Cigna 10Q 3rd Quarter
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

OR

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

for the transition period from _____ to _____

Commission file number 1-8323

CIGNA Corporation
(Exact name of registrant as specified in its charter)

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

One Liberty Place, 1650 Market Street
Philadelphia, Pennsylvania 19192
(Address of principal executive offices) (Zip Code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No _

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

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

As of September 30, 2005, 125,780,161 shares of the issuer's common stock were outstanding.




CIGNA CORPORATION

INDEX
 
   
 
Page No.
FINANCIAL INFORMATION
       
 
Item 1.
Financial Statements
       
   
Consolidated Income Statements
   
Consolidated Balance Sheets
   
Consolidated Statements of Comprehensive
   
Income and Changes in Shareholders' Equity
  
   
Consolidated Statements of Cash Flows
   
Notes to the Financial Statements
       
 
Item 2.
Management's Discussion and Analysis
   
of Financial Condition and Results of Operations
       
 
Item 3.
Quantitative and Qualitative Disclosures About
   
Market Risk
       
 
Item 4.
Controls and Procedures
       
OTHER INFORMATION
       
 
Item 1.
Legal Proceedings
       
 
Item 2.
Unregistered Sales of Equity Securities and
   
Use of Proceeds
       
 
Item 6.
Exhibits
       
       

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



 
 Part I. FINANCIAL INFORMATION                  
 Item 1. Financial Statements                  
                   
                 
CONSOLIDATED STATEMENTS OF INCOME
                  
(In millions, except per share amounts)
                  
   
Three Months Ended  
  
Nine Months Ended  
  
   
September 30,  
  
September 30,  
  
   
2005
  
2004
  
2005
  
2004
  
                   
REVENUES
                  
Premiums and fees
  
$
3,381
  
$
3,618
  
$
10,151
  
$
10,754
  
Net investment income
    
334
   
340
   
995
   
1,298
 
Other revenues
    
298
   
510
   
1,300
   
1,335
 
Realized investment gains
    
9
   
11
   
28
   
447
 
    Total revenues
    
4,022
   
4,479
   
12,474
   
13,834
 
                           
BENEFITS AND EXPENSES
                          
Health Care medical claims expense
    
1,579
   
1,671
   
4,633
   
5,044
 
Other benefit expenses
    
786
   
946
   
2,481
   
3,022
 
Other operating expenses
    
1,274
   
1,367
   
3,875
   
4,202
 
    Total benefits and expenses
    
3,639
   
3,984
   
10,989
   
12,268
 
                           
INCOME FROM CONTINUING OPERATIONS
                          
    BEFORE INCOME TAXES (BENEFITS)
    
383
   
495
   
1,485
   
1,566
 
                           
Income taxes (benefits):
                          
    Current
    
(58
)
  
58
   
169
   
649
 
    Deferred
    
182
   
129
   
250
   
(102
)
        Total taxes
    
124
   
187
   
419
   
547
 
                           
INCOME FROM CONTINUING OPERATIONS
   
259
   
308
   
1,066
   
1,019
 
                           
INCOME FROM DISCONTINUED OPERATIONS
   
-
   
-
   
349
   
-
 
                           
INCOME BEFORE CUMULATIVE EFFECT
                         
    OF ACCOUNTING CHANGE
    
259
   
308
   
1,415
   
1,019
 
                           
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
                          
    NET OF TAXES
    
-
   
-
   
-
   
(139
)
                           
NET INCOME
 
$
259
  
$
308
  
$
1,415
  
$
880
  
                           
                           
EARNINGS PER SHARE - BASIC
                         
                           
INCOME FROM CONTINUING OPERATIONS
  
$
2.04
  
$
2.28
  
$
8.27
  
$
7.39
  
                           
INCOME FROM DISCONTINUED OPERATIONS
    
-
   
-
   
2.71
   
-
 
                           
INCOME BEFORE CUMULATIVE EFFECT
                         
    OF ACCOUNTING CHANGE
    
2.04
   
2.28
   
10.98
   
7.39
 
                           
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
                          
    NET OF TAXES
    
-
   
-
   
-
   
(1.01
)
                           
NET INCOME
  
$
2.04
  
$
2.28
  
$
10.98
  
$
6.38
  
                           
EARNINGS PER SHARE - DILUTED
                         
                           
INCOME FROM CONTINUING OPERATIONS
  
$
2.00
  
$
2.26
  
$
8.12
  
$
7.32
  
                           
INCOME FROM DISCONTINUED OPERATIONS
    
-
   
-
   
2.66
   
-
 
                           
INCOME BEFORE CUMULATIVE EFFECT
                          
OF ACCOUNTING CHANGE
    
2.00
   
2.26
   
10.78
   
7.32
 
                           
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
                          
    NET OF TAXES
    
-
   
-
   
-
   
(1.00
)
                           
NET INCOME
 
$
2.00
  
$
2.26
  
$
10.78
  
$
6.32
  
                           
                           
DIVIDENDS DECLARED PER SHARE
  
$
0.025
  
$
0.025
  
$
0.075
  
$
0.380
  
                           
The accompanying Notes to the Financial Statements are an integral part of these statements.      
              
                           
 
1
 
                  
CONSOLIDATED BALANCE SHEETS
                   
(In millions, except per share amounts)
                   
       
As of
       
As of
  
       
September 30,
       
December 31,
  
       
2005
       
2004
  
                    
ASSETS
                   
Investments:
                   
      Fixed maturities, at fair value (amortized cost, $14,359; $14,758)
        
$
15,554
        
$
16,081
  
      Equity securities, at fair value (cost, $62; $65)
          
74
         
88
 
      Mortgage loans
          
3,919
         
3,529
 
      Policy loans
          
1,341
         
1,594
 
      Real estate
          
78
         
78
 
      Other long-term investments
          
508
         
478
 
      Short-term investments
          
540
         
71
 
            Total investments
          
22,014
         
21,919
 
Cash and cash equivalents
          
1,251
         
2,519
 
Accrued investment income
          
285
         
285
 
Premiums, accounts and notes receivable
          
1,667
         
1,628
 
Reinsurance recoverables
          
7,382
         
14,595
 
Deferred policy acquisition costs
          
588
         
544
 
Property and equipment
          
660
         
777
 
Deferred income taxes
          
1,238
         
1,383
 
Goodwill
          
1,620
         
1,620
 
Other assets, including other intangibles
         
330
         
312
 
Separate account assets
          
8,862
         
35,477
 
            Total assets
        
$
45,897
        
$
81,059
  
                           
LIABILITIES
                          
Contractholder deposit funds
        
$
10,359
        
$
17,839
  
Future policy benefits
          
8,415
         
8,428
 
Unpaid claims and claim expenses
          
4,365
         
4,311
 
Health Care medical claims payable
          
1,168
         
1,594
 
Unearned premiums
          
357
         
343
 
            Total insurance and contractholder liabilities
          
24,664
         
32,515
 
Accounts payable, accrued expenses and other liabilities
          
5,210
         
6,359
 
Short-term debt
          
100
         
-
 
Long-term debt
          
1,338
         
1,438
 
Nonrecourse obligations
          
65
         
67
 
Separate account liabilities
          
8,862
         
35,477
 
            Total liabilities
          
40,239
         
75,856
 
           
         
 
CONTINGENCIES - NOTE 13
                          
                           
SHAREHOLDERS' EQUITY
                          
Common stock (par value per share, $0.25; shares issued, 160; 160)
          
40
         
40
 
Additional paid-in capital
          
2,262
         
2,360
 
Net unrealized appreciation, fixed maturities
  
$
245
        
$
392
        
Net unrealized appreciation, equity securities
    
10
         
15
       
Net unrealized depreciation, derivatives
    
(14
)
        
(16
)
      
Net translation of foreign currencies
    
(3
)
        
2
       
Minimum pension liability adjustment
    
(759
)
        
(729
)
      
      Accumulated other comprehensive loss
          
(521
)
        
(336
)
Retained earnings
          
5,084
         
3,679
 
Less treasury stock, at cost
          
(1,207
)
        
(540
)
            Total shareholders' equity
          
5,658
         
5,203
 
                           
            Total liabilities and shareholders' equity
        
$
45,897
        
$
81,059
  
                           
SHAREHOLDERS' EQUITY PER SHARE
        
$
44.98
        
$
39.41
  
                           
The accompanying Notes to the Financial Statements are an integral part of these statements.      
              
 
2
 
                   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN   
              
SHAREHOLDERS' EQUITY
                    
(In millions)
                    
                     
Three Months Ended September 30,
  
2005    
  
 2004   
  
   
Compre-
hensive
Income
 
 Share-
holders'
Equity
  
 Compre-
hensive
Income
 
Share-
holders'
Equity
  
                     
Common stock
        
$
40
        
$
69
  
                           
Additional paid-in capital, July 1
          
2,285
         
3,727
 
  Effect of issuance of stock for employee benefits plans
          
(23
)
        
17
 
Additional paid-in capital, September 30
          
2,262
         
3,744
 
                           
Accumulated other comprehensive loss, July 1
          
(390
)
        
(597
)
  Net unrealized appreciation (depreciation), fixed maturities
  
$
(128
)
  
(128
)
$
197
    
197
 
  Net unrealized appreciation (depreciation), equity securities
    
2
   
2
   
(6
)
  
(6
)
  Net unrealized appreciation (depreciation) on securities
    
(126
)
        
191
       
  Net unrealized appreciation (depreciation), derivatives
    
(5
)
  
(5
)
  
3
   
3
 
  Net translation of foreign currencies
    
-
   
-
   
3
   
3
 
  Minimum pension liability adjustment
   
-
   
-
   
21
   
21
 
        Other comprehensive income (loss)
    
(131
)
        
218
       
Accumulated other comprehensive loss, September 30
          
(521
)
        
(379
)
                           
Retained earnings, July 1
          
4,829
         
10,024
 
  Net income
   
259
   
259
   
308
   
308
 
  Common dividends declared
          
(4
)
        
(4
)
Retained earnings, September 30
          
5,084
         
10,328
 
                           
Treasury stock, July 1
          
(885
)
        
(8,856
)
  Repurchase of common stock
          
(466
)
        
(210
)
  Other, primarily issuance of treasury stock for employee benefit plans
          
144
         
8
 
Treasury stock, September 30
          
(1,207
)
        
(9,058
)
TOTAL COMPREHENSIVE INCOME (LOSS) AND
SHAREHOLDERS' EQUITY
  
$
128
  
$
5,658
  
$
526
  
$
4,704
  
                           
Nine Months Ended September 30,                          
                           
Common stock
        
$
40
        
$
69
  
                           
Additional paid-in capital, January 1
          
2,360
         
3,647
 
  Effects of issuance of stock for employee benefits plans
          
(98
)
        
97
 
Additional paid-in capital, September 30
          
2,262
         
3,744
 
                           
Accumulated other comprehensive loss, January 1
          
(336
)
        
(54
)
  Net unrealized depreciation, fixed maturities
  
$
(147
)
  
(147
)
$
(195
)
  
(195
)
  Net unrealized depreciation, equity securities
    
(5
)
  
(5
)
  
(9
)
  
(9
)
      Net unrealized depreciation on securities
    
(152
)
        
(204
)
      
  Net unrealized appreciation, derivatives
    
2
   
2
   
9
   
9
 
  Net translation of foreign currencies
    
(5
)
  
(5
)
  
1
   
1
 
  Minimum pension liability adjustment
   
(30
)
  
(30
)
  
(131
)
  
(131
)
      Other comprehensive loss
    
(185
)
        
(325
)
      
Accumulated other comprehensive loss, September 30
          
(521
)
        
(379
)
                           
Retained earnings, January 1
          
3,679
         
9,502
 
  Net income
    
1,415
   
1,415
   
880
   
880
 
  Common dividends declared
          
(10
)
        
(54
)
Retained earnings, September 30
          
5,084
         
10,328
 
                           
Treasury stock, January 1
          
(540
)
        
(8,557
)
  Repurchase of common stock
          
(1,055
)
        
(494
)
  Other, primarily issuance of treasury stock for employee benefit plans
          
388
         
(7
)
Treasury stock, September 30
          
(1,207
)
        
(9,058
)
TOTAL COMPREHENSIVE INCOME AND
SHAREHOLDERS' EQUITY
  
$
1,230
  
$
5,658
  
$
555
  
$
4,704
  
                           
The accompanying Notes to the Financial Statements are an integral part of these statements.   
                
 
3

         
CONSOLIDATED STATEMENTS OF CASH FLOWS
          
           
   
Nine Months Ended September 30,  
  
   
2005
  
2004
  
           
CASH FLOWS FROM OPERATING ACTIVITIES
          
    Income from continuing operations
  
$
1,066
  
$
1,019
     
    Adjustments to reconcile income from continuing
             
      operations to net cash provided by operating activities:
              
        Insurance liabilities
    
(447
)
  
(601
)
        Reinsurance recoverables
    
1
   
127
 
        Deferred policy acquisition costs
    
(45
)
  
(72
)
        Premiums, accounts and notes receivable
    
159
   
309
 
        Accounts payable, accrued expenses and other liabilities
    
(401
)
  
(180
)
        Current income taxes
    
(72
)
  
98
 
        Deferred income taxes
    
250
   
(102
)
        Realized investment (gains)
   
(28
)
  
(447
)
        Depreciation and amortization
    
170
   
174
 
        Gains on sales of businesses
   
(374
)
  
(239
)
        Proceeds from sales and maturities of securities supporting
             
          experience-rated pension policyholder contracts,
              
          net of purchases
    
-
   
1,039
 
    Other, net
    
(26
)
  
79
 
        Net cash provided by operating activities
    
253
   
1,204
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
              
    Proceeds from investments sold:
             
        Fixed maturities
   
2,110
   
2,245
 
        Equity securities
    
10
   
62
 
        Mortgage loans
    
262
   
64
 
        Other (primarily short-term investments)
    
5,608
   
5,803
 
    Investment maturities and repayments:
              
        Fixed maturities
   
707
   
655
 
        Mortgage loans
    
205
   
662
 
    Investments purchased:
              
        Fixed maturities
   
(2,377
)
  
(3,624
)
        Equity securities
    
(9
)
  
(14
)
        Mortgage loans
    
(858
)
  
(668
)
        Other (primarily short-term investments)
    
(5,885
)
  
(5,575
)
    Proceeds from sale of businesses
    
-
   
2,103
 
    Property and equipment, net
    
(32
)
  
(32
)
    Other, net
    
(18
)
  
(24
)
                Net cash provided by (used in) investing activities
    
(277
)
  
1,657
 
               
               
CASH FLOWS FROM FINANCING ACTIVITIES
              
    Deposits and interest credited to contractholder deposit funds
    
464
   
2,235
 
    Withdrawals and benefit payments from contractholder deposit funds
    
(748
)
  
(2,908
)
    Change in cash overdraft position
    
(219
)
  
(23
)
    Repayment of long-term debt
    
-
   
(76
)
    Repurchase common stock
    
(1,034
)
  
(526
)
    Issuance of common stock
    
301
   
24
 
    Common dividends paid
    
(10
)
  
(54
)
                Net cash used in financing activities
    
(1,246
)
  
(1,328
)
               
    Effect of foreign currency rates on cash
    
2
   
-
 
               
Net increase (decrease) in cash and cash equivalents
    
(1,268
)
  
1,533
 
Cash and cash equivalents, beginning of period
    
2,519
   
1,392
 
               
Cash and cash equivalents, end of period
  
$
1,251
  
$
2,925
  
               
Supplemental Disclosure of Cash Information:
              
        Income taxes paid, net
 
$
218
  
$
543
  
        Interest paid
  
$
75
  
$
79
  
               
The accompanying Notes to the Financial Statements are an integral part of these statements.
              
4

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of CIGNA Corporation, its significant subsidiaries, and variable interest entities of which CIGNA is the primary beneficiary, which are referred to collectively as “CIGNA.” 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.

The interim 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 CIGNA’s 2004 Annual Report to Shareholders and Form 10-K for the year ended 2004.

The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.

Certain reclassifications have been made to prior period amounts to conform to the 2005 presentation.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

Stock compensation. Effective October 1, 2004, CIGNA elected to early adopt Statement of Financial Accounting Standards (SFAS) No. 123 (as revised in 2004 and referred to as SFAS 123R) “Share-Based Payment.” Prior period financial statements have been restated to comply with SFAS 123R. This standard requires companies to recognize in net income an estimate of expense for stock awards and options over their vesting periods typically determined as of the date of grant. Compensation expense for stock options is recorded over their vesting periods based on the estimated fair value of the stock options using an option-pricing model. Compensation expense is recorded for restricted stock grants and deferred stock units over their vesting periods based on fair value, which is equal to the market price of CIGNA common stock on the date of grant. The following information summarizes the effects (reported in Corporate) of implementing this standard on CIGNA’s prior year net income and earnings per share for stock option expense:
           
(In millions, except per share amounts)
  
Three Months
Ended
September 30, 2004
  
Nine Months
Ended
September 30, 2004
  
Net income, prior to implementation
 
$
312
 
$
878
 
Compensation expense for stock options, net of taxes, prior to implementation
 
 
8
 
 
35
 
Compensation expense for stock options, net of taxes, under SFAS 123R
    
 
(12
)
 
(33
)
Net income under SFAS 123R
   
$
308
 
$
880
 
Net income per share:
 
 
 
 
 
 
 
Basic - prior to implementation
 
$
2.31
 
$
6.37
 
Basic - as restated
 
$
2.28
 
$
6.38
 
Diluted - prior to implementation
 
$
2.29
 
$
6.30
 
Diluted - as restated
  
$
2.26
  
$
6.32
  
 
Compensation expense and related tax benefits for stock options, restricted stock and deferred stock units were as follows:
           
   
Three Months
Ended
September 30,
  
Nine Months
Ended
September 30,
  
(In millions)
  
2005
  
2004
  
2005
  
2004
  
Compensation expense
  
$
10
  
$
20
  
$
24
  
$
54
  
Tax benefits
  
$
4
  
$
6
  
$
9
  
$
18
  
 
5
Compensation expense for stock options was determined using the following data:
           
   
Three Months
Ended
September 30,
  
Nine Months
Ended
September 30,
  
(Options in thousands)
  
2005
 
2004
 
2005
 
2004
  
Options granted
 
 
7
 
 
7
 
 
825
 
 
3,166
 
Weighted average fair value of options granted
  
$
41.33
  
$
21.85
  
$
34.08
  
$
19.80
  

The average fair values were determined using the Black-Scholes option-pricing model under the following assumptions:
     
   
As of
     
September 30,
2005
December 31,
2004
Dividend yield
    
0.1%
0.2%
Expected volatility
    
35.0%
47.6%
Risk-free interest rate
    
3.9%
2.2%
Expected option life
    
5.25 years
3.3 years

The expected volatility of 2005 and 2004 grants reflects CIGNA's past daily stock price volatility. CIGNA does not consider volatility implied in the market prices of traded options to be a good indicator of future volatility because remaining maturities of traded options are less than one year. CIGNA developed the expected option life of 2005 grants by considering certain factors, including assumptions used by other companies with comparable stock option plan features and that CIGNA had cancelled a replacement option feature in June 2004. CIGNA developed the expected option life of 2004 grants considering CIGNA's experience.

Restricted stock granted and the average fair value at the date of grant was as follows:
     
 
Three Months
Ended
September 30,
Nine Months
Ended
September 30,
(Grants in thousands)
2005
2004
2005
2004
Restricted stock granted
19
3
331
421
Weighted average fair value
$104.90
$61.64
$92.45
$56.98
 
CIGNA did not award deferred stock units in 2005 or 2004.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, which provided additional guidance to stock option expensing provisions under SFAS 123R. This guidance had no significant impact on CIGNA's early adoption of SFAS 123R; however, CIGNA considered the additional guidance in establishing assumptions to value newly granted stock options under SFAS 123R.

Long-Duration Contracts.  Effective January 1, 2004, CIGNA implemented SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”

The SOP addresses accounting for certain contractual features of investment-related and universal life contracts and for separate accounts. The cumulative effect of implementing the SOP in the first quarter of 2004 was a reduction to net income of $139 million, of which $136 million resulted from recording liabilities for certain experience-rated pension policyholder contracts based on the appreciated value of associated pools of investments, primarily mortgage loans and real estate. CIGNA recorded additional benefits expense of $17 million pre-tax ($11 million after-tax) in the first quarter of 2004 to reflect the post-implementation effect of this accounting requirement. The sale of CIGNA's retirement benefits business generally resulted in the transfer to the buyer of the pool of investments supporting experience-rated pension policyholder contracts. See Note 4 for information about this sale.

The remaining cumulative effect resulted from implementing the SOP’s requirements applicable to universal life contracts. CIGNA’s accounting for reinsurance of guaranteed minimum death benefit contracts and guaranteed minimum income benefit contracts was not affected by the provisions of the SOP.

6
NOTE 3 - INCOME TAXES

During the second quarter of 2005, the Congressional Joint Committee on Taxation approved CIGNA's refund claim relating to a tax loss incurred from the sale of a business in 1999 and the completion of the IRS audit for 2000-2002. An additional tax benefit of $7 million related to this matter was recorded in the third quarter of 2005. Pursuant to this approval, CIGNA recorded total tax benefits of $437 million consisting of:

 
·
$287 million resulting from capital losses realized in connection with the divestiture of the property and casualty insurance operations in 1999, which is included in income from discontinued operations; and
 
·
$150 million resulting primarily from the release of tax reserves and valuation allowances of which:
 
·
$88 million is reported as income from continuing operations; and
 
·
$62 million relates to the divestiture of CIGNA's Brazilian health care business, which is included in income from discontinued operations.

Distribution from policyholders' surplus account. The American Jobs Creation Act of 2004 suspends, for a two-year period commencing January 1, 2005, the tax liability of stock life insurance companies on distributions from the policyholders’ surplus account. CIGNA's principal subsidiary distributed, with regulatory approval, the entire account balance of approximately $450 million to the parent company during the nine months of 2005 without incurring federal income tax.

NOTE 4 - ACQUISITIONS AND DISPOSITIONS

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

Sale of Retirement Benefits Business. On April 1, 2004, CIGNA sold its retirement benefits business, excluding the corporate life insurance business, for cash proceeds of $2.1 billion. The sale resulted in an after-tax gain of $804 million, of which $267 million after-tax was recognized immediately. The sales agreement provides for post closing adjustments, however, any future adjustments are not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition.

As this transaction was primarily in the form of a reinsurance arrangement under which CIGNA retains liability, $537 million of the after-tax gain was deferred. Subsequent to the original reinsurance transaction, the buyer of the retirement benefits business has entered into agreements with some of the insured parties relieving CIGNA of any remaining contractual obligation to those parties (novation). Additional such agreements are expected.
 
The deferred gain is amortized at the rate at which earnings from the sold business would have been expected to emerge (primarily 15 years on a declining basis) until CIGNA is relieved of any remaining contractual obligation. At the time of novation, CIGNA accelerates amortization of a portion of the deferred gain and also reduces the associated contractholder deposit funds, reinsurance recoverables and separate account balances. For the nine months of 2005, liabilities decreased by $32.9 billion as a result of novation activity attributable to the sold retirement benefits business. This decrease consisted of $6.9 billion of contractholder deposit funds and $26.0 billion of separate account liabilities. Corresponding decreases in assets of $32.9 billion consisted of $6.9 billion of reinsurance recoverables and $26.0 billion of separate account assets. See Note 11 for additional information on reinsurance recoverables associated with the sale of the retirement benefits business.

 
7
 
CIGNA recognized deferred gain amortization in other revenues in the Run-off Retirement segment as follows:
           
 
(In millions)
  
 Pre-Tax
  
 After-Tax
  
Three Months Ended September 30,
         
2005
          
Accelerated deferred gain amortization
  
$
10
  
$
2
  
Normal deferred gain amortization
  
$
3
  
$
2
  
2004
              
Accelerated deferred gain amortization
  
$
122
  
$
79
  
Normal deferred gain amortization
  
$
28
  
$
18
  
Nine Months Ended September 30,
              
2005
              
Accelerated deferred gain amortization
  
$
315
  
$
200
  
Normal deferred gain amortization
 
$
21
  
$
14
  
2004
              
Accelerated deferred gain amortization
  
$
126
  
$
82
  
Normal deferred gain amortization
  
$
57
  
$
37
  
 
The remaining pre-tax deferred gain as of September 30, 2005 was $76 million.

On January 1, 2005, CIGNA transferred the assets of substantially all of the separate accounts related to the retirement benefits business to the buyer. Since the arrangement is modified coinsurance, CIGNA received units of the buyer’s separate accounts and carries those units as separate account assets on its balance sheet for the business not yet directly assumed by the buyer. At September 30, 2005, there were approximately $5.1 billion of separate account assets and liabilities associated with the business not yet directly assumed by the buyer.
 
At September 30, 2005, CIGNA had approximately $2.0 billion of invested assets, primarily fixed maturities and mortgage loans, supporting the modified coinsurance arrangement of the single premium annuity business. These invested assets are held in a business trust established by CIGNA. CIGNA pays or receives cash quarterly to settle the results of the reinsured business, including the investment results of the assets underlying the modified coinsurance arrangement. CIGNA recorded in other operating expenses a pre-tax charge of $12 million ($8 million after-tax) for the nine months of 2005 to offset realized investment results. This charge had no effect on CIGNA's net income.

As a result of this modified coinsurance arrangement, CIGNA has an embedded derivative that transfers to the buyer certain unrealized changes in fair value due to interest rate and credit risks of these assets. CIGNA records these effects in other liabilities and other revenues. A decrease in interest rates could result in a charge to CIGNA's consolidated net income until the modified coinsurance arrangement ends in 2006 when the impact of accounting for this embedded derivative will unwind.

The modified coinsurance arrangement provides for conversion to an indemnity reinsurance structure. The buyer will assume ownership of the trust assets in 2006 unless the buyer elects termination, in which case CIGNA would retain the single premium annuity business, including the trust assets and the insurance liabilities. If the buyer elects termination, CIGNA does not expect a material adverse effect to its consolidated results of operations, liquidity or financial condition.

CIGNA had another modified coinsurance arrangement (terminated on December 1, 2004), which created an embedded derivative that transferred to the buyer certain unrealized changes in fair value due to interest rates and credit risk of assets supporting certain separate accounts. In the third quarter of 2004, CIGNA recorded a pre-tax charge in other revenues of $14 million for these effects. For the nine months of 2004, other revenues included a pre-tax benefit of $27 million for these effects and a related pre-tax charge of $41 million reflecting the amortization for the period of the excess of the fair value of related assets over the liabilities under this arrangement.

 
8
 

Discontinued Operations. The table below represents tax benefits recognized in the second quarter of 2005 from past divestitures. See Note 3 for additional information.
       
FINANCIAL SUMMARY 
 
(In millions)
  
Nine Months
Ended
September 30, 2005
  
Income tax benefits:
      
Property and Casualty insurance business
  
$
287
  
Brazilian Health Care operations
    
62
  
Income from discontinued operations
  
$
349
  
 
NOTE 5 - COST REDUCTION PROGRAMS

First quarter 2005 program. In the first quarter of 2005, CIGNA implemented a plan to further streamline operations in the health care business and in supporting areas. As a result, CIGNA recognized in other operating expenses a pre-tax charge of $51 million ($33 million after-tax) for severance costs. The table below shows CIGNA's cost reduction activity (pre-tax) related to severance for this program:
               
(In millions)
  
Health Care
  
Corporate
  
Total
  
First quarter 2005 charge
  
$
22
  
$
29
  
$
51
  
First quarter 2005 payments
    
(1
)
  
(2
)
  
(3
)
Balance as of March 31, 2005
    
21
    
27
    
48
  
Second quarter 2005 payments
    
(5
)
  
(6
)
  
(11
)
Balance as of June 30, 2005
    
16
    
21
    
37
  
Third quarter 2005 payments
    
(4
)
  
(5
)
  
(9
)
Balance as of September 30, 2005
  
$
12
  
$
16
  
$
28
  

Operational effectiveness review. In the first quarter of 2004, CIGNA adopted a restructuring program associated with planned organizational changes to streamline functional support resources and to adjust its operations to current business volumes. As a result, CIGNA recognized in other operating expenses total pre-tax charges of $86 million ($56 million after-tax) of which $75 million pre-tax ($49 million after-tax) was recorded in the first quarter of 2004.

The table below shows CIGNA’s restructuring activity (pre-tax) related to severance and real estate for this program:
               
(In millions)
  
Health Care/
Disability and Life*
  
Corporate
  
Total
  
Balance as of December 31, 2004:
              
Severance
  
$
11
  
$
9
  
$
20
  
Real estate
    
8
    
1
    
9
  
     
19
    
10
    
29
  
First quarter 2005 payments:
                    
Severance
    
(6
)
  
(6
)
  
(12
)
Real estate
    
(1
)
  
-
    
(1
)
Balance as of March 31, 2005
    
12
    
4
    
16
  
                     
Second quarter 2005 payments:
                    
Severance
    
(4
)
  
(2
)
  
(6
)
Real estate
    
(1
)
  
(1
)
  
(2
)
Balance as of June 30, 2005
    
7
    
1
    
8
  
                     
Third quarter 2005 payments:
                    
Severance
    
(1
)
  
-
    
(1
)
Real estate
    
(1
)
  
-
    
(1
)
Balance as of September 30, 2005
  
$
5
  
$
1
  
$
6
  

NOTE 6 - GUARANTEED MINIMUM DEATH BENEFIT AND INCOME BENEFIT CONTRACTS

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

The determination of reserves for guaranteed minimum death benefits requires CIGNA to make critical accounting estimates. CIGNA describes the assumptions used to develop the reserves for these death benefits, and provides the effects of hypothetical changes in those assumptions on page 22 of CIGNA’s 2004 Annual Report to Shareholders. CIGNA regularly evaluates the assumptions used in establishing reserves and changes its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. If actual experience differs from the assumptions and other considerations (including lapse, partial surrender, mortality, interest rates and volatility) used in
* Initial charge in the first quarter of 2004 included $2 million pre-tax in the Disability and Life segment.
9
 
estimating these reserves, the resulting change could have a material adverse effect on CIGNA’s consolidated results of operations, and in certain situations, could have a material adverse effect on CIGNA’s financial condition. During the first quarter of 2005, CIGNA completed its normal quarterly review of assumptions and recorded an after-tax charge of $11 million ($17 million pre-tax). This charge primarily resulted from an update to lapse assumptions based on emerging experience. The charge also reflects updates to partial surrender assumptions, reflecting the impact of stock market declines, as well as other assumptions. CIGNA had future policy benefit reserves for guaranteed minimum death benefit contracts of approximately $1.0 billion as of September 30, 2005 and December 31, 2004.
 
The following provides information about CIGNA’s reserving methodology and assumptions for guaranteed minimum death benefits as of September 30, 2005:

·
The reserves represent estimates of the present value of net amounts expected to be paid, less the present value of net future premiums. Included in net amounts expected to be paid is the excess of the guaranteed death benefits over the values of the contractholders’ accounts (based on underlying equity and bond mutual fund investments).
·
The reserves include an estimate for partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-20% depending on the net amount at risk for each policy and whether surrender charges apply.
·
The mean investment performance assumption is 5% considering CIGNA's program to reduce equity market exposures using futures and forward contracts.
·
The volatility assumption is 15-30%, varying by equity fund type; 3-8%, varying by bond fund type; and 1% for money market funds.
·
The discount rate is 5.75%.
·
The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.
·
The lapse rate assumption is 0-15%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

As of September 30, 2005, the aggregate fair value of the underlying mutual fund investments was approximately $41.5 billion. The death benefit coverage in force as of that date (representing the amount that CIGNA would have to pay if all 1.1 million contractholders had died on that date) was approximately $7.5 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the fair value of the underlying mutual fund investments.
 
CIGNA recorded in other revenues pre-tax losses of $45 million for the third quarter and $28 million for the nine months of 2005, compared with pre-tax gains of $33 million for the third quarter and pre-tax losses of $27 million for the nine months of 2004 from futures and forward contracts. Expense offsets reflecting corresponding changes in liabilities for these guaranteed minimum death benefit contracts were included in benefits and expenses. During the first quarter of 2005, CIGNA began using foreign currency futures contracts in place of foreign currency forward contracts as part of its program to reduce international equity market risks associated with this business. The notional amount of the futures contract positions held by CIGNA at September 30, 2005, was $1.2 billion.

For further information and details on these contracts and the program adopted to reduce related equity market risk, refer to Note 6 of CIGNA's 2004 Annual Report to Shareholders.

CIGNA has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. See Note 13 for further information.

10
NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Pension benefits. CIGNA funds its qualified pension plans by at least the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA). CIGNA contributed approximately $545 million in 2005 as follows:

·
$105 million for minimum funding requirements for the domestic pension plan and for voluntary contributions to the international pension plans; and
·
$440 million for voluntary contributions to the domestic pension plan, which represent an acceleration of expected payments for minimum funding requirements in 2006 and 2007.

The decision to make voluntary contributions to the domestic pension plan was based upon the favorable economic impact the contributions will have on the funding status of CIGNA's pension plan, including the potential for reducing future additional funding requirements as well as reducing premiums to the Pension Benefit Guaranty Corporation.
 
Components of net pension cost were as follows:
           
   
Three Months
Ended
September 30,
 
Nine Months
Ended
September 30,
 
(In millions)
  
2005
 
2004
 
2005
 
2004
  
Service cost
  
$
18
  
$
18
  
$
54
  
$
56
  
Interest cost
    
56
    
55
    
166
    
165
  
Expected return on plan assets
    
(46
)
  
(47
)
  
(136
)
  
(143
)
Amortization of:
Net loss from past
  experience
    
35
    
28
    
105
    
76
  
Prior service cost
    
—
    
(1
)
  
(1
)
  
(1
)
Net pension cost
  
$
63
  
$
53
  
$
188
  
$
153
  
 
Pension Liability
 
2005
 
Through the nine months of 2005, CIGNA recorded an after-tax charge of $30 million to increase plan obligations, which resulted in a decrease to shareholders’ equity. This charge was primarily due to the annual update of plan census data.
 
2004
 
During the third quarter of 2004, CIGNA amended its qualified domestic pension plan and remeasured plan assets and obligations. As a result, CIGNA increased equity by $21 million after-tax due to an increase in long-term interest rates (5.75% to 6.00%) used to determine the accumulated benefit obligation, partially offset by the effect of stock market depreciation on plan assets.
 
For the nine months of 2004 as a result of the sale of the retirement benefits business, the operational effectiveness review, the annual update of plan census data and the plan amendment, CIGNA remeasured plan assets and obligations and recorded an after-tax charge, which decreased equity by $131 million. This charge was primarily due to a reduction in long-term interest rates (from 6.25% to 6.00%) used to determine the accumulated benefit obligation, as well as the update of plan census data, partially offset by the effect of stock market appreciation on plan assets.
 
Other postretirement benefits. Components of net other postretirement benefit cost were as follows:
           
   
Three Months
Ended
September 30,
  
Nine Months
Ended
September 30,
 
(In millions)
  
2005
  
2004
  
2005
  
2004
  
Service cost
  
$
1
  
$
1
  
$
2
  
$
2
  
Interest cost
    
7
    
7
    
20
    
24
  
Expected return on plan assets
    
(1
)
  
(1
)
  
(2
)
  
(2
)
Amortization of:
                          
Net gain from past experience
    
—
    
—
    
(1
)
  
—
  
Prior service cost
    
(4
)
  
(4
)
  
(12
)
  
(12
)
Net other postretirement benefit cost
  
$
3
  
$
3
  
$
7
  
$
12
  
 
CIGNA also recognized gains of $5 million pre-tax ($3 million after-tax) for the third quarter of 2004 and $19 million pre-tax ($12 million after-tax) for the nine months of 2004 for other postretirement benefits in connection with the 2004 operational effectiveness review and the sale of the retirement benefits business.

11
NOTE 8 - INVESTMENTS

Realized Investment Gains and Losses

The following realized gains and losses on investments exclude amounts required to adjust future policy benefits:
           
   
Three Months
Ended
September 30,
  
Nine Months
Ended
September 30,
 
(In millions)
  
2005
 
2004
 
2005
 
2004
  
Fixed maturities
  
$
10
  
$
3
  
$
25
  
$
119
  
Equity securities
    
2
    
7
    
2
    
19
  
Mortgage loans
    
-
    
(4
)
  
(2
)
  
215
  
Real estate
    
1
    
(1
)
  
-
    
51
  
Derivatives and other
    
(4
)
  
6
    
3
    
43
  
Realized investment gains,
before income taxes
   
9
    
11
    
28
    
447
  
Less income taxes
    
3
    
3
    
10
    
156
  
Net realized investment gains
 
$
6
  
$
8
  
$
18
  
$
291
  

Fixed Maturities and Equity Securities

Sales of available-for-sale fixed maturities and equity securities were as follows:
     
 
Three Months
Ended
September 30,
Nine Months
Ended
September 30,
(In millions)
2005
2004
2005
2004
Proceeds from sales
$635
$1,164
$2,120
$2,307
Gross gains on sales
$11
$26
$33
$236
Gross losses on sales
$(4)
$(7)
$(18)
$(41)

Fixed maturities included securities of $45 million at September 30, 2005 and $56 million at December 31, 2004 classified as trading. These securities are carried at fair value with changes in fair value reported in other revenues.

Review of Declines in Fair Value. Management reviews fixed maturities and equity securities for impairment based on criteria that include:

·
length of time and severity of decline;
· financial health and specific near term prospects of the issuer; and
· changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region.
 
As of September 30, 2005, fixed maturities (primarily investment grade corporate bonds) and equity securities with a decline in fair value from cost were as follows, including the length of time of such decline:
   
 
  
 
  
 
  
(In millions)
    
Fair Value
 
  
 Amortized Cost
 
  
Unrealized Depreciation
  
Fixed maturities:
               
One year or less:
               
Investment grade
  
$
3,197
  
$
3,250
  
$
(53
)
Below investment grade
 
$
180
  
$
185
  
$
(5
)
More than one year:
                    
Investment grade
  
$
615
  
$
638
  
$
(23
)
Below investment grade
  
$
28
  
$
29
  
$
(1
)
Equity securities:
                    
Greater than one year
  
$
9
  
$
10
  
$
(1
)

As of September 30, 2005, CIGNA had commitments to purchase the following investments:
       
(In millions)
  
As of
September 30, 2005
  
Fixed maturities
  
$
91
  
Mortgage loans
    
360
  
Real estate joint ventures
    
45
  
Investments in partnerships secured by real estate
    
109
  
Investments in partnerships secured by securities
    
196
  
Total
  
$
801
  

CIGNA expects to disburse approximately $475 million of these committed amounts in the fourth quarter of 2005.

NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) excludes:

 
·
amounts required to adjust future policy benefits for certain annuities; and
 
·
amounts required to adjust other liabilities after the initial reclassification of unrealized appreciation under a modified coinsurance arrangement.

12
Changes in accumulated other comprehensive income (loss) are as follows:
               
 
(In millions)
  
Pre-Tax
  
Tax
(Expense)
Benefit
  
After-Tax
 
Three Months Ended September 30,
  
2005
              
Net unrealized depreciation, securities:
              
Unrealized depreciation on securities held
  
$
(183
)
$
64
  
$
(119
)
Gains realized on securities
    
(12
)
  
5
    
(7
)
Net unrealized depreciation, securities
  
$
(195
)
$
69
  
$
(126
)
Net unrealized depreciation, derivatives
  
$
(9
)
$
4
  
$
(5
)
Minimum pension liability adjustment
  
$
1
  
$
(1
)
$
-
  
2004
                    
Net unrealized appreciation,
securities:
                    
Unrealized appreciation on securities held
  
$
303
  
$
(106
)
$
197
  
Gains realized on securities
    
(10
)
  
4
    
(6
)
Net unrealized appreciation, securities
  
$
293
  
$
(102
)
$
191
  
Net unrealized appreciation, derivatives
  
$
6
  
$
(3
)
$
3
  
Net translation of foreign currencies
  
$
5
  
$
(2
)
$
3
  
Minimum pension liability adjustment
  
$
32
  
$
(11
)
$
21
  
Nine months ended September 30,
                    
2005