
The lapse rate assumption varies by contract from 2% to 23% and depends on the time since contract issue, the relative
value of the guarantee and the differing experience by issuing company of the underlying variable annuity contracts. |
|
|
|
The annuity election rate assumption varies by contract and depends on the annuitants age, the relative value of the
guarantee, whether a contractholder has had a previous opportunity to elect the benefit and the differing experience by
issuing company of the underlying variable annuity contracts. Immediately after the expiration of the waiting period,
the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second
and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. With
respect to the second and subsequent election opportunities, actual data is just beginning to emerge for the Company as
well as the industry and the estimates are based on this limited data. |
|
|
|
The risk and profit charge assumption is based on the Companys estimate of the capital and return on capital that
would be required by a hypothetical market participant. |
In addition, the company has considered other assumptions related to model, expense and
non-performance risk in calculating the GMIB liability.
The Company regularly evaluates each of the assumptions used in establishing these assets and
liabilities by considering how a hypothetical market participant would set assumptions at each
valuation date. Capital markets assumptions are expected to change at each valuation date
reflecting current observable market conditions. Other assumptions may also change based on a
hypothetical market participants view of actual experience as it emerges over time or other
factors that impact the net liability. If the emergence of future experience or future assumptions
differs from the assumptions used in estimating these assets and liabilities, the resulting impact
could be material to the Companys consolidated results of operations, and in certain situations,
could be material to the Companys financial condition.
GMIB liabilities are reported in the Companys Consolidated Balance Sheets in Accounts payable,
accrued expenses and other liabilities. GMIB assets associated with these contracts represent net
receivables in connection with reinsurance that the Company has purchased from two external
reinsurers and are reported in the Companys Consolidated Balance Sheets in Other assets, including
other intangibles. As of June 30, 2009, Standard & Poors (S&P) has given a financial strength
rating of AA to one reinsurer and a financial strength rating of A- to the parent company that
guarantees the receivable from the other reinsurer.
19
Changes in Level 3 Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring
Basis
The following tables summarize the changes in financial assets and financial liabilities classified
in Level 3 for the three months and six months ended June 30, 2009 and 2008. These tables exclude
separate account assets as changes in fair values of these assets accrue directly to policyholders.
Gains and losses reported in these tables may include changes in fair value that are attributable
to both observable and unobservable inputs.
For the Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 4/1/09 |
|
$ |
910 |
|
|
$ |
908 |
|
|
$ |
(1,641 |
) |
|
$ |
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB |
|
|
|
|
|
|
(198 |
) |
|
|
362 |
|
|
|
164 |
|
Other |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
(6 |
) |
|
|
(198 |
) |
|
|
362 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses required to adjust future policy benefits for settlement annuities (1) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
(7 |
) |
|
|
(25 |
) |
|
|
55 |
|
|
|
30 |
|
Transfers into Level 3 |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 6/30/09 |
|
$ |
923 |
|
|
$ |
685 |
|
|
$ |
(1,224 |
) |
|
$ |
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in income attributable to
instruments held at the reporting date |
|
$ |
(6 |
) |
|
$ |
(198 |
) |
|
$ |
362 |
|
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
For the Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 4/1/08 |
|
$ |
726 |
|
|
$ |
515 |
|
|
$ |
(965 |
) |
|
$ |
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB, excluding adoption effect |
|
|
|
|
|
|
(58 |
) |
|
|
107 |
|
|
|
49 |
|
Other |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
4 |
|
|
|
(58 |
) |
|
|
107 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses required to adjust future policy benefits for settlement annuities (1) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
17 |
|
|
|
(10 |
) |
|
|
22 |
|
|
|
12 |
|
Transfers out of Level 3 |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 6/30/08 |
|
$ |
695 |
|
|
$ |
447 |
|
|
$ |
(836 |
) |
|
$ |
(389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in income attributable to
instruments held at the reporting date |
|
$ |
3 |
|
|
$ |
(58 |
) |
|
$ |
107 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009 |
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 1/1/09 |
|
$ |
889 |
|
|
$ |
953 |
|
|
$ |
(1,757 |
) |
|
$ |
(804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB |
|
|
|
|
|
|
(236 |
) |
|
|
432 |
|
|
|
196 |
|
Other |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
(10 |
) |
|
|
(236 |
) |
|
|
432 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains included in other comprehensive income |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses required to adjust future policy benefits for settlement annuities (1) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
(10 |
) |
|
|
(32 |
) |
|
|
101 |
|
|
|
69 |
|
Transfers into Level 3 |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 6/30/09 |
|
$ |
923 |
|
|
$ |
685 |
|
|
$ |
(1,224 |
) |
|
$ |
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in income attributable to
instruments held at the reporting date |
|
$ |
(10 |
) |
|
$ |
(236 |
) |
|
$ |
432 |
|
|
$ |
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2008 |
|
Fixed Maturities & |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Equity Securities |
|
|
GMIB Assets |
|
|
GMIB Liabilities |
|
|
GMIB Net |
|
Balance at 1/1/08 |
|
$ |
732 |
|
|
$ |
173 |
|
|
$ |
(313 |
) |
|
$ |
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in shareholders net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of adoption of SFAS No. 157 |
|
|
|
|
|
|
244 |
|
|
|
(446 |
) |
|
|
(202 |
) |
Results of GMIB, excluding adoption effect |
|
|
|
|
|
|
67 |
|
|
|
(120 |
) |
|
|
(53 |
) |
Other |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in shareholders net income |
|
|
(1 |
) |
|
|
311 |
|
|
|
(566 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses included in other comprehensive income |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Losses required to adjust future policy benefits for settlement annuities (1) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, settlements |
|
|
11 |
|
|
|
(37 |
) |
|
|
43 |
|
|
|
6 |
|
Transfers out of Level 3 |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 6/30/08 |
|
$ |
695 |
|
|
$ |
447 |
|
|
$ |
(836 |
) |
|
$ |
(389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in income attributable to
instruments held at the reporting date |
|
$ |
3 |
|
|
$ |
311 |
|
|
$ |
(566 |
) |
|
$ |
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not accrue to shareholders. |
As noted in the tables above, total gains and losses included in shareholders net income are
reflected in the following captions in the Consolidated Statements of Income:
|
|
Other than temporary impairments on debt securities, net; other realized investment gains
(losses) and net investment income for amounts related to fixed maturities and equity
securities; and |
|
|
Guaranteed minimum income benefits (income) expense for amounts related to GMIB assets and
liabilities. |
Reclassifications impacting Level 3 financial instruments are reported as transfers in or out of
the Level 3 category as of the beginning of the quarter in which the transfer occurs. Therefore
gains and losses in income only reflect activity for the period the instrument was classified in
Level 3. Typically, investments that transfer out of Level 3 are classified in Level 2 as market
data on the securities becomes more readily available.
21
The Company provided reinsurance for other insurance companies that offer a guaranteed minimum
income benefit, and then retroceded a portion of the risk to other insurance companies. These
arrangements with third party insurers are the instruments still held at the reporting date for
GMIB assets and liabilities in the tables above. Because these reinsurance arrangements remain in
effect at the reporting date, the Company has reflected the total gain or loss for the period as
the total gain or loss included in income attributable to instruments still held at the reporting
date. However, the Company reduces the GMIB assets and liabilities resulting from these
reinsurance arrangements when annuitants lapse, die, elect their benefit, or reach the age after
which the right to elect their benefit expires.
Under SFAS No. 157, the Companys GMIB assets and liabilities are expected to be volatile in future
periods because the underlying assumptions will be based largely on market-observable inputs at the
close of each reporting period including interest rates and market-implied volatilities.
The net gain for GMIB was $164 million for the three months ended June 30, 2009 and $196 million
for the six months ended June 30, 2009, and was primarily due to the following factors:
|
|
increases in interest rates ($129 million for the three months and $206 million for the six
months ended June 30, 2009); |
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($51 million for the three months and $32
million for the six months ended June 30, 2009); and |
|
|
updates to the risk and profit charge estimates ($20 million for the three months and $18
million for the six months ended June 30, 2009). |
These favorable effects were partially offset by:
|
|
increases to the annuitization assumption, reflecting higher utilization experience ($21
million for the three months and six months ended June 30, 2009); |
|
|
updates to the lapse assumption (none for the three months and $14 million for the six
months ended June 30, 2009); and |
|
|
other amounts (including experience varying from assumptions, model and in-force updates)
($15 million for the three months and $25 million for the six months ended June 30, 2009). |
For the second quarter of 2008, gains on the GMIB liabilities and offsetting losses on the GMIB
assets were primarily the result of increases in interest rates. For the six months ended June 30,
2008, excluding the implementation impact of SFAS No. 157, losses on the GMIB liabilities and
offsetting gains on the GMIB assets were primarily the result of declines in equity markets.
Separate account assets
Fair values and changes in the fair values of separate account assets generally accrue directly to
the policyholders and are not included in the Companys revenues and expenses. As of June 30, 2009
and December 31, 2008 separate account assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Guaranteed
separate accounts (See Note
17) |
|
$ |
231 |
|
|
$ |
1,532 |
|
|
$ |
|
|
|
$ |
1,763 |
|
Non-guaranteed
separate accounts (1) |
|
|
1,409 |
|
|
|
2,740 |
|
|
|
625 |
|
|
|
4,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total separate account assets |
|
$ |
1,640 |
|
|
$ |
4,272 |
|
|
$ |
625 |
|
|
$ |
6,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-guaranteed separate accounts include $2.1 billion in assets supporting the
Companys pension plans, including $590 million classified in Level 3. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Guaranteed
separate accounts (See Note
17) |
|
$ |
233 |
|
|
$ |
1,557 |
|
|
$ |
|
|
|
$ |
1,790 |
|
Non-guaranteed
separate accounts (1) |
|
|
1,093 |
|
|
|
2,506 |
|
|
|
475 |
|
|
|
4,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total separate account assets |
|
$ |
1,326 |
|
|
$ |
4,063 |
|
|
$ |
475 |
|
|
$ |
5,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-guaranteed separate accounts include $1.5 billion in assets supporting the
Companys pension plans, including $435 million classified in Level 3. |
22
Separate account assets in Level 1 include exchange-listed equity securities. Level 2 assets
primarily include:
|
|
equity securities and corporate and structured bonds valued using recent trades of similar
securities or pricing models that discount future cash flows at estimated market interest
rates as described above; and |
|
|
actively-traded institutional and retail mutual fund investments and separate accounts
priced using the daily net asset value which is their exit price. |
Separate account assets classified in Level 3 include investments primarily in securities
partnerships and real estate generally valued at transaction price in the absence of market data
indicating a change in the estimated fair value. Values may be adjusted when evidence is available
to support such adjustments. Evidence may include market data as well as changes in the financial
results and condition of the investment.
The following tables summarize the changes in separate account assets reported in Level 3 for the
three months and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at 4/1 |
|
$ |
597 |
|
|
$ |
411 |
|
Policyholder gains (losses) (1) |
|
|
(21 |
) |
|
|
3 |
|
Purchases, issuances, settlements |
|
|
49 |
|
|
|
16 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
Balance at 6/30 |
|
$ |
625 |
|
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of $21 million and gains of $3 million attributable to instruments
still held at June 30, 2009 and June 30, 2008 respectively. |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Balance at 1/1 |
|
$ |
475 |
|
|
$ |
403 |
|
Policyholder gains (losses) (1) |
|
|
(67 |
) |
|
|
20 |
|
Purchases, issuances, settlements |
|
|
57 |
|
|
|
9 |
|
Transfers in (out) of Level 3 |
|
|
160 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
Balance at 6/30 |
|
$ |
625 |
|
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of $67 million and gains of $6 million attributable to instruments
still held at June 30, 2009 and June 30, 2008 respectively. |
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain financial assets and liabilities are measured at fair value on a non-recurring basis, such
as commercial mortgage loans held for sale and investments in real estate entities that are
impaired. In the second quarter of 2009, impaired real estate entities carried at cost of $41
million were written down to their fair values of $8 million, resulting in realized investment
losses of $33 million. These fair value measurements were based on discounted cash flow analyses
using significant unobservable inputs, and were classified in Level 3. As of December 31, 2008,
the amounts required to adjust these assets and liabilities to their fair values were not
significant.
23
Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
Most financial instruments that are subject to fair value disclosure requirements are carried in
the consolidated financial statements at amounts that approximate fair value. The following table
shows the fair values and carrying values of the Companys financial instruments not recorded at
fair value that are subject to fair value disclosure requirements at June 30, 2009 and December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
(In millions) |
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
Commercial mortgage loans |
|
$ |
3,308 |
|
|
$ |
3,578 |
|
|
$ |
3,401 |
|
|
$ |
3,617 |
|
Contractholder deposit funds, excluding universal life products |
|
$ |
921 |
|
|
$ |
938 |
|
|
$ |
889 |
|
|
$ |
915 |
|
Long-term debt, excluding capital leases |
|
$ |
2,150 |
|
|
$ |
2,427 |
|
|
$ |
1,684 |
|
|
$ |
2,077 |
|
The fair values presented in the table above have been estimated using market information when
available. The following is a description of the valuation methodologies and inputs used by the
Company to determine fair value.
Commercial mortgage loans. The Company estimates the fair value of commercial mortgage loans
generally by discounting the contractual cash flows at estimated market interest rates that reflect
the Companys assessment of the credit quality of the loans. Market interest rates are derived by
calculating the appropriate spread over comparable U.S. Treasury rates, based on the property type,
quality rating and average life of the loan. The quality ratings reflect the relative risk of the
loan, considering debt service coverage, the loan to value ratio and other factors. Fair values of
impaired mortgage loans are based on the estimated fair value of the underlying collateral
generally using an internal discounted cash flow model.
Contractholder deposit funds, excluding universal life products. Generally, the
Companys contractholder deposit funds do not have stated maturities. Approximately 45% of these
balances can be withdrawn by the customer at any time without prior notice or penalty. The fair
value for these contracts is the amount estimated to be payable to the customer as of the reporting
date, which is generally the carrying value. Most of the remaining contractholder deposit funds
are reinsured by the buyers of the individual life and annuity and retirement benefits businesses.
The fair value for these contracts is determined using the fair value of these buyers assets
supporting these reinsured contracts. The Company had a reinsurance recoverable equal to the
carrying value of these reinsured contracts.
Long-term debt, excluding capital leases. The fair value of long-term debt is based on quoted
market prices for recent trades. When quoted market prices are not available, fair value is
estimated using a discounted cash flow analysis and the Companys estimated current borrowing rate
for debt of similar terms and remaining maturities.
Fair values of off-balance-sheet financial instruments were not material.
Note 9 Investments
Total Realized Investment Gains and Losses
The following total realized gains and losses on investments include other than temporary
impairments on debt securities but exclude amounts required to adjust future policy benefits for
run-off settlement annuity business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fixed maturities |
|
$ |
5 |
|
|
$ |
(15 |
) |
|
$ |
(11 |
) |
|
$ |
(41 |
) |
Equity securities |
|
|
11 |
|
|
|
1 |
|
|
|
(6 |
) |
|
|
1 |
|
Commercial mortgage loans |
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
Other investments, including derivatives |
|
|
(35 |
) |
|
|
(3 |
) |
|
|
(37 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment losses, before income taxes |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(54 |
) |
|
|
(5 |
) |
Less income tax benefits |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses |
|
$ |
(9 |
) |
|
$ |
(12 |
) |
|
$ |
(33 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Included in pre-tax realized investment losses above were other than temporary impairments on
debt securities, asset write-downs and changes in valuation reserves as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Credit related (1) |
|
$ |
43 |
|
|
$ |
|
|
|
$ |
54 |
|
|
$ |
4 |
|
Other (2) |
|
|
(1 |
) |
|
|
11 |
|
|
|
9 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42 |
|
|
$ |
11 |
|
|
$ |
63 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit-related losses include other-than-temporary declines in value of fixed maturities,
equity securities and real estate entities. The amount related to credit losses on fixed
maturities for which a portion of the impairment was recognized in other comprehensive income was
not significant. |
|
(2) |
|
Prior to adoption of FSP No. 115-2 on April 1, 2009, other primarily represented the impact of
rising market yields on investments where the Company could not demonstrate the intent and ability
to hold until recovery. |
Fixed Maturities and Equity Securities
Securities in the following table are included in fixed maturities and equity securities on the
Companys Consolidated Balance Sheets. These securities are carried at fair value with changes in
fair value reported in other realized investment gains and interest and dividends reported in net
investment income. The Companys hybrid investments include preferred stock or debt securities
with call or conversion features. The Company elected fair value accounting for certain hybrid
securities to simplify accounting and mitigate volatility in results of operations and financial
condition.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
As of December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Included in fixed maturities: |
|
|
|
|
|
|
|
|
Trading securities (amortized cost: $9; $13) |
|
$ |
9 |
|
|
$ |
13 |
|
Hybrid securities (amortized cost: $20; $10) |
|
|
21 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in equity securities: |
|
|
|
|
|
|
|
|
Hybrid securities (amortized cost: $109; $123) |
|
$ |
69 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
Fixed maturities and equity securities included $218 million at June 30, 2009, which were
pledged as collateral to brokers as required under certain futures contracts. These fixed
maturities and equity securities were primarily corporate securities.
The following information about fixed maturities excludes trading and hybrid securities. The
amortized cost and fair value by contractual maturity periods for fixed maturities were as follows
at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
667 |
|
|
$ |
671 |
|
Due after one year through five years |
|
|
3,621 |
|
|
|
3,736 |
|
Due after five years through ten years |
|
|
4,740 |
|
|
|
4,793 |
|
Due after ten years |
|
|
2,481 |
|
|
|
2,657 |
|
Mortgage and other asset-backed securities |
|
|
628 |
|
|
|
608 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,137 |
|
|
$ |
12,465 |
|
|
|
|
|
|
|
|
Actual maturities could differ from contractual maturities because issuers may have the right
to call or prepay obligations, with or without penalties. Also, in some cases the Company may
extend maturity dates.
Mortgage-backed assets consist principally of commercial mortgage-backed securities and
collateralized mortgage obligations of which $38 million were residential mortgages and home equity
lines of credit, all of which were originated utilizing standard underwriting practices and are not
considered sub-prime loans.
25
Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and
hybrid securities) by type of issuer is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Appre- |
|
|
Depre- |
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
ciation |
|
|
ciation |
|
|
Value |
|
Federal government and agency |
|
$ |
392 |
|
|
$ |
201 |
|
|
$ |
(1 |
) |
|
$ |
592 |
|
State and local government |
|
|
2,351 |
|
|
|
145 |
|
|
|
(18 |
) |
|
|
2,478 |
|
Foreign government |
|
|
945 |
|
|
|
37 |
|
|
|
(9 |
) |
|
|
973 |
|
Corporate |
|
|
7,821 |
|
|
|
302 |
|
|
|
(309 |
) |
|
|
7,814 |
|
Federal agency mortgage-backed |
|
|
34 |
|
|
|
1 |
|
|
|
|
|
|
|
35 |
|
Other mortgage-backed |
|
|
138 |
|
|
|
3 |
|
|
|
(19 |
) |
|
|
122 |
|
Other asset-backed |
|
|
456 |
|
|
|
22 |
|
|
|
(27 |
) |
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,137 |
|
|
$ |
711 |
|
|
$ |
(383 |
) |
|
$ |
12,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table includes investments with a fair value of $2.1 billion supporting the
Companys run-off settlement annuity business, with gross unrealized appreciation of $296 million
and gross unrealized depreciation of $122 million at June 30, 2009. Such unrealized amounts are
required to support future policy benefit liabilities of this business and, as such, are not
included in accumulated other comprehensive income.
Sales information for available-for-sale fixed maturities and equity securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Proceeds from sales |
|
$ |
291 |
|
|
$ |
381 |
|
|
$ |
410 |
|
|
$ |
696 |
|
Gross gains on sales |
|
$ |
12 |
|
|
$ |
3 |
|
|
$ |
15 |
|
|
$ |
5 |
|
Gross losses on sales |
|
$ |
|
|
|
$ |
(11 |
) |
|
$ |
(3 |
) |
|
$ |
(23 |
) |
Review of declines in fair value. Management reviews fixed maturities and equity securities
with a decline in fair value from cost for impairment based on criteria that include:
|
|
length of time and severity of decline; |
|
|
financial health and specific near term prospects of the issuer; |
|
|
changes in the regulatory, economic or general market environment of the issuers industry
or geographic region; and |
|
|
prior to April 1, 2009, the Companys ability and intent to hold until recovery; beginning
April 1, 2009, the Companys intent to sell or the likelihood of a requirement to sell fixed
maturities prior to their recovery. |
Excluding
trading and hybrid securities, as of June 30, 2009, fixed maturities with a decline in
fair value from amortized cost (which were primarily investment grade corporate bonds) were as
follows, including the length of time of such decline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Amortized |
|
|
Unrealized |
|
|
Number |
|
(In millions) |
|
Value |
|
|
Cost |
|
|
Depreciation |
|
|
of Issues |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
1,889 |
|
|
$ |
1,996 |
|
|
$ |
(107 |
) |
|
|
359 |
|
Below investment grade |
|
$ |
237 |
|
|
$ |
255 |
|
|
$ |
(18 |
) |
|
|
107 |
|
More than one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
1,886 |
|
|
$ |
2,118 |
|
|
$ |
(232 |
) |
|
|
324 |
|
Below investment grade |
|
$ |
153 |
|
|
$ |
179 |
|
|
$ |
(26 |
) |
|
|
33 |
|
26
The unrealized depreciation of investment grade fixed maturities is primarily due to increases
in market yields since purchase. Approximately $119 million of the unrealized depreciation is due
to securities with a decline in value of greater than 20%. Approximately 40% of these securities
had been in that position for less than six months and approximately 90% less than twelve months.
The remaining $264 million of the unrealized depreciation is due to securities with declines in
value of less than 20%. There were no equity securities with a fair value significantly lower than
cost as of June 30, 2009.
Note 10 Derivative Financial Instruments
The Companys investment strategy is to manage the characteristics and risks of investment assets
(such as duration, yield, currency and liquidity) to meet the varying demands of the related
insurance and contractholder liabilities (such as paying claims, investment returns and
withdrawals). As part of this investment strategy, the Company typically uses
derivatives to minimize interest rate, foreign currency and equity price risks of chosen investment
assets to conform to the characteristics and risks of the related insurance and contractholder
liabilities. The Company routinely monitors exposure to credit risk associated with derivatives
and diversifies the portfolio among approved dealers of high credit quality to minimize credit
risk. In addition, the Company has written or sold contracts to guarantee minimum income benefits
and to enhance investment returns. See Note 7 for a discussion of derivatives associated
with GMDB contracts and Note 8 for a discussion of derivatives arising from GMIB contracts.
The Company uses hedge accounting when derivatives are designated, qualify and are highly effective
as hedges. Effectiveness is formally assessed and documented at inception and each period
throughout the life of a hedge using various qualitative and quantitative methods appropriate for
each hedge, including regression analysis and dollar offset. Under hedge accounting, the changes
in fair value of the derivative and the hedged risk are generally recognized together and offset
each other when reported in shareholders net income.
The Company accounts for derivative instruments as follows:
|
|
Derivatives are reported on the balance sheet at fair value with changes in fair values
reported in shareholders net income or accumulated other comprehensive income. |
|
|
Changes in the fair value of derivatives that hedge market risk related to future cash
flows and that qualify for hedge accounting are reported in a separate caption in
accumulated other comprehensive income. These hedges are referred to as cash flow hedges. |
|
|
A change in the fair value of a derivative instrument may not always equal the change in
the fair value of the hedged item; this difference is referred to as hedge ineffectiveness.
Where hedge accounting is used, the Company reflects hedge ineffectiveness in shareholders
net income (generally as part of other realized investment gains and losses). |
|
|
Features of certain investments and obligations, called embedded derivatives, are accounted
for as derivatives. As permitted under GAAP, derivative accounting has not been applied to
these features of such investments or obligations existing before January 1, 1999. |
Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that
contain bilateral provisions requiring the parties to such instruments to post collateral depending
on net liability thresholds and the partys financial strength or credit rating. The collateral
posting requirements vary by counterparty. The aggregate fair value of derivative instruments with
such credit-risk-related contingent features where a subsidiary of the Company was in a net
liability position as of June 30, 2009 was $19 million for which the Company was not required to
post collateral. If the contingent features underlying the agreements were triggered as of June
30, 2009, the Company would be required to post collateral of $19 million with its counterparties.
Such subsidiaries are parties to certain other derivative instruments that contain termination
provisions for which the counterparties could demand immediate payment of the total net liability
position if the financial strength rating of the subsidiary were to decline below specified levels.
As of June 30, 2009, there was no net liability position under such derivative instruments.
The table below presents information about the nature and accounting treatment of the Companys
primary derivative financial instruments including the Companys purpose for entering into specific
derivative transactions, and their locations in and effect on the financial statements as of and
for the three and six month periods ended June 30, 2009. Derivatives in the Companys separate
accounts are not included because associated gains and losses generally accrue directly to
policyholders.
27
|
|
|
|
|
|
|
|
|
Instrument / Volume of |
|
|
|
|
|
|
|
|
Activity |
|
Primary Risk |
|
Purpose |
|
Cash Flows |
|
Accounting Policy |
|
|
|
|
|
|
|
|
|
Derivatives Designated as Accounting Hedges Cash Flow Hedges |
|
Interest rate swaps
$145 million of
par value of
related investments
Foreign currency
swaps $179
million of U.S.
dollar equivalent
par value of
related investments
Interest rate and
foreign currency
swaps $54
million of U.S.
dollar equivalent
par value of
related investments
|
|
Interest rate and
foreign currency
|
|
To hedge the interest or
foreign currency cash
flows of fixed maturities
and commercial mortgage
loans to match associated
liabilities. Currency
swaps are primarily
Canadian dollars, euros,
Australian dollars, and
British pounds for periods
of up to 12 years.
|
|
The Company
periodically
exchanges cash
flows between
variable and fixed
interest rates or
between two
currencies for both
principal and
interest. Net
interest cash flows
are reported in net
investment income
and included in
operating
activities.
|
|
Using cash flow hedge accounting, fair values
are reported in other long-term investments
or other liabilities and accumulated other
comprehensive income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Effect on the
Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other |
|
|
|
As of June 30, 2009 |
|
|
Comprehensive Income |
|
|
|
|
|
|
|
Accounts Payable, Accrued |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
Instrument |
|
Other Long-Term Investments |
|
|
Expenses and Other Liabilities |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Interest rate swaps |
|
$ |
9 |
|
|
$ |
|
|
|
$ |
(4 |
) |
|
$ |
(5 |
) |
Foreign currency
swaps |
|
|
5 |
|
|
|
15 |
|
|
|
(17 |
) |
|
|
(15 |
) |
Interest rate and
foreign currency
swaps |
|
|
3 |
|
|
|
4 |
|
|
|
(9 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17 |
|
|
$ |
19 |
|
|
$ |
(30 |
) |
|
$ |
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased options
$311 million of
cash surrender
value of related
life insurance
policies
|
|
Interest rate
|
|
To hedge the possibility
of early policyholder cash
surrender when the
amortized cost of
underlying invested assets
is greater than their fair
values.
|
|
The Company pays a
fee and may receive
or pay cash, based
on the difference
between the
amortized cost and
fair values of
underlying invested
assets at the time
of policyholder
surrender. These
cash flows will be
reported in
financing
activities.
|
|
Using cash flow hedge accounting, fair values
are reported in other assets or other
liabilities, with changes in fair value
reported in accumulated other comprehensive
income and amortized to benefits expense over
the life of the underlying invested assets. |
|
|
|
Fair Value Effect on the Financial
Statements |
|
|
|
|
|
|
|
|
|
Fair values reported in other assets and other
comprehensive income were less than $1 million. |
Treasury lock
|
|
Interest rate
|
|
To hedge the variability
of and fix at inception
date, the benchmark
Treasury rate component of
future interest payments
on debt to be issued.
|
|
The Company paid
the fair value of
the contract at the
expiration. Cash
flows are reported
in operating
activities.
|
|
Using cash flow hedge accounting, fair values
are reported in short-term investments or
other liabilities, with changes in fair value
reported in accumulated other comprehensive
income and amortized to interest expense over
the life of the debt issued. |
|
|
Fair Value Effect on the Financial
Statements |
|
|
|
In the first quarter of 2009, all treasury locks matured and the Company recognized a gain of $14 million in other comprehensive
income, resulting in net cumulative losses of $26 million, to be amortized to interest expense over the life of the debt. In the
second quarter of 2009, the Company issued debt and began amortizing this loss to interest expense. Reclassifications from
accumulated other comprehensive income to interest expense for issued debt were less than $1 million for the three and six month
periods ended June 30, 2009. |
|
The amount of gains (losses) reclassified from accumulated other comprehensive income into
income was not significant. No gains (losses) were recognized due to ineffectiveness and no
amounts were excluded from the assessment of hedge ineffectiveness.
28
|
|
|
|
|
|
|
|
|
Instrument / Volume of |
|
|
|
|
|
|
|
|
Activity |
|
Primary Risk |
|
Purpose |
|
Cash Flows |
|
Accounting Policy |
|
|
|
|
|
|
|
|
|
Derivatives Not Designated As Accounting Hedges |
Futures
$1,285 million of
U.S. dollar
equivalent market
price of
outstanding
contracts
|
|
Equity and foreign
currency
|
|
To reduce domestic
and international
equity market
exposures for
certain reinsurance
contracts that
guarantee death
benefits resulting
from changes in
variable annuity
account values
based on underlying
mutual funds.
Currency futures
are primarily
euros, Japanese yen
and British pounds.
|
|
The Company receives (pays)
cash daily in the amount of
the change in fair value of
the futures contracts.
Cash flows are included in
operating activities.
|
|
Fair value changes are reported in other
revenues. Amounts not yet settled from the
previous days fair value change (daily
variation margin) are reported in premiums,
accounts and notes receivable, net or
accounts payable, accrued expenses and other
liabilities. |
|
|
Fair
Value Effect on the Financial Statements (in millions) |
|
|
|
|
|
|
|
|
|
|
|
Other Revenues |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
|
Futures |
|
$ |
(188 |
) |
|
$ |
(71 |
) |
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
$76 million of
par value of
related investments
|
|
Interest rate
|
|
To hedge the
interest cash flows
of fixed maturities
to match associated
liabilities.
|
|
The Company periodically
exchanges cash flows
between variable and fixed
interest rates for both
principal and interest.
Net interest cash flows are
reported in other realized
investment gains (losses)
and included in operating
activities.
|
|
Fair values are reported in other long-term
investments or other liabilities, with
changes in fair value reported in other
realized investment gains and losses. |
|
|
|
Fair Value Effect on the Financial Statements
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Investment Gains (Losses) |
|
|
|
As of June 30, 2009 |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Other Long-Term Investments |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Interest rate swaps |
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
Written options
(GMIB liability)
$1,508 million of
maximum potential
undiscounted future
payments as defined
in Note 17
Purchased options
(GMIB asset)
$829 million of
maximum potential
undiscounted future
receipts as defined
in Note 17
|
|
Equity and interest rate
|
|
The Company has
written certain
reinsurance
contracts to
guarantee minimum
income benefits
resulting from the
level of variable
annuity account
values compared
with a
contractually
guaranteed amount.
The actual payment
by the Company
depends on the
actual account
value in the
underlying mutual
funds and the level
of interest rates
when the
contractholders
elect to receive
minimum income
payments. The
Company purchased
reinsurance
contracts to hedge
a portion of the
market risks
assumed. These
contracts are
accounted for as
written and
purchased options.
|
|
The Company periodically
receives (pays) fees based
on either contractholders
account values or deposits
increased at a contractual
rate. The Company will
also pay (receive) cash
depending on changes in
account values and interest
rates when account holders
first elect to receive
minimum income payments.
These cash flows are
reported in operating
activities.
|
|
Fair values are reported in other liabilities
(GMIB liability) and other assets (GMIB
asset). Changes in fair value are reported
in guaranteed minimum income benefits
(income) expense. |
|
|
|
Fair Value Effect on the Financial Statements
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Minimum Income Benefits |
|
|
|
As of June 30, 2009 |
|
|
(Income) Expense |
|
|
|
|
|
|
|
Accounts Payable, Accrued |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
Instrument |
|
Other Assets |
|
|
Expenses and Other Liabilities |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Written options
(GMIB liability) |
|
$ |
|
|
|
$ |
1,224 |
|
|
$ |
(362 |
) |
|
$ |
(432 |
) |
Purchased options
(GMIB asset) |
|
|
685 |
|
|
|
|
|
|
|
198 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
685 |
|
|
$ |
1,224 |
|
|
$ |
(164 |
) |
|
$ |
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Note 11 Reinsurance
The Companys insurance subsidiaries enter into agreements with other insurance companies to assume
and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to
permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and
disposition transactions where the underwriting company is not being acquired. Reinsurance does not
relieve the originating insurer of liability. The Company regularly evaluates the financial
condition of its reinsurers and monitors its concentrations of credit risk.
Retirement benefits business. The Company had a reinsurance recoverable of $1.8 billion as of June
30, 2009, and $1.9 billion as of December 31, 2008 from Prudential Retirement Insurance and Annuity
Company resulting from the sale of the retirement benefits business, which was primarily in the
form of a reinsurance arrangement. The reinsurance recoverable, which is reduced as the Companys
reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed
maturities and mortgage loans equal to or greater than 100% of the reinsured liabilities. These
fixed maturities and mortgage loans are held in a trust established for the benefit of the Company.
As of June 30, 2009, the trust was adequately funded and S&P had assigned this reinsurer a rating
of AA-.
Individual life and annuity reinsurance. The Company had reinsurance recoverables totaling $4.5
billion as of June 30, 2009 and $4.6 billion as of December 31, 2008 from The Lincoln National Life
Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the
Companys individual life insurance and annuity business through indemnity reinsurance
arrangements. Effective December 31, 2007, a substantial portion of the reinsurance recoverables
are secured by investments held in a trust established for the benefit of the Company. At June 30,
2009, the trust assets secured approximately 90% of the reinsurance recoverables and S&P had
assigned both of these reinsurers a rating of AA-.
Other Ceded and Assumed Reinsurance
Ceded Reinsurance: Ongoing operations. The Companys insurance subsidiaries have reinsurance
recoverables from various reinsurance arrangements in the ordinary course of business for its
Health Care, Disability and Life, and International segments as well as the non-leveraged and
leveraged corporate-owned life insurance business. Reinsurance recoverables of $309 million as of
June 30, 2009 are expected to be collected from more than 90 reinsurers which have been assigned
the following financial strength ratings from S&P:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Reinsurance |
|
|
|
Reinsurance |
|
|
Percent |
|
|
Recoverable Protected |
|
Ongoing
operations (In millions) |
|
Recoverable |
|
|
of Total |
|
|
by Collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA- (Single reinsurer) |
|
$ |
45 |
|
|
|
15 |
% |
|
|
0 |
% |
AA- or higher (All other reinsurers) |
|
|
33 |
|
|
|
11 |
% |
|
|
0 |
% |
A (Single reinsurer) |
|
|
31 |
|
|
|
10 |
% |
|
|
0 |
% |
A+ to A- (All other reinsurers) |
|
|
106 |
|
|
|
34 |
% |
|
|
4 |
% |
Unrated (Single reinsurer) |
|
|
34 |
|
|
|
11 |
% |
|
|
96 |
% |
Below A- or unrated (All other reinsurers) |
|
|
60 |
|
|
|
19 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
309 |
|
|
|
100 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
The Company reviews its reinsurance arrangements and establishes reserves against the
recoverables in the event that recovery is not considered probable. As of June 30, 2009, the
Companys recoverables related to these segments were net of a reserve of $11 million.
Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Companys Run-off Reinsurance
operations assumed risks related to GMDB contracts, GMIB contracts, workers compensation, and
personal accident business. The Companys Run-off Reinsurance operations also purchased
retrocessional coverage to reduce the risk of loss on these contracts.
Liabilities related to GMDB, workers compensation and personal accident are included in future
policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under
GAAP, the asset related to GMIB is recorded in the Other assets, including other intangibles
caption and the liability related to GMIB is recorded in the Accounts payable, accrued expenses,
and other liabilities caption on the Companys Consolidated Balance Sheets (see Notes 8 and 17 for
additional discussion of the GMIB assets and liabilities).
30
The reinsurance recoverables for GMDB, workers compensation, and personal accident of $144 million
as of June 30, 2009 are expected to be collected from more than 100 retrocessionaires which have
been assigned the following financial strength ratings from S&P:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Reinsurance |
|
|
|
Reinsurance |
|
|
Percent |
|
|
Recoverable Protected |
|
Run-off
Reinsurance segment (In millions) |
|
Recoverable |
|
|
of Total |
|
|
by Collateral |
|
|
AA- or higher (All reinsurers) |
|
$ |
34 |
|
|
|
24 |
% |
|
|
10 |
% |
A (Single reinsurer) |
|
|
49 |
|
|
|
34 |
% |
|
|
100 |
% |
A- (Single reinsurer) |
|
|
25 |
|
|
|
17 |
% |
|
|
0 |
% |
A+ to A- (All other reinsurers) |
|
|
19 |
|
|
|
13 |
% |
|
|
1 |
% |
Below A- or unrated (All reinsurers) |
|
|
17 |
|
|
|
12 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144 |
|
|
|
100 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
The Company reviews its reinsurance arrangements and establishes reserves against the
recoverables in the event that recovery is not considered probable. As of June 30, 2009, the
Companys recoverables related to this segment were net of a reserve of $11 million.
The Companys payment obligations for underlying reinsurance exposures assumed by the Company under
these contracts are based on ceding companies claim payments. For GMDB, claim payments vary
because of changes in equity markets and interest rates, as well as mortality and policyholder
behavior. For workers compensation and personal accident, the payments relate to accidents and
injuries. Any of these claim payments can extend many years into the future, and the amount of the
ceding companies ultimate claims, and therefore the amount of the Companys ultimate payment
obligations and corresponding ultimate collection from retrocessionaires, may not be known with
certainty for some time.
Summary. The Companys reserves for underlying reinsurance exposures assumed by the Company, as
well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and
the run-off reinsurance operation, are considered appropriate as of June 30, 2009, based on current
information. However, it is possible that future developments could have a material adverse effect
on the Companys consolidated results of operations and, in certain situations, such as if actual
experience differs from the assumptions used in estimating reserves for GMDB, could have a material
adverse effect on the Companys financial condition. The Company bears the risk of loss if its
retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.
Effects of reinsurance. In the Companys Consolidated Statements of Income, premiums and fees were
net of ceded premiums, and benefits and expenses were net of reinsurance recoveries, in the
following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Ceded premiums and fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual life insurance and annuity business sold |
|
$ |
50 |
|
|
$ |
56 |
|
|
$ |
101 |
|
|
$ |
114 |
|
Other |
|
|
55 |
|
|
|
76 |
|
|
|
115 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105 |
|
|
$ |
132 |
|
|
$ |
216 |
|
|
$ |
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual life insurance and annuity business sold |
|
$ |
59 |
|
|
$ |
90 |
|
|
$ |
127 |
|
|
$ |
179 |
|
Other |
|
|
24 |
|
|
|
48 |
|
|
|
82 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83 |
|
|
$ |
138 |
|
|
$ |
209 |
|
|
$ |
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Note 12 Pension and Other Postretirement Benefit Plans
The Company and certain of its subsidiaries provide pension, health care and life insurance defined
benefits to eligible retired employees, spouses and other eligible dependents through various
plans.
On May 8, 2009, the Company announced a freeze of its domestic pension plans effective July 1,
2009. As a result of this action, the Company re-measured the benefit obligations of the affected
plans effective May 31, 2009, causing a reduction in the pension obligation of $47 million in the
second quarter of 2009. The reduction primarily reflects an increase in the discount rates used to
re-measure the pension plan obligations from 6.25% at December 31, 2008 to 6.5% at May 31, 2009
reflecting the change in market interest rates. A curtailment of benefits occurs as a result of
this action because it eliminates all future service for active employees in the domestic pension
plans. Accordingly, the Company recognized an after-tax curtailment gain of $30 million during the
second quarter of 2009, which was the remaining unamortized negative prior service cost at May 31,
2009.
Significant changes from the Companys disclosures at December 31, 2008 as a result of the decision
to freeze the domestic pension plans are as follows:
|
|
|
The Companys postretirement benefit liability adjustment increased by $24 million
pre-tax ($16 million after-tax) for the six months ended June 30, 2009, resulting in a
decrease to accumulated other comprehensive income. The increase to the liability was
primarily due to effect of the curtailment, partially offset by net amortization of
actuarial losses. |
|
|
|
|
The Company recognized all prior service costs for the domestic pension plans during the
second quarter of 2009 as part of the curtailment gain. As a result, there will be no
pre-tax amortization of prior service costs after June 30, 2009. The Company previously
disclosed that it expected to record amortization of negative prior service costs of $11
million pre-tax in 2009. The Company had been amortizing negative prior service costs
related to previous plan amendments over a 6-year period. As a result of the decision to
freeze the plans, the Company recorded an after-tax curtailment gain in the amount of $30
million during the second quarter of 2009. |
|
|
|
|
The Company now expects estimated amortization of actuarial losses for the pension plans
is to be approximately $34 million pre-tax for the full year 2009, compared with the
previous estimate of $54 million. The decline primarily reflects two factors: |
|
1) |
|
The weighted average amortization period for the frozen plans is now based on
average expected remaining life of plan participants, which is approximately 31 years.
This compares with the Companys previous amortization period of six years, which
reflected the expected remaining future service of active employees. This change in
amortization period occurred after the plan freeze because the workforce is considered
inactive for pension accounting purposes as these employees will no longer earn pension
benefits. |
|
|
2) |
|
The increase in the discount rate lowered the net actuarial loss to be
amortized. |
Pension benefits. Components of net pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
21 |
|
|
$ |
19 |
|
|
$ |
42 |
|
|
$ |
37 |
|
Interest cost |
|
|
62 |
|
|
|
60 |
|
|
|
123 |
|
|
|
121 |
|
Expected long-term return on plan assets |
|
|
(60 |
) |
|
|
(58 |
) |
|
|
(120 |
) |
|
|
(117 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from past experience |
|
|
10 |
|
|
|
14 |
|
|
|
27 |
|
|
|
28 |
|
Prior service cost |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
32 |
|
|
$ |
31 |
|
|
$ |
68 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company funds its qualified pension plans at least at the minimum amount required by the
Pension Protection Act of 2006, which requires companies to fully fund defined benefit pension
plans over a seven-year period beginning in 2008. The Company made $320 million in domestic
pension plan contributions during the six months ended June 30, 2009, and expects to make
an additional contribution of $90 million which will be contributed over the remainder of
2009.
32
Other postretirement benefits. Components of net other postretirement benefit cost were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
Interest cost |
|
|
6 |
|
|
|
6 |
|
|
|
12 |
|
|
|
12 |
|
Expected long-term return on plan assets |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Net gain from past experience |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
Prior service cost |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other postretirement benefit cost |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 Debt
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
Short-term: |
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
102 |
|
|
$ |
299 |
|
Current maturities of long-term debt |
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total short-term debt |
|
$ |
106 |
|
|
$ |
301 |
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
Uncollateralized debt: |
|
|
|
|
|
|
|
|
7% Notes due 2011 |
|
$ |
222 |
|
|
$ |
222 |
|
6.375% Notes due 2011 |
|
|
226 |
|
|
|
226 |
|
5.375% Notes due 2017 |
|
|
250 |
|
|
|
250 |
|
6.35% Notes due 2018 |
|
|
300 |
|
|
|
300 |
|
8.5% Notes due 2019 |
|
|
349 |
|
|
|
|
|
6.37% Notes due 2021 |
|
|
78 |
|
|
|
78 |
|
7.65% Notes due 2023 |
|
|
100 |
|
|
|
100 |
|
8.3% Notes due 2023 |
|
|
17 |
|
|
|
17 |
|
7.875% Debentures due 2027 |
|
|
300 |
|
|
|
300 |
|
8.3% Step Down Notes due 2033 |
|
|
83 |
|
|
|
83 |
|
6.15% Notes due 2036 |
|
|
500 |
|
|
|
500 |
|
Other |
|
|
10 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
2,435 |
|
|
$ |
2,090 |
|
|
|
|
|
|
|
|
Under a universal shelf registration statement filed with the Securities and Exchange
Commission (SEC), the Company issued $350 million of 8.5% Notes on May 4, 2009 ($349 million, net
of debt discount, with an effective interest rate of 9.90% per year). The difference between the
stated and effective interest rates primarily reflects the effect of a treasury lock. See Note
10 for further information. Interest is payable on May 1 and November 1 of each year beginning
November 1, 2009. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate
of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning
September 15, 2008. These Notes will mature on March 15, 2018.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal
to the greater of:
|
|
100% of the principal amount of the Notes to be redeemed; or |
|
|
|
the present value of the remaining principal and interest payments
on the Notes being redeemed discounted at the applicable treasury
rate plus 50 basis points (8.50% Notes due 2019) or 40 basis
points (6.35% Notes due 2018). |
33
On March 14, 2008, the Company entered into a new commercial paper program (the Program). Under
the Program, the Company is authorized to sell from time to time short-term unsecured commercial
paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share repurchases. The Company
uses the credit facility entered into in June 2007, as back-up liquidity to support the outstanding
commercial paper. If at any time funds are not available on favorable terms under the Program, the
Company may use its credit agreement for funding. In October 2008, the Company added an additional
dealer to its Program. As of June 30, 2009, the Company had $102 million in commercial paper
outstanding at a weighted average interest rate of 1.13% and
remaining maturities ranging from one to 34 days.
Note 14 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss excludes amounts required to adjust future policy benefits for
run-off settlement annuity business. Changes in accumulated other comprehensive loss were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
(Expense) |
|
|
After- |
|
(In millions) |
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
Three
Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Implementation effect of FASB FSP No. 115-2 |
|
$ |
(27 |
) |
|
$ |
9 |
|
|
$ |
(18 |
) |
Net unrealized appreciation on securities arising during the period |
|
|
345 |
|
|
|
(119 |
) |
|
|
226 |
|
Reclassification adjustment for (gains) included in shareholders net income |
|
|
(16 |
) |
|
|
4 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities |
|
$ |
302 |
|
|
$ |
(106 |
) |
|
$ |
196 |
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation, derivatives |
|
$ |
(30 |
) |
|
$ |
11 |
|
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
66 |
|
|
$ |
(24 |
) |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
$ |
5 |
|
|
$ |
(1 |
) |
|
$ |
4 |
|
Curtailment gain |
|
|
(46 |
) |
|
|
16 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment included in shareholders net income |
|
|
(41 |
) |
|
|
15 |
|
|
|
(26 |
) |
Net change due to valuation update |
|
|
10 |
|
|
|
(4 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
(31 |
) |
|
$ |
11 |
|
|
$ |
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation on securities arising during the period |
|
$ |
(184 |
) |
|
$ |
62 |
|
|
$ |
(122 |
) |
Reclassification adjustment for losses included in shareholders net income |
|
|
14 |
|
|
|
(4 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities |
|
$ |
(170 |
) |
|
$ |
58 |
|
|
$ |
(112 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
$ |
(6 |
) |
|
$ |
3 |
|
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
(26 |
) |
|
$ |
9 |
|
|
$ |
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Net change due to valuation update |
|
$ |
9 |
|
|
$ |
(3 |
) |
|
$ |
6 |
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
13 |
|
|
$ |
(3 |
) |
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
(Expense) |
|
|
After- |
|
(In millions) |
|
Pre-Tax |
|
|
Benefit |
|
|
Tax |
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Implementation effect of FASB FSP No. 115-2 |
|
$ |
(27 |
) |
|
$ |
9 |
|
|
$ |
(18 |
) |
Net unrealized appreciation on securities arising during the year |
|
|
388 |
|
|
|
(132 |
) |
|
|
256 |
|
Reclassification adjustment for losses included in shareholders net income |
|
|
17 |
|
|
|
(8 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation, securities |
|
$ |
378 |
|
|
$ |
(131 |
) |
|
$ |
247 |
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation, derivatives |
|
$ |
(13 |
) |
|
$ |
5 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
22 |
|
|
$ |
(8 |
) |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
$ |
12 |
|
|
$ |
(4 |
) |
|
$ |
8 |
|
Curtailment gain |
|
|
(46 |
) |
|
|
16 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment included in shareholders net income |
|
|
(34 |
) |
|
|
12 |
|
|
|
(22 |
) |
Net change due to valuation update |
|
|
10 |
|
|
|
(4 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
(24 |
) |
|
$ |
8 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation on securities arising during the year |
|
$ |
(214 |
) |
|
$ |
73 |
|
|
$ |
(141 |
) |
Reclassification adjustment for losses included in shareholders net income |
|
|
40 |
|
|
|
(13 |
) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, securities |
|
$ |
(174 |
) |
|
$ |
60 |
|
|
$ |
(114 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation, derivatives |
|
$ |
(18 |
) |
|
$ |
7 |
|
|
$ |
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Net translation of foreign currencies |
|
$ |
(34 |
) |
|
$ |
11 |
|
|
$ |
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Net change due to valuation update |
|
$ |
9 |
|
|
$ |
(3 |
) |
|
$ |
6 |
|
Reclassification adjustment for amortization of net losses from past
experience and prior service costs |
|
|
10 |
|
|
|
(3 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefits liability adjustment |
|
$ |
19 |
|
|
$ |
(6 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
Note 15 Income Taxes
The Company has historically accrued U.S. income taxes on the undistributed earnings of foreign
subsidiaries. In 2009, the Company determined that the prospective earnings of its South Korean
operation are to be permanently invested overseas. Income taxes for this operation will therefore
be accrued at the tax rate of the foreign jurisdiction. As a result, shareholders net income
increased for the three and six months ended June 30, 2009 by $20 million, which included $18
million representing the unrecognized deferred tax liabilities attributable to its investment in
the South Korean subsidiary that are considered permanent in nature. Management is currently
assessing whether the undistributed earnings of certain other foreign operations are permanently
invested overseas.
During the first quarter of 2009, the IRS completed its examination of the Companys 2005 and 2006
consolidated federal income tax returns, resulting in an increase to shareholders net income of
$21 million ($20 million in continuing operations and $1 million in discontinued operations). This
increase reflected a reduction in net unrecognized tax benefits of $8 million ($17 million reported
in income tax expense, partially offset by a $9 million pre-tax charge) and a reduction of interest
and penalties of $13 million (reported in income tax expense).
Gross unrecognized tax benefits declined for the first six months of 2009 by $34 million. This
decline was primarily due to completion of the previously referenced IRS examination which
increased shareholders net income by $8 million. There were other non-audit related changes in
net unrecognized tax benefits, resulting in a net increase to shareholders net income due to the
reduction of unrecognized tax benefits of $2 million for the first six months of 2009.
35
Over the next twelve months, the Company has determined it reasonably possible that the level of
unrecognized tax benefits could increase or decrease significantly, subject to developments in
certain matters in dispute with the IRS. It is also reasonably possible there could be a
significant change in the level of valuation allowances recorded against deferred tax benefits of
the reinsurance operations and certain unrealized investment losses within the next twelve months.
The Company, however, is currently unable to reasonably estimate the potential impact of such
changes.
During the first quarter, final resolution was reached in one of the two disputed issues associated
with the IRS examination of the Companys 2003 and 2004 consolidated federal income tax returns.
The second of these disputed matters remains unresolved and on June 4, 2009 the Company initiated
litigation of this matter by filing a petition in the United States Tax Court. Due to the nature
of the litigation process, the timing of the resolution of this matter is uncertain. Though the
Company expects to prevail, unfavorable resolution of this litigation would result in a charge to
shareholders net income of up to $15 million, representing net interest expense on the cumulative
incremental tax for all affected years. In addition, there remain two unresolved issues from the
IRS examination of the Companys 2005 and 2006 consolidated federal income tax returns. The
Company initiated a regulatory appeal of these matters on March 31, 2009 by filing a formal protest
of the proposed adjustments. One of these unresolved issues is the same matter which remains in
dispute from the prior IRS examination.
On
May 7, 2009, the proposed 2010 federal budget was issued which included various specific
income tax provisions that could affect the Company. Management is in the process of assessing the
impact of these provisions, particularly those related to the U.S. taxation of foreign operations.
Note 16 Segment Information
The Companys operating segments generally reflect groups of related products, except for the
International segment which is generally based on geography. In accordance with GAAP, operating
segments that do not require separate disclosure have been combined into Other Operations. The
Company measures the financial results of its segments using segment earnings (loss), which
subsequent to the implementation of SFAS No. 160, is defined as shareholders income (loss) from
continuing operations excluding after-tax realized investment gains and losses.
Summarized segment financial information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees, Mail order pharmacy revenues and Other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
$ |
3,240 |
|
|
$ |
3,420 |
|
|
$ |
6,529 |
|
|
$ |
6,484 |
|
Disability and Life |
|
|
689 |
|
|
|
669 |
|
|
|
1,390 |
|
|
|
1,330 |
|
International |
|
|
467 |
|
|
|
483 |
|
|
|
906 |
|
|
|
958 |
|
Run-off Reinsurance |
|
|
(183 |
) |
|
|
14 |
|
|
|
(62 |
) |
|
|
71 |
|
Other Operations |
|
|
46 |
|
|
|
45 |
|
|
|
90 |
|
|
|
91 |
|
Corporate |
|
|
(13 |
) |
|
|
(14 |
) |
|
|
(27 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,246 |
|
|
$ |
4,617 |
|
|
$ |
8,826 |
|
|
$ |
8,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care |
|
$ |
194 |
|
|
$ |
181 |
|
|
$ |
349 |
|
|
$ |
295 |
|
Disability and Life |
|
|
93 |
|
|
|
73 |
|
|
|
156 |
|
|
|
141 |
|
International |
|
|
64 |
|
|
|
48 |
|
|
|
106 |
|
|
|
100 |
|
Run-off Reinsurance |
|
|
112 |
|
|
|
42 |
|
|
|
86 |
|
|
|
(147 |
) |
Other Operations |
|
|
21 |
|
|
|
22 |
|
|
|
40 |
|
|
|
44 |
|
Corporate |
|
|
(40 |
) |
|
|
(81 |
) |
|
|
(62 |
) |
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings |
|
|
444 |
|
|
|
285 |
|
|
|
675 |
|
|
|
331 |
|
Realized investment losses, net of taxes |
|
|
(9 |
) |
|
|
(12 |
) |
|
|
(33 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders income from continuing operations |
|
$ |
435 |
|
|
$ |
273 |
|
|
$ |
642 |
|
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Note 17 Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various financial guarantees
provided in the ordinary course of business.
Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business
Separate account assets are contractholder funds maintained in accounts with specific investment
objectives. The Company records separate account liabilities equal to separate account assets. In
certain cases, primarily associated with the sold retirement benefits business (which was sold in
April 2004), the Company guarantees a minimum level of benefits for retirement and insurance
contracts, written in separate accounts. The Company establishes an additional liability if
management believes that the Company will be required to make a payment under these guarantees.
The Company guarantees that separate account assets will be sufficient to pay certain retiree or
life benefits. The sponsoring employers are primarily responsible for ensuring that assets are
sufficient to pay these benefits and are required to maintain assets that exceed a certain
percentage of benefit obligations. This percentage varies depending on the asset class within a
sponsoring employers portfolio (for example, a bond fund would require a lower percentage than a
riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers
do not maintain the required levels of separate account assets, the Company or an affiliate of the
buyer has the right to redirect the management of the related assets to provide for benefit
payments. As of June 30, 2009, employers maintained assets that exceeded the benefit obligations.
Benefit obligations under these arrangements were $1.8 billion as of June 30, 2009. Approximately
76% of these guarantees are reinsured by an affiliate of the buyer of the retirement benefits
business. The remaining guarantees are provided by the Company with minimal reinsurance from third
parties. There were no additional liabilities required for these guarantees as of June 30, 2009.
Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP
fair value hierarchy. See Note 8 for further information on the fair value hierarchy.
Other Financial Guarantees
Guaranteed minimum income benefit contracts. The Companys reinsurance operations, which were
discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income
benefits under certain variable annuity contracts issued by other insurance companies. A
contractholder can elect the guaranteed minimum income benefit (GMIB) within 30 days of any
eligible policy anniversary after a specified contractual waiting period. The Companys exposure
arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the
policys current account value. At the time of annuitization, the Company pays the excess (if any)
of the guaranteed benefit over the benefit based on the current account value in a lump sum to the
direct writing insurance company.
In periods of declining equity markets or declining interest rates, the Companys GMIB liabilities
increase. Conversely, in periods of rising equity markets and rising interest rates, the Companys
liabilities for these benefits decrease.
The Company estimates the fair value of the GMIB assets and liabilities using assumptions for
market returns and interest rates, volatility of the underlying equity and bond mutual fund
investments, mortality, lapse, annuity election rates, non-performance risk, and risk and profit
charges. Assumptions were updated beginning with January 1, 2008 to reflect the requirements of
SFAS No. 157. See Note 8 for additional information on how fair values for these liabilities and
related receivables for retrocessional coverage are determined.
The Company is required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits. Under these guarantees, the future payment amounts
are dependent on equity and bond fund market and interest rate levels prior to and at the date of
annuitization election, which must occur within 30 days of a policy anniversary, after the
appropriate waiting period. Therefore, the future payments are not fixed and determinable under
the terms of the contract. Accordingly, the Company has estimated the maximum potential
undiscounted future payments using hypothetical adverse assumptions, defined as follows:
|
|
No annuitants surrendered their accounts; |
|
|
All annuitants lived to elect their benefit; |
|
|
All annuitants elected to receive their benefit on the next available date (2009 through
2014); and |
|
|
All underlying mutual fund investment values remained at the June 30, 2009 value of $1.2
billion with no future returns. |
37
The maximum potential undiscounted payments that the Company would make under those assumptions
would aggregate $1.5 billion before reinsurance recoveries. The Company expects the amount of
actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The
Company has retrocessional coverage in place from two external reinsurers which covers 55% of the
exposures on these contracts. The Company bears the risk of loss if its retrocessionaires do not
meet or are unable to meet their reinsurance obligations to the Company.
Certain Other Guarantees. The Company had indemnification obligations to lenders of up to $243
million as of June 30, 2009 related to borrowings by certain real estate joint ventures which the
Company either records as an investment or consolidates. These borrowings, which are nonrecourse to
the Company, are secured by the joint ventures real estate properties with fair values in excess
of the loan amounts and mature at various dates beginning in 2009 through 2017. The Companys
indemnification obligations would require payment to lenders for any actual damages resulting from
certain acts such as unauthorized ownership transfers, misappropriation of rental payments by
others or environmental damages. Based on initial and ongoing reviews of property management and
operations, the Company does not expect that payments will be required under these indemnification
obligations. Any payments that might be required could be recovered through a refinancing or sale
of the assets. In some cases, the Company also has recourse to partners for their proportionate
share of amounts paid. There were no liabilities required for these indemnification obligations as
of June 30, 2009.
As of June 30, 2009, the Company guaranteed that it would compensate the lessors for a shortfall of
up to $44 million in the market value of certain leased equipment at the end of the lease.
Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had liabilities for these guarantees of $7 million as of June 30, 2009.
As part of the reinsurance and administrative service arrangements acquired from Great West Life
and Annuity, Inc., the Company is responsible to pay claims for the group medical and long-term
disability business of Great-West Healthcare and collect related amounts due from their third party
reinsurers. Any such amounts not collected will represent additional assumed liabilities of the
Company and decrease shareholders net income if and when these amounts are determined
uncollectible. At June 30, 2009, there were no receivables recorded for paid claims due from third
party reinsurers for this business and unpaid claims related to this business were estimated at $25
million.
The Company had indemnification obligations as of June 30, 2009 in connection with acquisition and
disposition transactions. These indemnification obligations are triggered by the breach of
representations or covenants provided by the Company, such as representations for the presentation
of financial statements, the filing of tax returns, compliance with law or the identification of
outstanding litigation. These obligations are typically subject to various time limitations,
defined by the contract or by operation of law, such as statutes of limitation. In some cases, the
maximum potential amount due is subject to contractual limitations based on a percentage of the
transaction purchase price, while in other cases limitations are not specified or applicable. The
Company does not believe that it is possible to determine the maximum potential amount due under
these obligations, since not all amounts due under these indemnification obligations are subject to
limitation. There were no liabilities required for these indemnification obligations as of June
30, 2009.
The Company does not expect that these guarantees will have a material adverse effect on the
Companys consolidated results of operations, liquidity or financial condition.
Regulatory and Industry Developments
Employee benefits regulation. The business of administering and insuring employee benefit
programs, particularly health care programs, is heavily regulated by federal and state laws and
administrative agencies, such as state departments of insurance and the Federal Departments of
Labor and Justice, as well as the courts. Regulation and judicial decisions have resulted in
changes to industry and the Companys business practices and will continue to do so in the future.
In addition, the Companys subsidiaries are routinely involved with various claims, lawsuits and
regulatory and IRS audits and investigations that could result in financial liability, changes in
business practices, or both. Health care regulation in its various forms could have an adverse
effect on the Companys health care operations if it inhibits the Companys ability to respond to
market demands or results in increased medical or administrative costs without improving the
quality of care or services.
38
Other possible regulatory and legislative changes or judicial decisions that could have an adverse
effect on the Companys employee benefits businesses include:
|
|
additional mandated benefits or services that increase costs; |
|
|
legislation that would grant plan participants broader rights to sue their health
plans; |
|
|
changes in public policy and in the political environment, which could affect
state and federal law, including legislative and regulatory proposals related to health care
issues, which could increase cost and affect the market for the Companys health care products
and services; and pension legislation, which could increase pension cost; |
|
|
changes in Employee Retirement Income Security Act (ERISA) regulations resulting
in increased administrative burdens and costs; |
|
|
additional restrictions on the use of prescription drug formularies and rulings
from pending purported class action litigation, which could result in adjustments to or the
elimination of the average wholesale price or AWP of pharmaceutical products as a benchmark
in establishing certain rates, charges, discounts, guarantees and fees for various
prescription drugs; |
|
|
additional privacy legislation and regulations that interfere with the proper use
of medical information for research, coordination of medical care and disease and disability
management; |
|
|
additional variations among state laws mandating the time periods and
administrative processes for payment of health care provider claims; |
|
|
legislation that would exempt independent physicians from antitrust laws; and |
|
|
changes in federal tax laws, such as amendments that could affect the taxation of
employer provided benefits. |
The employee benefits industry remains under scrutiny by various state and federal government
agencies and could be subject to government efforts to bring criminal actions in circumstances that
could previously have given rise only to civil or administrative proceedings.
Concentration of risk. For the Companys International segment, South Korea is the single largest
geographic market. South Korea generated 29% of the segments revenues for the second quarter of
2009 and 27% for the six months ended June 30, 2009. South Korea generated 55% of the segments
earnings for the second quarter of 2009 and 46% of the segments earnings for the six months ended
June 30, 2009. Due to the concentration of business in South Korea, the International segment is
exposed to potential losses resulting from economic and geopolitical developments in that country,
as well as foreign currency movements affecting the South Korean currency, which could have a
significant impact on the segments results and the Companys consolidated financial results.
Litigation and Other Legal Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits,
investigations and other legal matters arising, for the most part, in the ordinary course of the
business of administering and insuring employee benefit programs including payments to providers
and benefit level disputes. Litigation of income tax matters is accounted for under the provisions
of FIN No. 48, Accounting for Uncertainty in Income Taxes. Further information can be found in
Note 15. An increasing number of claims are being made for substantial non-economic,
extra-contractual or punitive damages. The outcome of litigation and other legal matters is always
uncertain, and outcomes that are not justified by the evidence can occur. The Company believes
that it has valid defenses to the legal matters pending against it and is defending itself
vigorously. Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to the Companys consolidated
results of operations, liquidity or financial condition.
Managed care litigation. On April 7, 2000, several pending actions were consolidated in the United
States District Court for the Southern District of Florida in a multi-district litigation
proceeding captioned In re Managed Care Litigation challenging, in general terms, the mechanisms
used by managed care companies in connection with the delivery of or payment for health care
services. The consolidated cases include Shane v. Humana, Inc., et al., Mangieri v. CIGNA
Corporation, Kaiser and Corrigan v. CIGNA Corporation, et al. and Amer. Dental Assn v. CIGNA Corp.
et al.
In 2004, the court approved a settlement agreement between the physician class and CIGNA. However,
a dispute over disallowed claims under the settlement submitted by a representative of certain
class member physicians is in arbitration. Separately, in 2005, the court approved a settlement
between CIGNA and a class of non-physician health care providers. Only the American Dental
Association case remains unresolved. On March 2, 2009, the Court dismissed five of the six counts
of the complaint with prejudice. On March 20, 2009, the Court declined to exercise supplemental
jurisdiction over the remaining state law claim and dismissed the case. Plaintiffs filed a notice
of appeal on April 17, 2009. CIGNA denies the allegations and will continue to vigorously defend
itself.
39
CIGNA has received insurance recoveries related to this litigation. In 2008, the trial court ruled
that the Company is not entitled to insurance recoveries from one of the two insurers from which
the Company is pursuing further recoveries. CIGNA appealed that decision and on June 3, 2009, the
Superior Court of Pennsylvania reversed the trial courts decision, remanding the case to the trial
court for further proceedings. The insurer continues to challenge this decision and is seeking
re-argument before the Superior Court of Pennsylvania.
Broker compensation. Beginning in 2004, the Company, other insurance companies and certain
insurance brokers received subpoenas and inquiries from various regulators, including the New York
and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorneys
Office for the Southern District of California and the U.S. Department of Labor relating to their
investigations of insurance broker compensation. CIGNA is cooperating with the inquiries and
investigations.
On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life
Insurance Company of North America, were named as defendants in a multi-district litigation
proceeding, In re Insurance Brokerage Antitrust Litigation, consolidated in the United States
District Court for the District of New Jersey. The complaint alleges that brokers and insurers
conspired to hide commissions, increasing the cost of employee benefit plans, and seeks treble
damages and injunctive relief. Numerous insurance brokers and other insurance companies are named
as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in
favor of the defendants. Plaintiffs have filed an appeal. CIGNA denies the allegations and will
continue to vigorously defend itself.
Amara cash balance pension plan litigation. On December 18, 2001, Janice Amara filed a class
action lawsuit, now captioned Janice C. Amara, Gisela R. Broderick, Annette S. Glanz, individually
and on behalf of all others similarly situated v. CIGNA Corporation and CIGNA Pension Plan, in the
United States District Court for the District of Connecticut against CIGNA Corporation and the
CIGNA Pension Plan on behalf of herself and other similarly situated participants in the CIGNA
Pension Plan affected by the 1998 conversion to a cash balance formula. The plaintiffs allege
various ERISA violations including, among other things, that the Plans cash balance formula
discriminates against older employees; the conversion resulted in a wear away period (during which
the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are
not adequately disclosed in the Plan.
In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension
Plan on the age discrimination and wear away claims. However, the court found in favor of the
plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from
the existing cash balance formula for the majority of the class, requiring class members to receive
their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under
the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment
and post-judgment interest. The court has stayed implementation of the decision until the parties
appeals have been exhausted. Both parties have appealed the courts decisions. In the second
quarter of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax),
which principally reflects the Companys current best estimate of the liabilities related to the
court order. The Company will continue to vigorously defend itself in this case.
Ingenix. On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an
industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of
UnitedHealthcare, used to calculate payments for services provided by out-of-network providers.
The Company received four subpoenas from the New York Attorney Generals office in connection with
this investigation and responded appropriately. On February 17, 2009, the Company entered into an
Assurance of Discontinuance resolving the investigation. In connection with the industry-wide
resolution, the Company will contribute $10 million to the establishment of a new non-profit
company that will compile and provide the data currently provided by Ingenix. In addition, on
March 28, 2008, the Company received a voluntary request for production of documents from the
Connecticut Attorney Generals office seeking certain out-of-network claim payment information.
The Company has responded appropriately. Since January 2009, the Company has received and is
responding to inquiries regarding the use of Ingenix data from the Texas Attorney General and the
Departments of Insurance in Illinois, Florida, Vermont, Georgia, Pennsylvania, Connecticut and
Alaska.
40
The Company is also a defendant in two putative class actions brought on behalf of members (Franco
et al. v. Connecticut General Life Insurance Co. et al. and Chazen et al. v. Connecticut General
Life Insurance Co. et al.), and five putative class actions brought on behalf of providers (AMA et
al. v. Connecticut General Life Insurance Co. et al., Shiring et al. v. CIGNA Corp. et al., Pain
Management and Surgery Center of Southern Indiana et al. v. CIGNA Corp. et al, Higashi v.
Connecticut General Life Insurance Co. et al. and North Peninsula Surgical Center v. Connecticut
General Life Insurance Co. et al.), asserting that due to the use of Ingenix data, the Company
improperly underpaid claims, an industry-wide issue. The Franco putative class action, filed on
March 22, 2004 in the United States District Court for the District of New Jersey, asserts claims
under ERISA and the RICO statute on behalf of members of CIGNA plans. Plaintiff seeks to recover
alleged underpayments in relation to out-of-network claims for the period from 1998 to present. In
2008, the court denied the Companys motion to dismiss for lack of standing while indicating that
the named plaintiffs unique situation might undermine her adequacy as a class representative. On
August 15, 2008, a second putative member class action was filed in the same court as Franco on
behalf of a different class representative, David Chazen. The Chazen complaint asserts claims under
ERISA and New Jersey state law for the time period 2002 to present. On February 9, 2009, the AMA
putative provider class action was filed in the same court as Franco and Chazen. The complaint
asserts claims under ERISA, the RICO statute and the Sherman Antitrust Act for the time period 2005
to the present. On April 17, 2009, a second putative provider class action, Shiring, was filed in
the same court, asserting claims on behalf of non-physician providers for the time period 2005 to
present. On June 17, 2009, the court consolidated the Franco, Chazen, AMA and Shiring cases and
issued a case management order providing for coordinated discovery, with class certification to be
litigated in March and April of 2010. On April 14, 2009, a third putative provider class action,
Pain Management and Surgery Center of Southern Indiana, was filed in the United States District
Court for the Southern District of Indiana, asserting claims under ERISA, the RICO statute and the
Sherman Antitrust Act, which was amended on June 26, 2009. The alleged damages period is 2005 to
the present. On June 17, 2009, a fourth putative provider class action, Higashi, was filed in the
United States District Court for the Central District of California, asserting claims under the
RICO statute and the Sherman Antitrust Act for the time period 2005 to the present. On July 6,
2009, a fifth putative provider class action, North Peninsula Surgical Center, was also filed in
the United States District Court for the Central District of California, asserting claims under
ERISA, the Sherman Antitrust Act and state unfair competition law for the time period 2005 to the
present.
On June 9, 2009, CIGNA filed motions in the United States District Court for the Southern District
of Florida to enforce the Managed Care MDL settlement by enjoining the RICO and antitrust causes of
action alleged in the AMA, Shiring and Pain Management cases on the ground that they arose prior to
and were released in the April, 2004 settlement. A parallel motion
was filed in the Higashi matter on July 28, 2009.
It is reasonably possible that others could initiate additional litigation or additional regulatory
action against the Company with respect to use of data provided by Ingenix, Inc. The Company
denies the allegations asserted in the investigations and litigation and will vigorously defend
itself in these matters.
41
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
|
|
|
|
|
INDEX |
|
|
|
|
|
Introduction |
|
|
42 |
|
Consolidated Results of Operations |
|
|
44 |
|
Critical Accounting Estimates |
|
|
47 |
|
Segment Reporting |
|
|
|
|
Health Care |
|
|
51 |
|
Disability and Life |
|
|
56 |
|
International |
|
|
58 |
|
Run-off Reinsurance |
|
|
60 |
|
Other Operations |
|
|
62 |
|
Corporate |
|
|
63 |
|
Discontinued Operations |
|
|
63 |
|
Industry Developments and Other Matters |
|
|
65 |
|
Liquidity and Capital Resources |
|
|
66 |
|
Investment Assets |
|
|
70 |
|
Market Risk |
|
|
75 |
|
Cautionary Statement |
|
|
76 |
|
INTRODUCTION
In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (the
Company) make certain forward-looking statements relating to the Companys financial condition and
results of operations, as well as to trends and assumptions that may affect the Company.
Generally, forward-looking statements can be identified through the use of predictive words (e.g.,
Outlook for 2009). Actual results may differ from the Companys predictions. Some factors that
could cause results to differ are discussed throughout Managements Discussion and Analysis (MD&A),
including in the Cautionary Statement beginning on page 76. The forward-looking statements
contained in this filing represent managements current estimate as of the date of this filing.
Management does not assume any obligation to update these estimates.
The following discussion addresses the financial condition of the Company as of June 30, 2009,
compared with December 31, 2008, and its results of operations for the second quarter of 2009 and
six months ended June 30, 2009 compared with the same periods last year. This discussion should be
read in conjunction with Managements Discussion and Analysis included in the Companys 2008 Form
10-K, to which the reader is directed for additional information.
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 and restatements have been made to prior period amounts to conform to the
presentation of 2009 amounts. In addition, certain amounts have been restated as a result of the
adoption of new accounting pronouncements. See Note 2 to the Consolidated Financial Statements for
additional information.
Overview
The Company constitutes one of the largest investor-owned health service organizations in the
United States. Its subsidiaries are major providers of health care and related benefits, the
majority of which are offered through the workplace. In addition, the Company has an international
operation that offers life, accident and supplemental health insurance products as well as
international health care products and services to businesses and individuals in selected markets.
The Company also has certain inactive businesses, including a Run-off Reinsurance segment.
42
Ongoing Operations
The Company generates revenues, shareholders net income and cash flow from ongoing operations by:
|
|
maintaining and growing its customer base; |
|
|
charging prices that reflect emerging experience; |
|
|
investing available cash at attractive rates of return for appropriate durations; and |
|
|
effectively managing other operating expenses. |
The Companys ability to increase revenue, shareholders net income and operating cash flow is
directly related to its ability to execute on its strategic initiatives, the success of which is
measured by certain key factors as discussed below.
Key factors affecting the Companys results from ongoing operations include:
|
|
the ability to profitably price products and services at competitive levels; |
|
|
the volume of customers served and the mix of products and services purchased by those
customers; |
|
|
the ability to cross sell its various health and related benefit products; |
|
|
the relationship between other operating expenses and revenue; and |
|
|
the effectiveness of the Companys capital deployment initiatives. |
Run-off Operations
Effectively managing the various exposures of its run-off operations is important to the Companys
ongoing profitability, operating cash flows and available capital. The results are influenced by a
range of economic factors, especially movements in equity markets and interest rates. Results are
also influenced by behavioral factors, including future partial surrender election rates for
guaranteed minimum death benefits (GMDB) contracts and annuity election rates for guaranteed
minimum income benefits (GMIB) contracts, as well as the collection of amounts recoverable from
retrocessionaires. In order to substantially reduce the impact of equity market movements, the
Company operates a GMDB equity hedge program. The Company actively monitors the performance of the
hedge program, and evaluates the cost/benefit of hedging other risks. The Company also actively
studies policyholder behavior experience and adjusts future expectations based on the results of
the studies, as warranted. The Company also performs regular audits of the ceding companies to
ensure treaty compliance that premiums received and claims paid are properly reflective of the
underlying risks and to maximize the probability of subsequent collection of claims from
retrocessionaires. Finally, the Company monitors the credit standing of the retrocessionaires.
Summary
The Companys overall results are influenced by a range of economic and other factors, especially:
|
|
cost trends and inflation for medical and related services; |
|
|
utilization patterns of medical and other services; |
|
|
the tort liability system; |
|
|
developments in the political environment both domestically and internationally; |
|
|
interest rates, equity market returns, foreign currency fluctuations and credit market
volatility, including the availability and cost of credit in the future; and |
|
|
federal and state regulation. |
The Company regularly monitors the trends impacting operating results from the above mentioned key
factors and economic and other factors affecting its operations. The Company develops strategic and
tactical plans designed to improve performance and maximize its competitive position in the markets
it serves. The Companys ability to achieve its financial objectives is dependent upon its ability
to effectively execute these plans and to appropriately respond to emerging economic and
company-specific trends.
The Company seeks to improve the performance of and profitably grow its ongoing businesses and
manage the risks associated with the run-off reinsurance operations.
43
Acquisition of Great-West Healthcare
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc.
(Great-West Healthcare or the acquired business) through 100% indemnity reinsurance agreements
and the acquisition of certain affiliates and other assets and liabilities of Great-West
Healthcare. The purchase price was approximately $1.5 billion and consisted of a payment to the
seller of approximately $1.4 billion for the net assets acquired and the assumption of net
liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare
primarily sells medical plans on a self-funded basis with stop-loss coverage to select and regional
employer groups. Great-West Healthcares offerings also include the following specialty products:
stop-loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental
death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was
financed through a combination of cash and the issuance of both short and long-term debt.
See Note 3 to the Consolidated Financial Statements for additional information.
Initiatives to Lower Operating Expenses
During the second quarter of 2009, the Company continued its previously announced comprehensive
review of its ongoing businesses. As a result, in the second quarter of 2009 the Company recognized
in other operating expenses a total charge of $14 million pre-tax ($9 million after-tax), for
severance resulting from reductions of 465 positions in its workforce. The Company expects to pay
substantially all of this charge in cash during 2009. The Health Care segment reported
substantially all of this charge. As a result of these actions, the Company expects annualized
after-tax savings of approximately $15 million beginning in 2010.
CONSOLIDATED RESULTS OF OPERATIONS
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
4,013 |
|
|
$ |
4,218 |
|
|
$ |
8,064 |
|
|
$ |
8,069 |
|
Net investment income |
|
|
260 |
|
|
|
265 |
|
|
|
489 |
|
|
|
530 |
|
Mail order pharmacy revenues |
|
|
316 |
|
|
|
286 |
|
|
|
628 |
|
|
|
582 |
|
Other revenues |
|
|
(83 |
) |
|
|
113 |
|
|
|
134 |
|
|
|
256 |
|
Total realized investment losses |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(54 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,488 |
|
|
|
4,863 |
|
|
|
9,261 |
|
|
|
9,432 |
|
Benefits and expenses |
|
|
3,858 |
|
|
|
4,450 |
|
|
|
8,358 |
|
|
|
8,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
630 |
|
|
|
413 |
|
|
|
903 |
|
|
|
487 |
|
Income taxes |
|
|
195 |
|
|
|
140 |
|
|
|
260 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
435 |
|
|
|
273 |
|
|
|
643 |
|
|
|
329 |
|
Shareholders income (loss) from discontinued operations, net of taxes |
|
|
|
|
|
|
(1 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
435 |
|
|
|
272 |
|
|
|
644 |
|
|
|
331 |
|
Less: Net income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders net income |
|
$ |
435 |
|
|
$ |
272 |
|
|
$ |
643 |
|
|
$ |
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment losses, net of taxes |
|
$ |
(9 |
) |
|
$ |
(12 |
) |
|
$ |
(33 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Special Items
In order to facilitate an understanding and comparison of results of operations and permit analysis
of trends in underlying revenue, expenses and shareholders income from continuing operations,
presented below are special items, which management believes are not representative of the
underlying results of operations.
SPECIAL ITEMS
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
After-Tax |
|
|
|
Benefit |
|
|
Benefit |
|
(In millions) |
|
(Charge) |
|
|
(Charge) |
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
46 |
|
|
$ |
30 |
|
Cost reduction charge |
|
|
(14 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
32 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Charge related to litigation matter |
|
$ |
(80 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
46 |
|
|
$ |
30 |
|
Cost reduction charge |
|
|
(14 |
) |
|
|
(9 |
) |
Completion of IRS examination |
|
|
(9 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
Total |
|
$ |
23 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Charges related to litigation matters |
|
$ |
(117 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
See Note 12 to the Consolidated Financial Statements for additional information related to the
curtailment gain and Note 6 to the Consolidated Financial Statements for further discussion of the
cost reduction charge. The other special item for 2009 is a result of the completion of the 2005
and 2006 IRS examinations. See Note 15 to the Consolidated Financial Statements for additional
information.
See Note 17 to the Consolidated Financial Statements for further discussion of the litigation
charge associated with the pension plan reported in the second quarter of 2008. The remaining
special item for 2008 consisted of charges related to certain litigation matters which were
reported in the Health Care segment.
Overview of Consolidated Results of Operations
Three Months Ended June 30, 2009 Compared with Three Months ended June 30, 2008
Shareholders income from continuing operations for the three months ended June 30, 2009 increased
significantly compared with the three months ended June 30, 2008, as a result of:
|
|
Significantly higher earnings in the Run-off Reinsurance segment resulting from favorable
results from the GMIB business. See the Run-off Reinsurance section of this MD&A for further
discussion; |
|
|
A curtailment gain related to the decision to freeze the pension plans which was partially
offset by a cost reduction charge; |
|
|
Absence of the 2008 litigation charge associated with the pension plan; and |
|
|
Higher overall segment earnings in ongoing businesses. See the Segment reporting section
of the MD&A for further information. |
Six Months Ended June 30, 2009 Compared with Six Months ended June 30, 2008
Shareholders income from continuing operations was also significantly higher for the six months
ended June 30, 2009. In addition to the items cited above related to the three months ended June
30, the increase for the six months resulted from:
|
|
The absence of the $131 million charge in the GMIB business resulting from the adoption of
Statement of Financial Accounting Standards (SFAS) No. 157; |
|
|
The favorable impact of the completion of the 2005 and 2006 IRS examination. The net
favorable effect of the IRS examination on continuing operations of $20 million is being
reported as a special item; |
45
|
|
The absence of the litigation charge in the first quarter of 2008 reported as a special
item; and |
|
|
Higher overall segment earnings in the ongoing business segments. |
Partially offsetting these favorable effects were higher net realized investment losses in 2009
primarily due to higher asset write-downs and the absence of a significant gain on the sale of real
estate reported in the first quarter of 2008, partially offset by gains on sales of fixed
maturities. See the Investment Assets section of the MD&A beginning on page 70 for more
information.
Outlook for 2009
The Company expects full-year 2009 shareholders income from continuing operations, excluding
realized investment results, the results of the GMIB business, and special items, to be higher than
2008 due to lower losses in the Run-off Reinsurance segment. Overall earnings in the ongoing
operating segments are expected to be slightly higher than 2008. This outlook includes an
assumption that results of the GMDB business will be approximately break-even for the remainder of
2009. This assumption reflects Managements view that the long-term reserve assumptions are
appropriate and that equity market conditions and volatility will continue to be stable for the
remainder of 2009. The Companys outlook is subject to the factors cited in the Cautionary
Statement and the sensitivities discussed in the Critical Accounting Estimates section of the MD&A
in the Companys 2008 Form 10-K. If unfavorable equity market and interest rate movements or
changes in assumptions occur, the Company could experience additional losses related to the GMDB
business.
Information is not available for management to reasonably estimate the future results of the GMIB
business, realized investment gains (losses), or to identify or reasonably estimate special items
in 2009. However, if unfavorable equity market and interest rate movements occur, the Company
could also experience additional losses related to the GMIB business and investment impairments.
Potential losses related to the GMDB and GMIB businesses, as well as investment impairments, could
adversely impact the Companys consolidated results of operations and financial condition, and
could reduce the capital of the Companys insurance subsidiaries as well as their dividend paying
capabilities. Special items for the remainder of 2009 may include
potential charges associated with the previously announced cost
reduction plan, as well as litigation related items.
Revenues
Total revenue decreased by 8% for the three months ended June 30, 2009, compared with three months
ended June 30, 2008 and 2% for the six months ended June 30, 2009 compared with the six months
ended June 30, 2008. Changes in the components of total revenue are described more fully below.
Premiums and Fees
Premiums and fees decreased by 5% for the three months ended June 30, 2009, compared with the three
months ended June 30, 2008, primarily reflecting membership declines in the Health Care segment
largely due to disenrollment. See segment reporting discussions for additional detail and drivers.
For the six months ended June 30, 2009, premiums and fees were level with the six months ended June
30, 2008, reflecting the effect of the acquired business in the first quarter of 2009 and growth in
the Disability and Life segment, offset by membership declines in Health Care and the unfavorable
effect of foreign currency translation in International.
Net Investment Income
Net investment income decreased 2% for the three months ended June 30, 2009, compared with the
three months ended June 30, 2008 primarily due to lower yields driven by declines in short-term
interest rates and lower income from real estate funds, which reflects declines in market values
due to the deterioration in economic conditions. These factors were partially offset by higher
invested assets.
For the six months ended June 30, 2009, net investment income declined 8% compared with the six
months ended June 30, 2008. In addition to the factors cited for the three months ended June 30,
2009, lower income from security partnerships negatively affected net investment income for the six
months.
46
Mail Order Pharmacy Revenues
Mail order pharmacy revenues increased 10% for the three months ended June 30, 2009, compared with
the three months ended June 30, 2008 and 8% for the six months ended June 30, 2009 compared with
the six months ended June 30, 2008. These increases were primarily due to higher volume and, to a
lesser extent, rate increases.
Other Revenues
Excluding the impact of the futures contracts associated with the GMDB equity hedge program, other
revenues were nearly level for the three months and six months ended June 30, 2009, compared with the
same periods last year. The Company reported losses of $188 million for the three months ended and
$71 million for the six months ended June 30, 2009 associated with the GMDB equity hedge program,
compared with gains of $6 million for the three months ended June 30, 2008 and $48 million for the
six months ended June 30, 2008. The losses in 2009 reflect increases in stock market values, while
the gains in 2008 primarily reflect declines in stock market values.
Realized Investment Results
Realized investment results for the three months ended June 30, 2009 were level with the three
months ended June 30, 2008. For the six months ended June 30, 2009, realized investment losses
were substantially higher than for the six months ended June 30, 2008, primarily due to higher
asset write-downs and the absence of a significant gain on the sale of real estate reported in the
first quarter of 2008, partially offset by gains on sales of fixed maturities. In addition, for
the six months ended June 30, 2009, the Company reported higher losses associated with its hybrid
securities which are reported in other realized investment losses. These losses primarily reflect
continued market pressure in the financial sector. See Note 9 to the Consolidated Financial
Statements for additional information.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures in the consolidated financial
statements. Management considers an accounting estimate to be critical if:
|
|
it requires assumptions to be made that were uncertain at the time the estimate was made;
and |
|
|
changes in the estimate or different estimates that could have been selected could have a
material effect on the Companys consolidated results of operations or financial condition. |
Management has discussed the development and selection of its critical accounting estimates with
the Audit Committee of the Companys Board of Directors and the Audit Committee has reviewed the
disclosures presented below.
The Companys most critical accounting estimates, as well as the effects of hypothetical changes in
material assumptions used to develop each estimate, are described in the Companys 2008 Form 10-K
beginning on page 49 and are as follows:
|
|
future policy benefits guaranteed minimum death benefits; |
|
|
Health Care medical claims payable; |
|
|
accounts payable, accrued expenses and other liabilities, and other assets guaranteed
minimum income benefits; |
|
|
reinsurance recoverables for Run-off Reinsurance; |
|
|
accounts payable, accrued expenses and other liabilities pension liabilities; and |
|
|
investments fixed maturities. |
47
The Company regularly evaluates items which may impact critical accounting estimates. During the
six months ended June 30, 2009, the Company updated the following critical accounting estimates:
|
|
|
|
|
Balance Sheet Caption / |
|
|
|
|
Nature of Critical Accounting Estimate |
|
Assumptions / Approach Used |
|
Effect if Different Assumptions Used |
Future policy benefits
Guaranteed minimum death benefits
These liabilities are estimates of
the present value of net amounts
expected to be paid, less the present
value of net future premiums expected
to be received. The amounts to be
paid represent the excess of the
guaranteed death benefit over the
values of contractholders accounts.
The death benefit coverage in force
at June 30, 2009 (representing the
amount payable if all of
approximately 615,000 contractholders
had died as of that date) was
approximately $9.6 billion.
Liabilities for future policy
benefits for these contracts were as
follows (in millions):
June 30, 2009 $1,542
Dec 31, 2008 $1,609
|
|
The Company estimates these liabilities based on assumptions for lapse, partial
surrender, mortality, interest rates (mean investment performance and discount
rate), and volatility. These assumptions are based on the Companys experience
and future expectations over the long-term period. The Company monitors actual
experience to update these estimates as necessary.
Lapse refers to the full surrender of an annuity prior to a contractholders death.
Partial surrender refers to the fact that most contractholders have the ability to
withdraw substantially all of their mutual fund investments while retaining any
available death benefit coverage in effect at the time of the withdrawal. Once a
partial surrender is made, the liability increases reflecting lower future assumed
premiums, a lower likelihood of lapsation, and a lower likelihood of account
values recovering sufficiently to reduce the death benefit exposure in future
periods. These effects are not covered by the Companys GMDB equity hedge
program. Market declines could expose the Company to higher amounts of death
benefit exposure that can be retained by contractholders subsequent to a
significant partial surrender and to higher election rates of future partial
surrenders. Thus, if equity markets decline, the Companys liability for partial
surrenders increases and there is no corresponding offset from the hedge program.
The election rate for expected future partial surrenders is updated quarterly
based on emerging experience.
Interest rates include both (a) the mean investment performance assumption
considering the Companys GMDB equity hedge program which reflects the average
short-term interest rate to be earned over the life of the program, and (b) the
liability discount rate assumption.
Volatility refers to the degree of variation of future market returns of the
underlying mutual fund investments.
|
|
Current assumptions used to estimate these liabilities are detailed in Note 7 to
the Consolidated Financial Statements. Based on current and historical market,
industry and Company-specific experience and managements judgment, the Company
believes that it is reasonably likely that the unfavorable changes in the key
assumptions and/or conditions described below could occur. If these unfavorable
assumption changes were to occur when the recorded reserve is insufficient, the
approximate after-tax decrease in net income would be as follows:
5% increase in mortality rates $40 million
10% decrease in lapse rates $30 million
10% increase in election rates for future partial surrenders $10
million
50 basis point decrease in interest rates:
Mean Investment Performance $30 million
Discount Rate $35 million
10% increase in volatility $15 million
As of June 30, 2009, if contractholder account values invested in underlying
equity mutual funds declined by 10% due to equity market performance, the
after-tax
decrease in net income resulting from an increase in the provision for
partial surrenders would be approximately $20 million.
As of June 30, 2009, if contractholder account values invested in underlying
bond/money market mutual funds declined by 3% due to bond/money market
performance, the after-tax decrease in net income resulting from an increase in
the provision for partial surrenders and an increase in unhedged exposure would
be approximately $15 million.
The amounts would be reflected in the Run-off Reinsurance segment. |
48
|
|
|
|
|
Balance Sheet Caption / |
|
|
|
|
Nature of Critical Accounting Estimate |
|
Assumptions / Approach Used |
|
Effect if Different Assumptions Used |
Accounts payable, accrued expenses and other liabilities, and Other assets
Guaranteed minimum income benefits
These liabilities are estimates of the present value of net amounts
expected to be paid, less the present value of net future premiums expected
to be received. The amounts to be paid represent the excess of the
expected value of the income benefit over the value of the annuitants
accounts at the time of annuitization.
The assets associated with these contracts represent receivables in
connection with reinsurance that the Company has purchased from two
external reinsurers, which covers 55% of the exposures on these contracts.
As discussed in Note 2 to the Consolidated Financial Statements, the
Company implemented SFAS No. 157, Fair Value Measurements, on January 1,
2008. At adoption, the Company was required to change certain assumptions.
As a result, the Company recorded a charge of $131 million after-tax, net
of reinsurance ($202 million pre-tax).
Liabilities related to these contracts were as follows (in millions):
June 30, 2009 $1,224
Dec 31, 2008 $1,757
Estimated amounts receivable related to these contracts from two external
reinsurers, were as follows (in millions):
June 30, 2009 $685
Dec 31, 2008 $953
|
|
With the adoption of SFAS No. 157, the Company updated assumptions to reflect those
that the Company believes a hypothetical market participant would use to determine a
current exit price. The Company estimates a hypothetical market participants view
of these assumptions considering market observable information, the actual and
expected experience of the Company, and other relevant and available industry
sources. Resulting changes in fair value are reported in GMIB expense.
The Company considers the various assumptions used to estimate the fair values of
assets and liabilities associated with those contracts in two categories. The first
group of assumptions used to estimate these fair values consist of capital market
inputs including market returns and discount rates, claim interest rates and market
volatility.
Interest rates include (a) market returns, (b) the liability discount rate assumption
and (c) the projected interest rates used to calculate the reinsured income benefit
at the time of annuitization (claim interest rate).
Volatility refers to the degree of variation of future market returns of the
underlying mutual fund investments.
The second group of assumptions consists of future annuitant behavior including
annuity election rates, lapse, and mortality, retrocessionnaire credit risk, and a
risk and profit charge.
Annuity election rates refer to the proportion of annuitants who elect to receive
their income benefit as an annuity.
Lapse refers to the full surrender of an annuity prior to annuitization of the policy.
Credit risk refers to the ability of these reinsurers to pay.
Risk and profit charge refers to the amount that a hypothetical market participant
would include in the valuation to cover the uncertainty of outcomes and the desired
return on capital.
|
|
Current assumptions used to estimate these liabilities are
detailed in Note 11 to the Consolidated Financial Statements.
With the adoption of SFAS No. 157, the Companys results of
operations are expected to be more volatile in future periods
because these assumptions will be based largely on
market-observable inputs at the close of each period including
interest rates and market implied volatilities.
Based on current and historical market, industry and
Company-specific experience and managements judgment, the
Company believes that it is reasonably likely that the
unfavorable changes in the key assumptions and/or conditions
described below could occur. If these unfavorable assumption
changes were to occur, the approximate after-tax decrease in net
income, net of estimated amounts receivable from reinsurers,
would be as follows:
50 basis point decrease in interest rates (which are
aligned with LIBOR) used for projecting market returns and
discounting $15 million
50 basis point decrease in interest rates used for
projecting claim exposure (7-year Treasury rates) $30 million
20%
increase in implied market volatility
$5 million
5% decrease in mortality $1 million
10% increase in annuity election rates $5 million
10% decrease in lapse rates $5 million
10% decrease in amounts receivable from reinsurers
(credit risk) $40 million
10% increase to the risk and profit charge $5 million
Market declines which reduce annuitants account values expose
the Company to higher potential claims which results in a larger
net liability. If annuitants account values as of June 30, 2009
declined by 10% due to the performance of the underlying mutual
funds, the approximate after-tax decrease in net income, net of
estimated amounts receivable from reinsurers, would be
approximately $30 million.
All of these estimated impacts due to unfavorable changes in
assumptions could vary from quarter to quarter depending on
actual reserve levels, the actual market conditions or changes in
the anticipated view of a hypothetical market participant as of
any future valuation date.
The amounts would be reflected in the Run-off Reinsurance
segment. |
49
Investments Fixed Maturities. Losses for other-than-temporary impairments of fixed
maturities must be recognized in shareholders net income based on an estimate of fair value or the
present value of expected cash flows by management. Determining whether a decline in value is
other-than-temporary includes an evaluation of the reasons for, the significance of, and the
duration of the decrease in value of the security and the Companys intent to sell or likelihood of
requirement to sell the security before recovery. For all fixed maturities with cost in excess of
their fair value, if this excess was determined to be other-than-temporary, the Companys
shareholders net income as of June 30, 2009 would have decreased by $249 million after-tax. See
Note 9 to the Consolidated Financial Statements for more information.
Summary
There are other accounting estimates used in the preparation of the Companys Consolidated
Financial Statements, including estimates of liabilities for future policy benefits other than
those identified above, as well as estimates with respect to unpaid claims and claim expenses,
post-employment and postretirement benefits other than pensions, certain compensation accruals and
income taxes.
Management believes the current assumptions used to estimate amounts reflected in the Companys
Consolidated Financial Statements are appropriate. However, if actual experience differs from the
assumptions used in estimating amounts reflected in the Companys Consolidated Financial
Statements, the resulting changes could have a material adverse effect on the Companys
consolidated results of operations, and in certain situations, could have a material adverse effect
on liquidity and the Companys financial condition.
50
SEGMENT REPORTING
Operating segments generally reflect groups of related products, but the International segment is
generally based on geography. The Company measures the financial results of its segments using
segment earnings (loss), which is defined as shareholders income (loss) from continuing
operations excluding after-tax realized investment gains and losses.
Health Care Segment
Segment Description
The Health Care segment includes medical, dental, behavioral health, prescription drug and other
products and services that may be integrated to provide consumers with comprehensive health care
solutions. This segment also includes group disability and life insurance products that were
historically sold in connection with certain experience-rated medical products. These products and
services are offered through a variety of funding arrangements such as guaranteed cost,
retrospectively experience-rated and administrative services only arrangements.
The Company measures the operating effectiveness of the Health Care segment using the following key
factors:
|
|
sales of specialty products to core medical customers; |
|
|
changes in operating expenses per member; and |
|
|
medical expense as a percentage of premiums (medical cost ratio) in the guaranteed cost
business. |
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
2,855 |
|
|
$ |
3,065 |
|
|
$ |
5,766 |
|
|
$ |
5,769 |
|
Net investment income |
|
|
46 |
|
|
|
53 |
|
|
|
80 |
|
|
|
100 |
|
Mail order pharmacy revenues |
|
|
316 |
|
|
|
286 |
|
|
|
628 |
|
|
|
582 |
|
Other revenues |
|
|
69 |
|
|
|
69 |
|
|
|
135 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
3,286 |
|
|
|
3,473 |
|
|
|
6,609 |
|
|
|
6,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mail order pharmacy cost of goods sold |
|
|
255 |
|
|
|
227 |
|
|
|
507 |
|
|
|
466 |
|
Benefits and other expenses |
|
|
2,729 |
|
|
|
2,961 |
|
|
|
5,562 |
|
|
|
5,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
|
2,984 |
|
|
|
3,188 |
|
|
|
6,069 |
|
|
|
6,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
302 |
|
|
|
285 |
|
|
|
540 |
|
|
|
461 |
|
Income taxes |
|
|
108 |
|
|
|
104 |
|
|
|
191 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
194 |
|
|
$ |
181 |
|
|
$ |
349 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
(11 |
) |
|
$ |
(1 |
) |
|
$ |
(16 |
) |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
25 |
|
|
$ |
|
|
|
$ |
25 |
|
|
$ |
|
|
Cost reduction charge |
|
$ |
(8 |
) |
|
$ |
|
|
|
$ |
(8 |
) |
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Charge related to litigation matters |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(24 |
) |
51
Excluding the special items noted in the table above, the Health Care segments earnings for
the second quarter of 2009 were lower than the same period last year, primarily due to:
|
|
lower investment income, primarily reflecting lower real estate income; and |
|
|
lower Medicare Part D earnings reflecting a decline in membership, as well as lower
margins. |
These unfavorable effects were largely offset by:
|
|
lower operating expenses reflecting both volume related
declines, as well as a reduction in
baseline expenses; |
|
|
higher stop loss earnings, due in part to improving total medical cost management
particularly in the acquired business; |
|
|
higher Medicare risk earnings due in part to higher membership; and |
|
|
strong contributions from the Specialty businesses. |
Segment earnings for the six months ended June 30, 2009, as compared with the six months ended June
30, 2008, were favorably impacted by the absence of the following items recorded in the first
quarter of 2008:
|
|
$4 million after-tax of incremental medical costs related to higher than expected upper
respiratory inpatient claims; and |
|
|
$7 million after-tax related to an adjustment to a large experience-rated life and
non-medical account in run-out. |
Excluding these items and the special items noted in the table above, segment earnings for the six
months ended June 30, 2009 were slightly higher compared to the six months ended June 30, 2008
reflecting:
|
|
higher stop loss earnings largely benefiting from the acquired business (effective April 1,
2008); |
|
|
higher Medicare risk earnings due in part to higher membership; and |
|
|
higher active case margins in the experience-rated business. |
These favorable effects were largely offset by:
|
|
lower investment income, primarily reflecting lower real estate and security partnership
income; and |
|
|
lower Medicare Part D earnings reflecting a decline in membership, as well as lower
margins. |
52
Revenues
The table below shows premiums and fees for the Health Care segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Medical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed cost excluding voluntary / limited benefits(1),(2) |
|
$ |
786 |
|
|
$ |
898 |
|
|
$ |
1,583 |
|
|
$ |
1,788 |
|
Voluntary / Limited Benefits |
|
|
58 |
|
|
|
52 |
|
|
|
118 |
|
|
|
102 |
|
Experience-rated(2),(3) |
|
|
426 |
|
|
|
496 |
|
|
|
858 |
|
|
|
989 |
|
Stop loss |
|
|
320 |
|
|
|
351 |
|
|
|
653 |
|
|
|
511 |
|
Dental |
|
|
185 |
|
|
|
195 |
|
|
|
371 |
|
|
|
394 |
|
Medicare |
|
|
153 |
|
|
|
101 |
|
|
|
291 |
|
|
|
196 |
|
Medicare Part D |
|
|
75 |
|
|
|
87 |
|
|
|
166 |
|
|
|
190 |
|
Other (4) |
|
|
127 |
|
|
|
128 |
|
|
|
258 |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical |
|
|
2,130 |
|
|
|
2,308 |
|
|
|
4,298 |
|
|
|
4,427 |
|
Life and other non-medical |
|
|
46 |
|
|
|
58 |
|
|
|
96 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums |
|
|
2,176 |
|
|
|
2,366 |
|
|
|
4,394 |
|
|
|
4,521 |
|
Fees(2),(5) |
|
|
679 |
|
|
|
699 |
|
|
|
1,372 |
|
|
|
1,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and fees |
|
$ |
2,855 |
|
|
$ |
3,065 |
|
|
$ |
5,766 |
|
|
$ |
5,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes guaranteed cost premiums primarily associated with open access and commercial
HMO, as well as other risk-related products. |
|
(2) |
|
Premiums and/or fees associated with certain specialty products are also included. |
|
(3) |
|
Includes minimum premium members who have a risk profile similar to experience-rated
funding arrangements. The risk portion of minimum premium revenue is reported in
experience-rated medical premium whereas the self funding portion of minimum premium
revenue is recorded in fees. Also, includes certain non-participating cases for which
special customer level reporting of experience is required. |
|
(4) |
|
Other medical premiums include risk revenue for specialty products. |
|
(5) |
|
Represents administrative service fees for medical members and related specialty
product fees for non-medical members as well as fees related to Medicare Part D of $27
million for the second quarter of 2009 and $53 million for the six months ended June 30,
2009 and $24 million for the second quarter of 2008 and $48 million for the six
months ended June 30, 2008. |
Premiums and fees decreased 7% for the second quarter of 2009 and were essentially level for
the six months ended June 30, 2009, compared with the same periods of 2008, primarily reflecting
lower membership largely due to disenrollment, particularly in the guaranteed cost and
experience-rated businesses.
This impact was partially offset by rate increases and favorable revenue yields, as well as
membership growth in the Medicare private fee for services product.
Net investment income decreased 13% for the second quarter of 2009 and 20% for the six months ended
June 30, 2009 compared with the same periods of 2008, primarily reflecting lower real estate
income, with the six months ended results also impacted by lower security partnership income.
Other revenues for the Health Care segment consist of revenues earned on direct channel sales of
certain specialty products, including behavioral health and disease management.
53
Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Medical claims expense |
|
$ |
1,748 |
|
|
|
1,917 |
|
|
$ |
3,528 |
|
|
|
3,661 |
|
Other benefit expenses |
|
|
38 |
|
|
|
53 |
|
|
|
86 |
|
|
|
102 |
|
Mail order pharmacy cost of goods sold |
|
|
255 |
|
|
|
227 |
|
|
|
507 |
|
|
|
466 |
|
Other operating expenses |
|
|
943 |
|
|
|
991 |
|
|
|
1,948 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
$ |
2,984 |
|
|
$ |
3,188 |
|
|
$ |
6,069 |
|
|
$ |
6,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical claims expense decreased 9% for the second quarter of 2009 and 4% for the six months
ended June 30, 2009 compared with the same periods in 2008 largely due to lower membership,
particularly on experience-rated and guaranteed cost business; partially offset by increases in
medical expense related to claim trend and Medicare member driven growth.
Other operating expenses include expenses related to:
|
|
integration costs associated with the acquired business; |
|
|
|
both retail and mail order pharmacy; |
|
|
|
disease management; |
|
|
|
voluntary and limited benefits; and |
|
|
|
Medicare claims administration businesses. |
Excluding the items noted above, other operating expenses for the second quarter of 2009 were lower
than the same period last year reflecting both volume related declines as well as a reduction in
baseline expenses. Operating expenses increased for the six months ended June 30, 2009, compared
with the six months ended June 30, 2008, primarily due to expenses related to the acquired business
(effective April 1, 2008), as well as a modest increase in information technology related expenses.
Other Items Affecting Health Care Results
Medical Membership
The Companys medical membership includes any individual for whom the Company retains medical
underwriting risk, who uses the Companys network for services covered under their medical coverage
or for whom the Company administers medical claims. As of June 30, estimated medical membership
was as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
Guaranteed cost excluding voluntary/limited benefits (1) |
|
|
769 |
|
|
|
960 |
|
Voluntary/limited benefits |
|
|
223 |
|
|
|
204 |
|
Medicare |
|
|
49 |
|
|
|
34 |
|
|
|
|
|
|
|
|
Total guaranteed cost |
|
|
1,041 |
|
|
|
1,198 |
|
Experience-rated (2) |
|
|
773 |
|
|
|
929 |
|
Service |
|
|
9,375 |
|
|
|
9,940 |
|
|
|
|
|
|
|
|
Total medical membership |
|
|
11,189 |
|
|
|
12,067 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes guaranteed cost members primarily associated with open access and commercial
HMO, as well as other risk-related products. |
|
(2) |
|
Includes minimum premium members, who have a risk profile similar to experience-rated
members. |
The net decrease in the Companys medical membership is 7% as of June 30, 2009 when compared
with June 30, 2008, primarily driven by disenrollment across all funding arrangements as a result
of the current economic environment.
54
Operational Improvement Initiatives
The Company is focused on several initiatives including developing and enhancing a customer focused
service model. This effort is expected to require significant investments over the next 3 to 5
years. These investments are expected to enable the Company to grow its membership and to improve
operational effectiveness and profitability by developing innovative products and services that
promote customer engagement at a competitive cost. Executing on these operational improvement
initiatives is critical to attaining a leadership position in the health care marketplace.
The operational improvement initiatives currently underway are discussed below.
Reducing other operating expenses. The Company operates in an intensely competitive marketplace
and its ability to establish a fully competitive cost advantage is key to achieving its
initiatives. Accordingly, the Company is focused on reducing operating expenses in three key areas
primarily to facilitate operating efficiency and responsiveness to customers. These three areas
include: customer acquisition, which encompasses spending on sales, the account management process,
underwriting and marketing; fulfillment, mainly claims processing and billing; and reducing
overhead in various administrative and staffing functions. In connection with these efforts, in
the fourth quarter of 2008, the Company completed a review of staffing levels and organization and
announced a plan to reorganize its business model and supporting areas to more tightly align the
ongoing operating segments. During the second quarter of 2009 the Company continued its review of
operating expenses in the HealthCare segment, identifying additional job eliminations, in order to
meet the challenges and opportunities presented by the current economic environment.
Maintaining and upgrading information technology systems. The Companys current business model and
long-term strategy require effective and reliable information technology systems. The Companys
current systems architecture will require continuing investment to meet the challenges of
increasing customer demands from both our existing and emerging customer base to support its
business growth and strategies, improve its competitive position and provide appropriate levels of
service to customers. The Company is focused on providing these enhanced strategic capabilities in
response to increasing customer expectations, while continuing to provide a consistent, high
quality customer service experience with respect to the Companys current programs. Accordingly, in
2009, the Companys efforts will be focused primarily on optimizing the technology underlying our
claims processing and call servicing capabilities with specific emphasis on reducing handling time
and improving customer service. Continued integration of the Companys multiple administrative
and customer facing platforms is also required to support the Companys growth strategies, and to
ensure reliable, efficient and effective customer service both in todays employer focused model as
well as in a customer directed model. The Companys ability to effectively deploy capital to make
these investments will influence the timing and the impact these initiatives will have on its
operations.
Profitable
sales and customer retention. The Company continues to focus
on selling profitable new business and retaining current customers by:
|
|
focusing on targeted segments where buyers value our health improvement capabilities; |
|
|
|
providing a diverse product portfolio that meets current market needs as well as emerging consumer-directed trends; |
|
|
|
developing and implementing the systems, information technology and infrastructure to deliver member service that keeps
pace with the emerging consumer-directed market trends; |
|
|
|
ensuring competitive provider networks; |
|
|
|
maintaining a strong clinical quality in medical, specialty health care and disability management; and |
|
|
|
increasing specialty penetration. |
The Company is also focused on segment and product expansion. With respect to segment expansion,
our focus is predominantly in the Select (employers with 51-250 employees), and individual
segments. As part of its effort to achieve these objectives, the Company completed the acquisition
of Great-West Healthcare of Denver, Colorado on April 1, 2008. This acquisition will enable the
Company to broaden its distribution reach and provider network, particularly in the western regions
of the United States, and expand the range of health benefits and product offerings.
The Company has also recently developed new product offerings for its guaranteed cost and
experienced-rated portfolios. These offerings will provide our employer customers with lower-cost
options for providing medical, pharmacy and dental benefits.
Driving additional cross-selling is also key to our integrated benefits value proposition. We are
expanding network access for our dental product and improving network flexibility to ensure better
alignment with our customers needs. Also, with the acquisition of Great-West Healthcare, we will
be working in 2009 to transition this book to CIGNA pharmacy and increase pharmacy penetration
across the entire book.
55
Offering products that meet emerging customer and market trends. In order to meet emerging customer
and market trends, the Companys suite of products (CIGNATURE®, CareAllies®, and CIGNA Choice
Fund®) offers various options to customers and employers and is key to our customer engagement
strategy. Offerings include: choice of benefit, participating provider network, funding, medical
management, and health advocacy options. Through the CIGNA Choice Fund®, the Company offers a set
of customer-directed capabilities that includes options for health reimbursement arrangements
and/or health savings accounts and enables customers to make effective health decisions using
information tools provided by the Company.
Underwriting and pricing products effectively. One of the Companys key priorities is to achieve
strong profitability in a competitive health care market. The Company is focused on effectively
managing pricing and underwriting decisions at both the case and overall book of business level,
particularly for the guaranteed cost book, as well as its experience-rated, ASO businesses and stop
loss coverages.
Effectively managing medical costs. The Company operates under a centralized medical management
model, which helps facilitate consistent levels of care for its members and reduces infrastructure
expenses.
The Company is focused on continuing to effectively manage medical utilization and unit costs. The
Company believes that by increasing the quality of medical care and improving access to care we can
drive reductions in total medical cost and better outcomes, resulting in healthier members. To
help achieve this, the Company continues to focus on contracting with providers, enhancing clinical
activities, as well as engaging our members and clients/employers. In addition, the Company seeks
to strengthen its network position in selected markets. In connection with the Great-West
Healthcare acquisition in April 2008, the Company has made significant progress converting and
integrating these acquired members to its extensive preferred provider network which offers access
to a broad range of utilization review and case management services at a reduced medical cost. The
integration is progressing well, with savings from medical cost management initiatives (including
contract integration and enhancement of clinical activities) projected to be on target, with most
to be achieved by the end of 2009.
Delivering quality member and provider service. The Company is focused on delivering competitive
service to members, providers and customers. The Company believes that further enhancing quality
service can improve member retention and, when combined with useful health information and tools,
can help motivate members to become more engaged in their personal health, and will help promote
healthy outcomes thereby removing cost from the system. The evolution of the consumer-driven
healthcare market is driving increased product and service complexity and is raising customers
expectations with respect to service levels, which is expected to require significant investment,
management attention and heightened interaction with customers.
The Company is focused on the development and enhancement of a service model that is capable of
meeting the challenges brought on by the increasing product and service complexity and the
heightened expectations of health care customers. The Company continues to make significant
investments in the development and implementation of systems and technology to improve the member
and provider service experience, enhance its capabilities and improve its competitive position.
The Companys health advocacy capabilities support its recent membership growth efforts. The
Company must be able to deliver those capabilities efficiently and cost-effectively. The Company
continues to identify additional cost savings to further improve its competitive cost position.
Savings generated from the Companys operating efficiency initiatives provide capital to make
investments that will enhance its capabilities in the areas of customer engagement, particularly
product development, the delivery of member service and health advocacy and related technology.
Disability and Life Segment
Segment Description
The Disability and Life segment includes group disability, life, accident and specialty insurance
and case management services for disability and workers compensation.
Key factors for this segment are:
|
|
premium and fee growth, including new business and customer retention; |
|
|
benefits expense as a percentage of earned premium (loss ratio); and |
|
|
other operating expense as a percentage of earned premiums and fees (expense ratio). |
56
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
661 |
|
|
$ |
638 |
|
|
$ |
1,333 |
|
|
$ |
1,269 |
|
Net investment income |
|
|
61 |
|
|
|
64 |
|
|
|
118 |
|
|
|
128 |
|
Other revenues |
|
|
28 |
|
|
|
31 |
|
|
|
57 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
750 |
|
|
|
733 |
|
|
|
1,508 |
|
|
|
1,458 |
|
Benefits and expenses |
|
|
618 |
|
|
|
631 |
|
|
|
1,296 |
|
|
|
1,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
132 |
|
|
|
102 |
|
|
|
212 |
|
|
|
198 |
|
Income taxes |
|
|
39 |
|
|
|
29 |
|
|
|
56 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
93 |
|
|
$ |
73 |
|
|
$ |
156 |
|
|
$ |
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net of taxes |
|
$ |
3 |
|
|
$ |
(4 |
) |
|
$ |
(7 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
4 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
|
|
Cost reduction charge |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
|
|
Segment earnings for the three months ended June 30, 2009 include the favorable after-tax
impact of reserve studies of $20 million, which primarily reflects strong results from disability
management programs over the past several years, resulting in improved resolution rates. Results
also include the favorable after-tax impact of special items of $3 million. Segment earnings for
the three months ended June 30, 2008 include the favorable after-tax impact of reserve studies of
$8 million, also reflecting strong results from disability management programs. Excluding the
impact of reserve studies and special items, segment earnings increased due to favorable life,
disability and accident claims experience partially offset by lower net investment income.
Segment earnings for the six months ended June 30, 2009 include the favorable after-tax impact of
reserve studies of $29 million and special items of $8 million. Segment earnings for the six
months ended June 30, 2008 include the favorable after-tax impact of reserve studies of $11
million. Excluding the impact of reserve studies and special items, segment earnings decreased due
to lower investment income, higher expenses and less favorable life claims experience, partially
offset by favorable accident claims experience.
Revenues
Premiums and fees increased 4% and 5% respectively, for the three and six months ended June 30,
2009 reflecting new sales growth and solid customer retention in the disability and life lines of
business, partially offset by less favorable customer retention in the specialty line of business.
Net investment income decreased 5% for the three months ended June 30, 2009 reflecting lower yields
and 8% for the six months ended June 30, 2009 reflecting lower yields and lower real estate and
security partnership income.
Benefits and Expenses
Benefits and expenses include the favorable pre-tax impact of reserve studies and special items of
$33 million for the three months ended June 30, 2009 and $11 million for the three months ended
June 30, 2008. Excluding the impact of the reserve studies and special items, benefits and
expenses increased 1%, primarily reflecting disability and life business growth offset by more
favorable life, disability and accident claims experience. The more favorable life claims
experience was driven by lower mortality in the group life business offset by the higher average
size of death claims. The more favorable disability claims experience was driven by higher
resolutions partially offset by higher new claims. The expense ratio reflects effective operating
expense management offset by investments in the claim operations and strategic information
technology initiatives.
Benefits and expenses include the favorable pre-tax impact of reserve studies and special items of
$46 million for the six months ended June 30, 2009 and $16 million for the six months ended June
30, 2008. Excluding the impact of the reserve studies and special items, benefits and expenses
increased 5%, primarily reflecting disability and life business growth, less favorable life claims
experience partially offset by a slightly lower expense ratio and more favorable accident claims
experience. The less favorable life claims experience was driven by a higher average size of
death claims. The lower expense ratio reflects effective operating expense management offset by
investments in the claim operations and strategic information technology initiatives.
57
International Segment
Segment Description
The International segment includes life, accident and supplemental health insurance products and
international health care products and services, including those offered to expatriate employees of
multinational corporations.
The key factors for this segment are:
|
|
premium growth, including new business and customer retention; |
|
|
benefits expense as a percentage of earned premium (loss ratio); and |
|
|
operating expense as a percentage of earned premium (expense ratio). |
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
462 |
|
|
$ |
479 |
|
|
$ |
896 |
|
|
$ |
951 |
|
Net investment income |
|
|
17 |
|
|
|
19 |
|
|
|
33 |
|
|
|
39 |
|
Other revenues |
|
|
5 |
|
|
|
4 |
|
|
|
10 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
484 |
|
|
|
502 |
|
|
|
939 |
|
|
|
997 |
|
Benefits and expenses |
|
|
414 |
|
|
|
427 |
|
|
|
804 |
|
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
70 |
|
|
|
75 |
|
|
|
135 |
|
|
|
156 |
|
Income taxes |
|
|
6 |
|
|
|
27 |
|
|
|
28 |
|
|
|
55 |
|
Income attributable to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
64 |
|
|
$ |
48 |
|
|
$ |
106 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency movements included in segment earnings |
|
$ |
(7 |
) |
|
$ |
(1 |
) |
|
$ |
(16 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains, net of taxes |
|
$ |
3 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
During the second quarter of 2009, the Companys International Segment implemented a strategy to
permanently invest the earnings of its South Korean operation overseas. Income taxes for this
operation will therefore be recorded at the tax rate of the foreign jurisdiction. Segment earnings
reflect favorable tax adjustments of $14 million for the implementation of this strategy and $5
million related to the ongoing impact of the lower tax rate on the permanently invested earnings
for the second quarter of 2009 and the six months ended June 30, 2009. Excluding the impact of the
Korean tax adjustments, the impact of foreign currency movements and the special items noted above,
International segment earnings increased 6% for the second quarter of 2009 and 1% for the six
months ended June 30, 2009, compared with the same periods last year. The increase in the second
quarter of 2009 and for six months ended June 30, 2009 was primarily driven by strong fundamental
revenue growth in the life, accident and supplemental health insurance business and the expatriate
employee benefits business, partially offset by unfavorable claims experience in both businesses.
Margins in the life, accident and supplemental health business and the expatriate employee benefits
businesses remained competitively strong. The impact of foreign currency movements is calculated
by comparing the reported results to what the results would have been had the exchange rates
remained constant with the prior years comparable period exchange rates.
Revenues
Premiums and fees. The decrease in premiums and fees of 4% for the second quarter of 2009 and 6%
for the six months ended June 30, 2009, compared with the same periods last year, was primarily
attributable to unfavorable currency movements partially offset by new sales growth in the life,
accident and supplemental health insurance operations, particularly in South Korea, and membership
growth in the expatriate employee benefits business. These results also continue to reflect
appropriate renewal pricing on existing business.
58
Premiums and fees, excluding the effect of foreign currency movements, were $527 million for the
second quarter of 2009 and $1,055 million for the six months ended June 30, 2009, compared with
$483 million for the second quarter of 2008 and $946 million for the six months ended June 30,
2008.
Benefits and Expenses
Benefits and expenses decreased 3% for the second quarter of 2009 and 4% for the six months ended
June 30, 2009, compared with the same periods last year, primarily due to foreign currency
movements and lower expenses partially offset by business growth, higher loss ratios and increased
amortization of acquisition costs.
Loss ratios increased for the second quarter of 2009 and for the six months ended June 30, 2009, in
the life accident and supplemental health and the expatriate benefits businesses due to unfavorable
claims experience.
Policy acquisition expenses decreased for the second quarter of 2009 and the six months ended June
30, 2009 in the life, accident and supplemental health business due to foreign currency movements,
partially offset by business growth and higher amortization of deferred acquisition costs
associated with lower persistency.
Expense ratios decreased for the second quarter of 2009 and six months ended June 30, 2009,
reflecting effective expense management and foreign currency movements.
Other Items Affecting International Results
For the Companys International segment, South Korea is the single largest geographic market. South
Korea generated 29% of the segments revenues for the second quarter of 2009 and 27% for the six
months ended June 30, 2009. South Korea generated 55% of the segments earnings for the second
quarter of 2009 and 46% of the segments earnings for the six months ended June 30, 2009. Due to
the concentration of business in South Korea, the International segment is exposed to potential
losses resulting from economic and geopolitical developments in that country, as well as foreign
currency movements affecting the South Korean currency, which could have a significant impact on
the segments results and the Companys consolidated financial results.
59
Run-off Reinsurance Segment
Segment Description
The Companys reinsurance operations were discontinued and are now an inactive business in run-off
mode since the sale of the U.S. individual life, group life and accidental death reinsurance
business in 2000. This segment is predominantly comprised of guaranteed minimum death benefit
(GMDB, also known as VADBe), guaranteed minimum income benefit (GMIB), workers compensation and
personal accident reinsurance products.
The determination of liabilities for GMDB and GMIB required the Company to make critical accounting
estimates. The Company describes the assumptions used to develop the reserves for GMDB in Note 7
to the Consolidated Financial Statements and for the assets and liabilities associated with GMIB in
Note 8 to the Consolidated Financial Statements.
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
6 |
|
|
$ |
9 |
|
|
$ |
12 |
|
|
$ |
25 |
|
Net investment income |
|
|
34 |
|
|
|
23 |
|
|
|
58 |
|
|
|
45 |
|
Other revenues |
|
|
(189 |
) |
|
|
5 |
|
|
|
(74 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
(149 |
) |
|
|
37 |
|
|
|
(4 |
) |
|
|
116 |
|
Benefits and expenses |
|
|
(321 |
) |
|
|
(23 |
) |
|
|
(136 |
) |
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefits |
|
|
172 |
|
|
|
60 |
|
|
|
132 |
|
|
|
(236 |
) |
Income taxes (benefits) |
|
|
60 |
|
|
|
18 |
|
|
|
46 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (loss) |
|
$ |
112 |
|
|
$ |
42 |
|
|
$ |
86 |
|
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment losses, net of taxes |
|
$ |
(3 |
) |
|
$ |
(4 |
) |
|
$ |
(6 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of GMIB business (after-tax) included in segment earnings (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge on adoption of SFAS No. 157 for GMIB contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(131 |
) |
Results of GMIB business excluding charge on adoption |
|
$ |
110 |
|
|
$ |
34 |
|
|
$ |
133 |
|
|
$ |
(30 |
) |
Segment earnings for the six months ended June 30, 2009 included a loss from the GMDB business
of $50 million, primarily due to reserve strengthening in the first quarter of $47 million.
Excluding the results of the GMIB (presented in the table above) and GMDB businesses, segment
earnings for Run-off Reinsurance were lower for the three months and six months ended June 30, 2009
compared with the same periods of 2008, reflecting reduced favorable settlement activity related to
personal accident and workers compensation.
See the Benefits and Expenses section for further discussion around the results of the GMIB and
GMDB businesses.
Other Revenues
Other revenues included pre-tax losses from futures contracts used in the GMDB equity hedge program
(see Note 7 to the Consolidated Financial Statements) of $188 million for the three months ended
and $71 million for the six months ended June 30, 2009, compared with pre-tax gains of $6 million
for the three months ended and $48 million for the six months ended June 30, 2008. Amounts
reflecting corresponding changes in liabilities for GMDB contracts were included in benefits and
expenses consistent with GAAP when a premium deficiency exists (see below Other Benefits and
Expenses). The notional amount of the futures contract positions held by the Company at June 30,
2009 related to this program was $1.3 billion.
60
Benefits and Expenses
Benefits and expenses were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
GMIB (income) expense |
|
$ |
(164 |
) |
|
$ |
(49 |
) |
|
$ |
(196 |
) |
|
$ |
255 |
|
Other benefits and expenses |
|
|
(157 |
) |
|
|
26 |
|
|
|
60 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
$ |
(321 |
) |
|
$ |
(23 |
) |
|
$ |
(136 |
) |
|
$ |
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB Expense. Under SFAS No. 157, the Companys results of operations are expected to be
volatile in future periods because assumptions will be based largely on market-observable inputs at
the close of each reporting period including interest rates (LIBOR swap curve) and market-implied
volatilities.
The pre-tax income for GMIB was $164 million for the three months ended June 30, 2009 and $196
million for the six months ended June 30, 2009, and was primarily due to the following factors:
|
|
increases in interest rates ($129 million for the three months and $206 million for the six
months ended June 30, 2009); |
|
|
increases in underlying account values in the period, driven by favorable equity market and
bond fund returns, resulting in reduced exposures ($51 million for the three months and $32
million for the six months ended June 30, 2009); and |
|
|
updates to the risk and profit charge estimates ($20 million for the three months and $18
million for the six months ended June 30, 2009). |
These favorable effects were partially offset by:
|
|
increases to the annuitization assumption, reflecting higher utilization experience ($21
million for the three months and six months ended June 30, 2009); |
|
|
updates to the lapse assumption (none for the three months and $14 million for the six
months ended June 30, 2009); and |
|
|
other amounts (including experience varying from assumptions, model and in-force updates)
($15 million for the three months and $25 million for the six months ended June 30, 2009). |
During the three months ended June 30, 2008, the pre-tax income for GMIB of $49 million was
primarily driven by increases in interest rates. For the six months ended June 30, 2008, GMIB
expenses of $255 million included a pre-tax charge of $202 million for the adoption of SFAS No.
157, which is discussed further in Note 2 to the Consolidated Financial Statements. Excluding this
one-time effect of adopting SFAS No. 157, expense for the six months ending June 30, 2008 was
primarily the result of declines in equity markets.
The GMIB liabilities and related assets are calculated using a complex internal model and
assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and
related asset) is higher than the Company believes will ultimately be required to settle claims
primarily because market-observable interest rates are used to project growth in account values of
the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market
participant. The Companys payments for GMIB claims are expected to occur over the next 15 to 20
years and will be based on actual values of the underlying mutual
funds and the 7-year treasury
rate at the dates benefits are elected. Management does not believe that current market-observable
interest rates reflect actual growth expected for the underlying mutual funds over that timeframe,
and therefore believes that the recorded liability and related asset do not represent what will
ultimately be required as this business runs off.
However, significant declines in mutual fund values that underlie the contracts (increasing the
exposure to the Company) together with declines in the 7-year treasury rate during 2008 (used to
determine claim payments) increased the expected amount of claims that will be paid out for
contractholders who choose to annuitize while these conditions continue. It is also possible that
these unfavorable market conditions will have an impact on the level of contractholder
annuitizations, particularly if these unfavorable market conditions persist for an extended period.
61
Other Benefits and Expenses. Other benefits and expenses reflected income for the three months
ended and expense for the six months ended June 30, 2009, compared to expense during the comparable
periods in 2008. These fluctuations reflect the impact of significant improvements in the equity
markets on guaranteed minimum death benefit contracts during the three months ended June 30, 2009,
compared to varying levels of equity market declines during all other periods presented. Equity
market improvements result in increases in the underlying annuity account values, which decreases
the exposure under the contracts. Equity market declines result in decreases in the underlying
annuity account values, which increases the exposure under the contracts. These changes in
benefits expense are partially offset by futures gains and losses, discussed in Other Revenues
above.
The Company recorded additional other benefits and expenses of $73 million ($47 million after-tax)
primarily to strengthen GMDB reserves following an analysis of experience during the first quarter
of 2009. These amounts were primarily due to:
|
|
adverse impacts of overall market declines of $50 million ($32 million after-tax). This
includes (a) $39 million ($25 million after-tax) primarily related to the provision for future
partial surrenders and (b) $11 million ($7 million after-tax) related to declines in the
values of contractholders non-equity investments such as bond funds, neither of which is
included in the GMDB equity hedge program; |
|
|
adverse volatility-related impacts of $11 million ($7 million after-tax) due to turbulent
equity market conditions, including higher than expected claims and the performance of the
diverse mix of equity fund investments held by contractholders being different than expected;
and |
|
|
adverse interest rate impacts of $12 million ($8 million after-tax). Interest rate risk is
not covered by the GMDB equity hedge program, and the interest rate returns on the futures
contracts were less than the Companys long-term assumption for mean investment performance. |
See Note 7 to the Consolidated Financial Statements for additional information about assumptions
and reserve balances related to GMDB.
Segment Summary
The Companys payment obligations for underlying reinsurance exposures assumed by the Company under
these contracts are based on ceding companies claim payments. For GMDB and GMIB, claim payments
vary because of changes in equity markets and interest rates, as well as mortality and policyholder
behavior. For workers compensation and personal accident, the claim payments relate to accidents
and injuries. Any of these claim payments can extend many years into the future, and the amount of
the ceding companies ultimate claims, and therefore the amount of the Companys ultimate payment
obligations and corresponding ultimate collection from retrocessionaires may not be known with
certainty for some time.
The Companys reserves for underlying reinsurance exposures assumed by the Company, as well as for
amounts recoverable from retrocessionaires, are considered appropriate as of June 30, 2009, based
on current information. However, it is possible that future developments, which could include but
are not limited to worse than expected claim experience and higher than expected volatility, could
have a material adverse effect on the Companys consolidated results of operations and could have a
material adverse effect on the Companys financial condition. The Company bears the risk of loss
if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or
successfully challenge, their reinsurance obligations to the Company.
Other Operations Segment
Segment Description
Other Operations consist of:
|
|
non-leveraged and leveraged corporate-owned life insurance (COLI); |
|
|
deferred gains recognized from the 1998 sale of the individual life insurance and annuity
business and the 2004 sale of the retirement benefits business; and |
|
|
run-off settlement annuity business. |
62
Results of Operations
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums and fees |
|
$ |
29 |
|
|
$ |
27 |
|
|
$ |
57 |
|
|
$ |
55 |
|
Net investment income |
|
|
102 |
|
|
|
105 |
|
|
|
200 |
|
|
|
209 |
|
Other revenues |
|
|
17 |
|
|
|
18 |
|
|
|
33 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
|
148 |
|
|
|
150 |
|
|
|
290 |
|
|
|
300 |
|
Benefits and expenses |
|
|
116 |
|
|
|
117 |
|
|
|
242 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
32 |
|
|
|
33 |
|
|
|
48 |
|
|
|
66 |
|
Income taxes |
|
|
11 |
|
|
|
11 |
|
|
|
8 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings |
|
$ |
21 |
|
|
$ |
22 |
|
|
$ |
40 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment losses, net of taxes |
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(5 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special item (after-tax) included in segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings for Other Operations for the second quarter of 2009 declined compared with
the same period last year due to the continued decline in deferred gain amortization associated
with sold businesses, partially offset by slightly higher COLI earnings driven by more favorable
mortality. For the six months ended June 30, 2009, earnings declined compared with the same period
last year due to the continued decline in deferred gain amortization associated with sold
businesses and lower COLI earnings driven by less favorable mortality and lower interest margins.
Corporate
Description
Corporate reflects amounts not allocated to segments, such as net interest expense (defined as
interest on corporate debt less net investment income on investments not supporting segment
operations) interest on uncertain tax positions, certain litigation matters, intersegment
eliminations, compensation cost for stock options and certain corporate overhead expenses such as
directors expenses.
FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Segment loss |
|
$ |
(40 |
) |
|
$ |
(81 |
) |
|
$ |
(62 |
) |
|
$ |
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special items (after-tax) included in segment loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion of IRS examination |
|
$ |
|
|
|
$ |
|
|
|
$ |
12 |
|
|
$ |
|
|
Charges related to litigation matters |
|
$ |
|
|
|
$ |
(52 |
) |
|
$ |
|
|
|
$ |
(52 |
) |
Excluding the special items noted above (see Consolidated Results of Operations section of the
MD&A beginning on page 44 for more information on special
items), Corporate losses were higher for both the three months ended and the six months ended June 30, 2009, compared with same periods
last year. The increase in losses primarily reflects higher net interest expense attributable to
lower average invested assets and increased debt to finance the acquired business. In addition,
directors expenses increased due to increases in the Companys stock price during the three months
ended and six months ended June 30, 2009 compared with decreases during the three months ended and
six months ended June 30, 2008.
DISCONTINUED OPERATIONS
Description
Discontinued operations represent results associated with certain investments or businesses that
have been sold or are held for sale.
Discontinued operations for the six months ended June 30, 2009 primarily represented a tax benefit
associated with a past divestiture related to the completion of the 2005 and 2006 IRS examinations.
63
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.
64
INDUSTRY DEVELOPMENTS AND OTHER MATTERS
The disability industry is under continuing review by regulators and legislators with respect to
its offset practices regarding Social Security Disability Insurance (SSDI). There has been
specific inquiry as to the industrys role in assisting individuals with their applications for
SSDI. The Company has received one Congressional inquiry and has responded to the information
request. Also, legislation prohibiting the offset of SSDI payments against private disability
insurance payments for prospectively issued policies was introduced but not enacted in the
Connecticut state legislature. The Company is also involved in related pending litigation. If the
industry is forced to change its offset SSDI procedures, the practices and products for the
Companys Disability & Life segment could be significantly impacted.
In 1998, the Company sold its individual life insurance and annuity business to Lincoln National
Life Insurance Company and its affiliates (Lincoln). Because this business was sold in an
indemnity reinsurance transaction, the Company is not relieved of primary liability for the
reinsured business and had reinsurance recoverables totaling $4.5 billion as of June 30, 2009.
Lincoln has secured approximately 90% of its reinsurance obligations under these arrangements by
placing assets into a trust which qualifies under Regulation 114 of the New York Insurance
Department.
The Companys remaining reinsurance recoverables are unsecured. If Lincoln does not maintain a
specified financial strength rating, at the Companys request, Lincoln is contractually required to
provide additional assurance that it will meet its reinsurance obligations, to include placing
assets in a trust to secure these remaining reinsurance recoverables.
Since the filing of the Companys 2008 Form 10-K, Moodys has downgraded the financial strength
rating of the Lincoln affiliated reinsurer to A2 from A1 and S&P has downgraded its rating to AA-
from AA. In light of the downgrades, the Company is closely monitoring the situation.
65
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company maintains liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
|
|
claim and benefit payments to policyholders; and |
|
|
|
operating expense requirements, primarily for employee compensation and benefits. |
The Companys subsidiaries normally meet their operating requirements by:
|
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
|
|
|
using cash flows from operating activities; |
|
|
|
selling investments; |
|
|
|
matching investment maturities to the estimated duration of the related insurance and contractholder liabilities; and |
|
|
|
borrowing from its parent company. |
Liquidity requirements at the parent level generally consist of:
|
|
debt service and dividend payments to shareholders; and |
|
|
|
funding of pension plans. |
The parent normally meets its liquidity requirements by:
|
|
maintaining appropriate levels of cash, cash equivalents and short-term investments; |
|
|
|
collecting dividends from its subsidiaries; |
|
|
|
using proceeds from issuance of debt and equity securities; |
|
|
|
collecting pension contributions from subsidiaries in the amount of the GAAP expense charged; and |
|
|
|
borrowing from its subsidiaries. |
Cash flows for the six months ended June 30, were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
|
2008 |
|
Operating activities |
|
$ |
112 |
|
|
$ |
559 |
|
Investing activities |
|
$ |
(648 |
) |
|
$ |
(2,347 |
) |
Financing activities |
|
$ |
211 |
|
|
$ |
623 |
|
Cash flows from operating activities consist of cash receipts and disbursements for premiums
and fees, gains (losses) recognized in connection with the Companys GMDB equity hedge program,
investment income, taxes, benefits and expenses.
Because certain income and expense transactions do not generate cash, and because cash transactions
related to revenue and expenses may occur in periods different from when those revenues and
expenses are recognized in shareholders net income, cash flows from operating activities can be
significantly different from shareholders net income.
Cash flows from investing activities generally consist of net investment purchases or sales and net
purchases of property and equipment, which includes capitalized software, as well as cash used to
acquire businesses.
Cash flows from financing activities are generally comprised of issuances and re-payment of debt at
the parent level, proceeds on the issuance of common stock resulting from stock option exercises,
and stock repurchases. In addition, the subsidiaries report net deposits/withdrawals to/from
investment contract liabilities (which include universal life insurance liabilities) because such
liabilities are considered financing activities with policyholders.
66
2009:
Operating activities
For the six months ended June 30, 2009, cash flows from operating activities were less than net
income by $532 million. Net income contains certain after-tax non-cash income and expense items,
including:
|
|
|
GMIB income of $133 million; |
|
|
|
A curtailment gain of $30 million, net of a cost reduction charge of $9 million; |
|
|
|
Tax benefits related to the IRS examination of $20 million; |
|
|
|
Depreciation and amortization charges of $94 million; and |
|
|
|
Realized investment losses of $33 million. |
Cash flows from operating activities were lower than net income excluding the non-cash items noted
above by $485 million. This decrease was primarily due to cash outflows of $71 million associated
with the GMDB equity hedge program which did not affect shareholders net income, contributions to
the qualified domestic pension plan of approximately $320 million and increases in receivables.
Cash flows from operating activities decreased by $447 million compared with the six months ended
June 30, 2008. Excluding the results of the GMDB equity hedge program (which did not affect
shareholders net income), cash flows from operating activities decreased by $328 million. This
decrease primarily reflects contributions to the qualified domestic pension plan of approximately
$320 million for the six months ended June 30, 2009, compared with none for the six months ended
June 30, 2008.
Investing activities
Cash used in investing activities was $648 million. This use of cash primarily consisted of net
purchases of investments of $512 million and net purchases of property and equipment of $136
million.
Financing activities
Cash provided from financing activities primarily consisted of net proceeds from the issuance of
long-term debt of $346 million, offset by repayments of short-term debt, principally commercial
paper, of $197 million. Financing activities also included net deposits to contractholder deposit
funds of $88 million.
2008:
Operating activities
For the six months ended June 30, 2008, cash flows from operating activities were greater than net
income by $228 million. Net income contains certain after-tax non-cash income and expense items,
including:
|
|
|
GMIB expense of $161 million; |
|
|
|
Litigation accruals of $76 million; |
|
|
|
Depreciation and amortization charges of $76 million; and |
|
|
|
Realized investment losses of $3 million. |
Cash flows from operating activities were lower than net income excluding the non-cash items noted
above by $88 million. This decrease was primarily due to cash outflows related to annual payments
of incentive compensation in the first quarter and the timing of payments for litigation matters,
reinsurance premiums, experience rated refunds and premium taxes. These outflows were partially
offset by cash inflows associated with the GMDB equity hedge program of $48 million.
67
Investing activities
The Company used net cash of $1.3 billion to fund the acquisition of Great-West Healthcare.
Excluding this item, cash used in investing activities was $1.0 billion. This use of cash
primarily consisted of net purchases of investments of $910 million and net purchases of property
and equipment of $128 million.
Financing activities
Cash provided from financing activities primarily consisted of proceeds from the net issuance of
short-term debt and long-term debt of $425 million and $298 million, respectively. These borrowing
arrangements were entered into for general corporate purposes, including the financing of the
acquisition of Great-West Healthcare. Financing activities also included net deposits to
contractholder deposit funds of $104 million and proceeds from the issuance of common stock under
the Companys stock plans of $35 million and dividends on and repurchases of common stock of $231
million.
Interest Expense
Interest expense on long-term debt, short-term debt and capital leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest expense |
|
$ |
41 |
|
|
$ |
37 |
|
|
$ |
79 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense for the six months ended June 30, 2009 was primarily due to
the issuance of debt in connection with the Great-West Healthcare acquisition.
Capital Resources
The Companys capital resources (primarily retained earnings and the proceeds from the issuance of
debt and equity securities) provide protection for policyholders, furnish the financial strength to
underwrite insurance risks and facilitate continued business growth.
Management, guided by regulatory requirements and rating agency capital guidelines, determines the
amount of capital resources that the Company maintains. Management allocates resources to new
long-term business commitments when returns, considering the risks, look promising and when the
resources available to support existing business are adequate.
The Company prioritizes its use of capital resources to:
|
|
provide capital necessary to support growth and maintain or improve the financial strength
ratings of subsidiaries; |
|
|
consider acquisitions that are strategically and economically advantageous; and |
|
|
return capital to investors through share repurchase. |
The availability of capital resources will be impacted by equity and credit market conditions.
Extreme volatility in credit or equity market conditions may reduce the Companys ability to issue
debt or equity securities. Significant volatility and deterioration of the equity markets during
2008 resulted in reduced retained earnings and reduced the capital available for growth,
acquisitions, and share repurchase.
On March 14, 2008, the Company entered into a new commercial paper program (the Program). Under
the Program, the Company is authorized to sell from time to time short-term unsecured commercial
paper notes up to a maximum of $500 million. The proceeds are used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share repurchases. The Company
uses the credit facility described below as back-up liquidity to support the outstanding commercial
paper. If at any time funds are not available on favorable terms under the Program, the Company
may use the Credit Agreement (see below) for funding. In October 2008, the Company added an
additional dealer to its Program. As of June 30, 2009, the Company had $102 million in commercial
paper outstanding, at a weighted average interest rate of 1.13% and
remaining maturities ranging from one to 34 days.
68
On May 4, 2009, the Company issued $350 million of 8.50% Notes ($349 million, net of debt discount,
with an effective interest rate of 9.90% per year). The difference between the stated and
effective interest rates primarily reflects the effect of a treasury lock. See Note 10 to the
Consolidated Financial Statements for further information. Interest is payable on May 1 and
November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for
general corporate purposes, including the repayment of some of the Companys outstanding commercial
paper. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate
of 6.68% per year). Interest is payable on March 15 and September 15 of each year beginning
September 15, 2008. The proceeds of this debt were used for general corporate purposes, including
financing the acquisition of Great-West Healthcare. These Notes will mature on March 15, 2018.
The Company may redeem these Notes, at any time, in whole or in part, at a redemption price equal
to the greater of:
|
|
100% of the principal amount of the Notes to be redeemed; or |
|
|
the present value of the remaining principal and interest payments on the Notes being
redeemed discounted at the applicable treasury rate plus 50 basis points (8.50% Notes due
2019) or 40 basis points (6.35% Notes due 2018). |
Liquidity and Capital Resources Outlook
At June 30, 2009, there was approximately $180 million in cash available at the parent company
level. For the remainder of 2009, the parent companys cash requirements include scheduled
interest payments of approximately $85 million on outstanding long-term debt of $2.4 billion at
June 30, 2009, approximately $90 million of required pre-tax contributions to the domestic
qualified pension plan and approximately $100 million of commercial paper that will mature over the
next three months. There are no scheduled long-term debt repayments in 2009. The parent company
expects to fund these cash requirements with a combination of subsidiary dividends, tax benefits on
the pension contributions and by refinancing the maturing commercial paper borrowings with new
commercial paper.
The estimated remaining contributions to the domestic qualified pension plan during 2009 do not
include funding requirements related to the litigation matter discussed in Note 17 to the
Consolidated Financial Statements, as management does not expect this matter to be resolved in
2009. Future years contributions will ultimately be based on a wide range of factors including
but not limited to asset returns, discount rates, and funding targets.
The availability of resources at the parent company level is partially dependent on dividends from
the Companys subsidiaries, most of which are subject to regulatory restrictions and rating agency
capital guidelines, and partially dependent on the availability of liquidity from the issuance of
debt or equity securities.
The Company expects, based on current projections for cash activity, to have sufficient liquidity
to meet its obligations.
However, the Companys cash projections may not be realized and the demand for funds could exceed
available cash if:
|
|
ongoing businesses experience unexpected shortfalls in earnings; |
|
|
|
regulatory restrictions or rating agency capital guidelines reduce the amount of dividends available to be distributed
to the parent company from the insurance and HMO subsidiaries (including the impact of equity market deterioration and
volatility on subsidiary capital); |
|
|
|
significant disruption or volatility in the capital and credit markets reduces the Companys ability to raise capital
or creates unexpected losses related to the GMDB and GMIB businesses; |
|
|
|
a substantial increase in funding over current projections is required for the Companys pension plans; or |
|
|
|
a substantial increase in funding is required for the Companys GMDB equity hedge program. |
In those cases, the Company expects to have the flexibility to satisfy liquidity needs through a
variety of measures, including intercompany borrowings and sales of liquid investments. The parent
company may borrow up to $400 million from Connecticut General Life Insurance Company (CGLIC)
without prior state approval. As of June 30, 2009, the parent company had no outstanding
borrowings from CGLIC. In addition, the Company may use short-term borrowings, such as the
commercial paper program and the committed line of credit agreement of up to $1.75 billion subject
to the maximum debt leverage covenant in its line of credit agreement. As of June 30, 2009, the
Company had an additional $1 billion of borrowing capacity within the maximum debt leverage
covenant in the line of credit agreement in addition to the $2.5 billion of debt outstanding as of
June 30, 2009.
69
Though the Company believes it has adequate sources of liquidity, continued significant disruption
or volatility in the capital and credit markets could affect the Companys ability to access those
markets for additional borrowings or increase costs associated with borrowing funds.
Solvency regulation. Many states have adopted some form of the National Association of
Insurance Commissioners (NAIC) model solvency-related laws and risk-based capital rules (RBC
rules) for life and health insurance companies. The RBC rules recommend a minimum level of
capital depending on the types and quality of investments held, the types of business written and
the types of liabilities incurred. If the ratio of the insurers adjusted surplus to its
risk-based capital falls below statutory required minimums, the insurer could be subject to
regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based
upon solvency, liquidity and reserve coverage measures. During 2008, the Companys HMOs and life
and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with
applicable RBC and non-U.S. surplus rules.
In 2008, the NAIC adopted Actuarial Guideline VACARVM, which will be effective December 31, 2009.
VACARVM will impact statutory and tax reserves for CIGNAs GMDB and GMIB contracts. Upon
implementation, it is anticipated that statutory reserves for these contracts will increase and
thus statutory surplus for Connecticut General Life Insurance Company will be reduced. The
magnitude of any impact depends on equity market and interest rate levels at the time of
implementation.
Guarantees and Contractual Obligations
The Company, through its subsidiaries, is contingently liable for various contractual obligations
entered into in the ordinary course of business. See Note 17 to the Consolidated Financial
Statements for additional information.
Contractual obligations. The Company has updated its contractual obligations previously provided
on page 71 of the Companys 2008 Form 10-K for certain items as follows:
|
|
other long-term liabilities associated with GMIB contracts primarily as a result of
increasing interest rates, as well as equity market improvements during the second quarter of
2009, partially offset by the unfavorable equity market environment during the first quarter
of 2009; |
|
|
future policy benefit liabilities associated with GMDB contracts as a result of
improvements in the equity market environment during the second quarter of 2009, partially
offset by the unfavorable equity market environment during the first quarter of 2009; |
|
|
short-term debt, primarily as a result of maturing commercial paper. See Note 13 to the
Consolidated Financial Statements for additional information; and |
|
|
long-term debt, primarily due to the issuance of new debt in the second quarter of 2009,
see Note 13 to the Consolidated Financial Statements for additional information. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
4-5 |
|
|
After 5 |
|
(In millions, on an undiscounted basis) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
On-Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
11,561 |
|
|
$ |
490 |
|
|
$ |
939 |
|
|
$ |
793 |
|
|
$ |
9,339 |
|
Short-term debt |
|
$ |
106 |
|
|
$ |
106 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
$ |
4,772 |
|
|
$ |
150 |
|
|
$ |
782 |
|
|
$ |
281 |
|
|
$ |
3,559 |
|
Other long-term liabilities |
|
$ |
1,807 |
|
|
$ |
857 |
|
|
$ |
393 |
|
|
$ |
189 |
|
|
$ |
368 |
|
INVESTMENT ASSETS
The Companys investment assets do not include separate account assets. Additional information
regarding the Companys investment assets and related accounting policies is included in Notes 2,
8, 9 and 14 to the Consolidated Financial Statements. More detailed information about the fixed
maturities and mortgage loan portfolios by type of issuer, maturity dates, and, for mortgages by
property type and location is included in Note 9 to the Consolidated Financial Statements and Notes
2, 12, 13 and 16 to the Consolidated Financial Statements in the Companys 2008 Form 10-K.
70
Investments in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor
and trading securities. Fixed maturities and equity securities include hybrid securities. Fair
values are based on quoted market prices when available. When market prices are not available,
fair value is generally estimated using discounted cash flow analyses, incorporating current market
inputs for similar financial instruments with comparable terms and credit quality. In instances
where there is little or no market activity for the same or similar instruments, the Company
estimates fair value using methods, models and assumptions that the Company believes a hypothetical
market participant would use to determine a current transaction price.
The Company performs ongoing analyses on prices to conclude that they represent reasonable
estimates of fair value. This process involves quantitative and qualitative analysis and is
overseen by the Companys investment professionals. This process also includes review of pricing
methodologies, pricing statistics and trends and backtesting recent trades.
As of June 30, 2009, the Companys mix of investments and their primary characteristics have not
materially changed since December 31, 2008. The Companys fixed maturity portfolio continues to be
diversified by issuer and industry type, with no single industry constituting more than 10% of
total invested assets as of June 30, 2009. The Companys commercial mortgage loans continue to be
diversified by property type, location and borrower to reduce exposure to potential losses.
As of
June 30, 2009, approximately 64% or $1,594 million of the Companys total investments in state and local
government securities of $2,478 million were guaranteed by monoline bond insurers.
The quality ratings of these investments with and without this
guaranteed support as of June 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
June 30, |
|
|
|
|
|
2009 |
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
Without |
|
(in millions) |
|
Quality Rating |
|
With Guarantee |
|
|
Guarantee |
|
State and local governments |
|
Aaa |
|
$ |
67 |
|
|
$ |
42 |
|
|
|
Aa1-Aa3 |
|
|
1,131 |
|
|
|
974 |
|
|
|
A1-A3 |
|
|
338 |
|
|
|
393 |
|
|
|
Baa1-Baa3 |
|
|
57 |
|
|
|
23 |
|
|
|
Not available |
|
|
1 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
Total state and local governments |
|
|
|
$ |
1,594 |
|
|
$ |
1,594 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, approximately 84% or $381 million of the Companys total investments in
other asset-backed securities of $451 million were guaranteed by monoline bond insurers. All of
these securities had quality ratings of Baa2 or better. Quality ratings without considering the
guarantees for these other asset-backed securities were not available.
As of June 30, 2009, the Company had no direct investments in monoline bond insurers. Guarantees
provided by various monoline bond insurers for certain of the Companys investments in state and
local governments and other asset-backed securities as of June 30, 2009 were:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
June 30, |
|
(in millions) |
|
Guarantor |
|
2009 |
|
Guarantor |
|
Quality Rating |
|
Indirect Exposure |
|
AMBAC |
|
Ba1 |
|
$ |
206 |
|
MBIA, Inc. |
|
A3 |
|
|
1,151 |
|
Financial Security Assurance |
|
Aa1 |
|
|
578 |
|
Financial Guaranty Insurance Co. |
|
NR |
|
|
40 |
|
|
|
|
|
|
|
Total |
|
|
|
$ |
1,975 |
|
|
|
|
|
|
|
71
The Company continues to underwrite investments in these securities focusing on the underlying
issuers credit quality, without regard for guarantees. As such, this portfolio of state and local
government securities, guaranteed by monoline bond insurers is of high quality with approximately
88% rated A3 or better without their guarantees.
Problem and Potential Problem Investments
Problem bonds and commercial mortgage loans are either delinquent by 60 days or more or have been
restructured as to terms (interest rate or maturity date). Potential problem bonds and
commercial mortgage loans are considered current (no payment more than 59 days past due), but
management believes they have certain characteristics that increase the likelihood that they may
become problems. These characteristics include, but are not limited to, the following:
|
|
request from the borrower for restructuring; |
|
|
principal or interest payments past due by more than 30 but fewer than 60 days; |
|
|
downgrade in credit rating; |
|
|
collateral losses on asset-backed securities; and |
|
|
for commercial mortgages, deterioration of debt service coverage below 1.0x and/or value
declines resulting in estimated loan-to-value ratios increasing to 100% or above. |
The Company recognizes interest income on problem bonds and commercial mortgage loans only when
payment is actually received because of the risk profile of the underlying investment. The amount
that would have been reflected in net income if interest on non-accrual investments had been
recognized in accordance with the original terms was not significant for the six months ended June
30, 2009 and 2008.
The following table shows problem and potential problem investments at amortized cost, net of
valuation reserves and write-downs:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Gross |
|
|
Reserve |
|
|
Net |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Problem bonds |
|
$ |
109 |
|
|
$ |
(57 |
) |
|
$ |
52 |
|
Potential problem bonds |
|
$ |
141 |
|
|
$ |
(5 |
) |
|
$ |
136 |
|
Problem commercial mortgage loans |
|
$ |
66 |
|
|
$ |
|
|
|
$ |
66 |
|
Potential problem commercial mortgage loans |
|
$ |
255 |
|
|
$ |
|
|
|
$ |
255 |
|
Foreclosed real estate |
|
$ |
59 |
|
|
$ |
|
|
|
$ |
59 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Problem bonds |
|
$ |
94 |
|
|
$ |
(59 |
) |
|
$ |
35 |
|
Potential problem bonds |
|
$ |
140 |
|
|
$ |
(14 |
) |
|
$ |
126 |
|
Potential problem commercial mortgage loans |
|
$ |
92 |
|
|
$ |
|
|
|
$ |
92 |
|
Potential problem commercial mortgage loans represent 7% of the total loan portfolio. These
increased $163 million and $166 million from December 31, 2008 and March 31, 2009, respectively,
reflecting the results of managements in-depth portfolio loan review which was completed in early
July 2009 and included in the above table. The loan review includes an analysis of each propertys
December 31, 2008 audited financial statements, 2009 rent rolls and operating plans/budgets, a
physical inspection of the property and other pertinent factors. As a result of this review
management added nine loans totaling $169 million to the potential problem loan list that are
exhibiting signs of distress such as an elevated loan to value ratio and/or low or negative debt
service coverage. These loans were all performing according to their contractual terms as of June
30, 2009 and although they are showing signs of stress, most of these loans are well collateralized and management does not expect
any significant impact to the Companys financial condition.
72
Overview
The Company recorded after-tax realized investment losses for investment asset write-downs and
changes in valuation reserves as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Credit-Related (1) |
|
$ |
28 |
|
|
$ |
|
|
|
$ |
35 |
|
|
$ |
3 |
|
Other (2) |
|
|
(1 |
) |
|
|
8 |
|
|
|
6 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27 |
|
|
$ |
8 |
|
|
$ |
41 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit-related losses include other-than-temporary declines in value of fixed
maturities, equity securities and real estate entities. The amount related to credit
losses on fixed maturities for which a portion of the impairment was recognized in
other comprehensive income was not significant. |
|
(2) |
|
Prior to adoption of FSP No. 115-2 on April 1, 2009, other primarily represented the
impact of rising market yields on investments where the Company could not demonstrate
the intent and ability to hold until recovery. |
The financial markets experienced a significant rally in the second quarter of 2009. Both
investment grade and below investment grade corporate credit indices reported record tightening of
credit spreads and the S&P 500 posted a total return of 15%. While credit spreads eased in the
quarter and asset values increased significantly, market yields remain elevated in relation to
pre-recessionary levels reflecting the uncertain economic environment, increase default rates and
rising treasury rates. Commercial real estate fundamentals continued to weaken as the struggling
economy negatively impacted occupancy levels and rental rates for all major property types. The
corporate and commercial real estate debt and equity markets are expected to remain challenging
until economic stability returns. As a result of this economic environment, risks in the Companys
investment portfolio remain elevated.
Although credit spreads tightened significantly in the second quarter of 2009, market yields remain
elevated and the market value of the Companys existing investment portfolio remains depressed.
The Companys corporate fixed maturity and commercial mortgage loan portfolios are well diversified
limiting exposure. However, if broad economic conditions and/or illiquidity in the capital markets
persist or worsen, this would likely result in an increase in the severity and duration of the
decline in asset values, and may cause the Company to experience additional problem loans and
investment losses.
As discussed above, the Company completed an in depth commercial mortgage portfolio review in early
July 2009. The loan review includes an analysis of each propertys December 31, 2008 audited
financial statements, 2009 rent rolls and operating plans/budgets, a physical inspection of the
property and other pertinent factors. Based on this review the portfolios loan to value ratio
increased from 64% as of December 31, 2008, to 78% driven by an average decline in the portfolios underlying property
values of 16% since completion of the previous review during the third quarter of 2008. The 16%
decrease is below the reported declines in commercial real estate values of 20% to 30% from peak
prices achieved in late 2006 and into early 2007. This is driven by the combination of management
not fully reflecting 2006-2007 peak prices in previous valuations, along with previous declines in
value recognized during the Companys 2008 review. Debt service coverage was essentially unchanged
at 1.5x reflecting the positive impacts from additional leasing of properties that were in the
process of leasing up (predominantly apartments), and the removal of a non-performing office loan
that was foreclosed during the second quarter of 2009, partially offset by modest declines in
coverage for most loans secured by stabilized properties across all property types, and more
significant declines from hotel loans.
There are also ten loans where the aggregate carrying value of the mortgage loans exceeds the value
of the underlying properties by $24 million. Seven of these loans have current debt service
coverage of greater than 1.0x and the remaining three with debt service coverage below 1.0x have
other mitigating factors including strong borrower sponsorship. The decline in property values and
current underwater position is better than managements expectations reflecting a combination of
factors including, prior year property values not fully reflecting peak market pricing, a more
modest allocation to the more depressed property types such as retail and hotel and the overall
quality of the Companys portfolio. While the results of the loan review were better than
expected, and management believes the portfolio is positioned to perform competitively well due to
the solid aggregate loan to value ratio, strong debt service coverage and minimal underwater
position, the commercial real estate market is exhibiting significant signs of stress and if these
conditions continue for an extended period or worsen substantially it could result in an increase
in problem and potential problem loans.
73
Although the property value declines increased the portfolio loan to value ratios, all but three of
the 181 loans that comprise our total mortgage loan portfolio continue to perform under their
contractual terms, and the actual aggregate default rate is 1.8%. Given the quality and diversity
of the underlying real estate, positive debt service coverage, significant borrower cash investment
averaging nearly 30%, and only $100 million of loans maturing in the next twelve months, the
Company remains confident that the vast majority of borrowers will continue to perform as required
and the mortgage loan portfolio will perform well competitively. Given the current economic
environment, future impairments are possible; however, management does not expect those losses to
have a material effect on the Companys financial
condition.
The value of the Companys fixed maturity portfolio increased $250 million in the second quarter of
2009 driven by a decline in market yields. Although asset values have improved significantly there
are securities with amortized cost in excess of fair value by $383 million. Continued economic
weakness for an extended period could cause the Company to recognize impairment losses if default
rates increase and/or recoveries decline. Future realized and unrealized investment results will
be impacted largely by market conditions that exist when a transaction occurs or at the reporting
date. These future conditions are not reasonably predictable. Management believes that the vast
majority of the Companys fixed maturity investments will continue to perform under their
contractual terms, and that declines in their fair values below carrying value are temporary.
Based on the Companys strategy to match the duration of invested assets to the duration of
insurance and contractholder liabilities, it has both the intent and ability to hold these assets
to recovery. Therefore, future credit related losses are not expected to have a material adverse
effect on the Companys liquidity or financial condition.
The Companys Other Long-Term Investments include $554 million in private equity and real estate
funds as well as direct real estate joint ventures. The funds typically invest in mezzanine debt
or equity of privately held companies and real estate partnerships. Because these investments have
a subordinate position in the capital structure, the Company assumes a higher level of risk for
higher expected returns. Many of these entities have experienced a decline in value over the last
several quarters due to economic weakness and the disruption in the capital markets. To mitigate
risk, these investments are diversified across approximately 55 separate partnerships, and
approximately 35 general partners who manage one or more of those partnerships and the funds
underlying investments are diversified by industry sector, property type, and geographic region.
No single partnership investment exceeds 7% of the Companys private equity and real estate
partnership portfolio. Given the weak economic conditions there continues to be downward pressure
on asset values that could result in future losses but management does not expect any losses to
have a material adverse effect on the Companys liquidity or financial condition.
74
MARKET RISK
Financial Instruments
The Companys assets and liabilities include financial instruments subject to the risk of potential
losses from adverse changes in market rates and prices. The Companys primary market risk
exposures are interest-rate risk, foreign currency exchange rate risk and equity price risk.
The Company uses futures contracts as part of a GMDB equity hedge program to substantially reduce
the effect of equity market changes on certain reinsurance contracts that guarantee minimum death
benefits based on unfavorable changes in underlying variable annuity account values. The
hypothetical effect of a 10% increase in the S&P 500, S&P 400, Russell 2000, NASDAQ, TOPIX
(Japanese), EUROSTOXX and FTSE (British) equity indices and a 10% weakening in the U.S. dollar to
the Japanese yen, British pound and euro would have been a decrease of approximately $130 million
in the fair value of the futures contracts outstanding under this program as of June 30, 2009. A
corresponding decrease in liabilities for GMDB contracts would result from the hypothetical 10%
increase in these equity indices and 10% weakening in the U.S. dollar. See Note 7 to the
Consolidated Financial Statements for further discussion of this program and related GMDB
contracts.
Stock Market Performance
The performance of equity markets can have a significant effect on the Companys businesses,
including on:
|
|
risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial
Statements) and GMIB contracts (see Note 8 to the Consolidated Financial Statements); and |
|
|
pension liabilities since equity securities comprise a significant portion of the assets of
the Companys employee pension plans. See Liquidity and Capital Resources section of the
MD&A beginning on page 66 for further information. |
75
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company and its representatives may from time to time make written and oral forward-looking
statements, including statements contained in press releases, in the Companys filings with the
Securities and Exchange Commission, in its reports to shareholders and in meetings with analysts
and investors. Forward-looking statements may contain information about financial prospects,
economic conditions, trends and other uncertainties. These forward-looking statements are based on
managements beliefs and assumptions and on information available to management at the time the
statements are or were made. Forward-looking statements include but are not limited to the
information concerning possible or assumed future business strategies, financing plans, competitive
position, potential growth opportunities, potential operating performance improvements, trends and,
in particular, the Companys productivity initiatives, litigation and other legal matters,
operational improvement in the health care operations, and the outlook for the Companys full year
2009 results. Forward-looking statements include all statements that are not historical facts and
can be identified by the use of forward-looking terminology such as the words believe, expect,
plan, intend, anticipate, estimate, predict, potential, may, should or similar
expressions.
You should not place undue reliance on these forward-looking statements. The Company cautions that
actual results could differ materially from those that management expects, depending on the outcome
of certain factors. Some factors that could cause actual results to differ materially from the
forward-looking statements include:
1. |
|
increased medical costs that are higher than anticipated in establishing premium rates in the
Companys health care operations, including increased use and costs of medical services; |
2. |
|
increased medical, administrative, technology or other costs resulting from new legislative
and regulatory requirements imposed on the Companys employee benefits businesses; |
3. |
|
challenges and risks associated with implementing operational improvement initiatives and
strategic actions in the ongoing operations of the businesses, including those related to: (i)
offering products that meet emerging market needs, (ii) strengthening underwriting and pricing
effectiveness, (iii) strengthening medical cost and medical membership results, (iv)
delivering quality member and provider service using effective technology solutions, (v)
lowering administrative costs and (vi) transitioning to an integrated operating company model,
including operating efficiencies related to the transition; |
4. |
|
risks associated with pending and potential state and federal class action lawsuits, disputes
regarding reinsurance arrangements, other litigation and regulatory actions challenging the
Companys businesses, government investigations and proceedings, and tax audits and related
litigation; |
5. |
|
heightened competition, particularly price competition, which could reduce product margins
and constrain growth in the Companys businesses, primarily the health care business; |
6. |
|
risks associated with the Companys mail order pharmacy business which, among other things,
includes any potential operational deficiencies or service issues as well as loss or
suspension of state pharmacy licenses; |
7. |
|
significant changes in interest rates and deterioration in the loan to value ratios of
commercial real estate investments for a sustained period of time; |
8. |
|
downgrades in the financial strength ratings of the Companys insurance subsidiaries, which
could, among other things, adversely affect new sales, retention of current business as well
as the downgrade in the financial strength ratings of reinsurers which could result in
increased statutory reserve or capital requirements; |
9. |
|
limitations on the ability of the Companys insurance subsidiaries to dividend capital to the
parent company as a result of downgrades in the subsidiaries financial strength ratings,
changes in statutory reserve or capital requirements or other financial constraints; |
10. |
|
inability of the program adopted by the Company to substantially reduce equity market risks
for reinsurance contracts that guarantee minimum death benefits under certain variable
annuities (including possible market difficulties in entering into appropriate futures
contracts and in matching such contracts to the underlying equity risk); |
11. |
|
adjustments to the reserve assumptions (including lapse, partial surrender, mortality,
interest rates and volatility) used in estimating the Companys liabilities for reinsurance
contracts covering guaranteed minimum death benefits under certain variable annuities; |
12. |
|
adjustments to the assumptions (including annuity election rates and amounts collectible from
reinsurers) used in estimating the Companys assets and liabilities for reinsurance contracts
covering guaranteed minimum income benefits under certain variable annuities; |
76
13. |
|
significant stock market declines, which could, among other things, result in increased
expenses for guaranteed minimum income benefit contracts, guaranteed minimum death benefit
contracts and the Companys pension plans in future periods as well as the recognition of
additional pension obligations; |
14. |
|
unfavorable claims experience related to workers compensation and personal accident
exposures of the run-off reinsurance business, including losses attributable to the inability
to recover claims from retrocessionaires; |
15. |
|
significant deterioration in economic conditions and significant market volatility, which
could have an adverse effect on the Companys operations, investments, liquidity and access to
capital markets; |
16. |
|
significant deterioration in economic conditions and significant market volatility, which
could have an adverse effect on the businesses of our customers (including the amount and type
of healthcare services provided to their workforce, loss in workforce and our customers
ability to pay receivables) and our vendors (including their ability to provide services); |
17. |
|
changes in public policy and in the political environment, which could affect state and
federal law, including legislative and regulatory proposals related to health care issues,
which could increase cost and affect the market for the Companys health care products and
services; and amendments to income tax laws, which could affect the taxation of employer
provided benefits and certain insurance products such as corporate
owned-life insurance; |
18. |
|
potential public health epidemics and bio-terrorist activity, which could, among other
things, cause the Companys covered medical and disability expenses, pharmacy costs and
mortality experience to rise significantly, and cause operational disruption, depending on the
severity of the event and number of individuals affected; |
19. |
|
risks associated with security or interruption of information systems, which could, among
other things, cause operational disruption; |
20. |
|
challenges and risks associated with the successful management of the Companys outsourcing
projects or key vendors, including the agreement with IBM for provision of technology
infrastructure and related services; |
21. |
|
the ability to successfully integrate and operate the businesses acquired from Great-West by,
among other things, renewing insurance and administrative services contracts on competitive
terms, retaining and growing membership, realizing revenue, expense and other synergies,
successfully leveraging the information technology platform of the acquired businesses, and
retaining key personnel; and |
22. |
|
the ability of the Company to execute its growth plans by successfully managing Great-West
Healthcares outsourcing projects and leveraging the Companys capabilities and those of the
business acquired from Great-West to further enhance the combined organizations network
access position, underwriting effectiveness, delivery of quality member and provider service,
and increased penetration of its membership base with differentiated product offerings. |
This list of important factors is not intended to be exhaustive. Other sections of the Companys
2008 Annual Report on Form 10-K, including the Risk Factors section, the Quarterly Report on Form
10-Q for the quarter ended March 31, 2009, and other documents filed with the Securities and
Exchange Commission include both expanded discussion of these factors and additional risk factors
and uncertainties that could preclude the Company from realizing the forward-looking statements.
The Company does not assume any obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law.
77
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information responsive to this item is contained under the caption Market Risk in Item 2 above,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
78
|
|
|
Item 4. |
|
CONTROLS AND PROCEDURES |
Based on an evaluation of the effectiveness of CIGNAs disclosure controls and procedures
conducted under the supervision and with the participation of CIGNAs management, CIGNAs Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered
by this report, CIGNAs 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 SECs rules
and forms.
During the period covered by this report, there have been no changes in CIGNAs internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, CIGNAs internal control over financial reporting.
79
Part II. OTHER INFORMATION
|
|
|
Item 1. |
|
LEGAL PROCEEDINGS |
The information contained under Litigation and Other Legal Matters in Note 17 to CIGNAs
Financial Statements is incorporated herein by reference.
80
CIGNAs Annual Report on Form 10-K for the year ended December 31, 2008 includes a detailed
description of its risk factors.
81
|
|
|
Item 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about CIGNAs share repurchase activity for the quarter
ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities |
|
Period |
|
Total # of shares purchased(1) |
|
|
Average price paid per share |
|
|
Total # of shares purchased as part of publicly announced program (2) |
|
|
Approximate dollar value of
shares that may yet be purchased as part of publicly announced program (3) |
|
April 1-30, 2009 |
|
|
6,039 |
|
|
$ |
19.69 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
May 1-31, 2009 |
|
|
2,962 |
|
|
$ |
21.55 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
June 1-30, 2009 |
|
|
20 |
|
|
$ |
19.45 |
|
|
|
0 |
|
|
$ |
448,919,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9.021 |
|
|
$ |
20.30 |
|
|
|
0 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares tendered by employees as payment of taxes withheld on the exercise of
stock options and the vesting of restricted stock granted under the Companys equity
compensation plans. Employees tendered 6,039 shares in April, 2,962 shares in May and 20
shares in June. |
|
(2) |
|
CIGNA has had a repurchase program for many years, and has had varying levels of
repurchase authority and activity under this program. The program has no expiration date.
CIGNA suspends activity under this program from time to time, generally without public
announcement. Remaining authorization under the program was approximately $449 million as
of June 30, 2009 and July 30, 2009. |
|
(3) |
|
Approximate dollar value of shares is as of the last date of the applicable month. |
82
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
CIGNA held its annual meeting of shareholders on April 22, 2009. As of February 27,
2009, the record date for the meeting, 270,934,706 shares of CIGNA common stock were
outstanding and entitled to vote at the meeting. At the meeting, 225,666,490 shares of CIGNA
common stock were represented in person or by proxy. CIGNA shareholders elected all four
nominees to the Board of Directors and ratified the appointment of PricewaterhouseCoopers LLP
as the independent registered public accounting firm for 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
Votes Against |
|
|
Abstained |
|
1. Election of nominees to
Board of Directors for terms
expiring in 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
H. Edward Hanway |
|
|
219,681,766 |
|
|
|
5,785,376 |
|
|
|
199,348 |
|
John M. Partridge |
|
|
214,583,975 |
|
|
|
10,752,539 |
|
|
|
329,976 |
|
James E. Rogers |
|
|
200,652,321 |
|
|
|
24,712,394 |
|
|
|
301,775 |
|
Eric C. Wiseman |
|
|
214,006,003 |
|
|
|
11,320,522 |
|
|
|
339,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Ratification of
Pricewaterhouse Coopers LLP
as CIGNAs independent
registered public accounting
firm. |
|
|
221,812,563 |
|
|
|
3,601,826 |
|
|
|
252,101 |
|
83