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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-8323
CIGNA Corporation
(Exact name of registrant as specified in its charter)
 
     
Delaware   06-1059331
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
Two Liberty Place, Philadelphia, Pennsylvania   19192
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (215) 761-1000
 
Securities registered pursuant to section 12(b) of the Act :
     
    Name of each exchange on
Title of each class   which registered
     
Common Stock, Par Value $0.25   New York Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   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
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2009 was approximately $6.6 billion.
As of January 30, 2010, 274,968,520 shares of the registrant’s Common Stock were outstanding.
Part III of this Form 10-K incorporates by reference information from the registrant’s proxy statement to be dated on or about March 19, 2010.
 
 

 


 

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  Exhibit 3.2
  Exhibit 4.2
  Exhibit 4.3
  Exhibit 10.4
  Exhibit 10.7
  Exhibit 10.10
  Exhibit 10.15(a)
  Exhibit 10.15(b)
  Exhibit 10.17
  Exhibit 10.18
  Exhibit 10.24
  Exhibit 12
  Exhibit 21
  Exhibit 23
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

 

 


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PART I
Item 1.   BUSINESS
A. Description of Business
CIGNA Corporation and its subsidiaries constitute 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, including: health care products and services; group disability, life and accident insurance; and workers’ compensation case management and related services. 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 operation. CIGNA Corporation had consolidated shareholders’ equity of $5.4 billion and assets of $43.0 billion as of December 31, 2009, and revenues of $18.4 billion for the year then ended. CIGNA’s major insurance subsidiary, Connecticut General Life Insurance Company (“CGLIC”), traces its origins to 1865. CIGNA Corporation was incorporated in the State of Delaware in 1981.
As used in this document, “CIGNA” and the “Company” may refer to CIGNA Corporation itself, one or more of its subsidiaries, or CIGNA Corporation and its consolidated subsidiaries. CIGNA Corporation is a holding company and is not an insurance company. Its subsidiaries conduct various businesses, which are described in this Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“Form 10-K”).
CIGNA’s revenues are derived principally from premiums, fees, mail order pharmacy, other revenues and investment income. The financial results of CIGNA’s businesses are reported in the following segments:
  Health Care;
  Disability and Life;
  International;
  Run-off Reinsurance; and
  Other Operations, including Corporate-owned Life Insurance.
Available Information
CIGNA’s annual, quarterly and current reports, proxy statements and other filings, and any amendments to these filings, are made available free of charge on its website (http://www.cigna.com, under the “Investors—SEC Filings” captions) as soon as reasonably practicable after the Company electronically files these materials with, or furnish them to, the Securities and Exchange Commission (the “SEC”). The Company uses its website as a channel of distribution for material company information. Important information, including news releases, analyst presentations and financial information regarding CIGNA is routinely posted on and accessible at www.cigna.com. See “Code of Ethics and Other Corporate Governance Disclosures” in Part III, Item 10 beginning on page 171 of this Form 10-K for additional available information.
B. Financial Information about Business Segments
The financial information included herein is in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated. Certain reclassifications have been made to prior years’ financial information to conform to the 2009 presentation. Industry rankings and percentages set forth herein are for the year ended December 31, 2009, unless otherwise indicated. Unless otherwise noted, statements set forth in this document concerning CIGNA’s rank or position in an industry or particular line of business have been developed internally, based on publicly available information.
Financial data for each of CIGNA’s business segments is set forth in Note 22 to the Consolidated Financial Statements beginning on page 160 of this Form 10-K.

 

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C. Strategy
As a global health service organization, CIGNA’s mission remains focused on helping the people it serves improve their health, well-being and sense of security. CIGNA’s long-term growth strategy is based on: (1) growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals.
CIGNA expects to focus on the following areas it believes represent the markets or areas with the most potential for profitable growth:
  In the Health Care segment, the Company is concentrating on: (1) further enhancing its geographic focus in the middle market in order to create geographic density; (2) growing the “Select” market, which generally includes employers with more than 50 but fewer than 250 employees, by leveraging the Company’s customer knowledge, differentiated service model, product portfolio and distribution model; and (3) engaging those national account employers who share and will benefit from the Company’s value proposition of using health advocacy and employee engagement to increase productivity, performance and the health outcomes of their employees.
  In the Disability and Life segment, CIGNA’s strategy is to grow its Disability business by fully leveraging the key components of its industry-leading disability management model to reduce medical costs for its clients and return their employees to work sooner through: (1) early claim notification and outreach, (2) a full suite of clinical and return-to-work resources, and (3) specialized case management services.
  In the International segment, the Company is targeting growth through: (1) product and channel expansion in its life, accident and health business in key Asian geographies, (2) the introduction of new expatriate benefits products, and (3) further geographic expansion.
The Company plans to improve its strategic and financial flexibility by driving further reductions in its Health Care operating expenses, improving its medical cost competitiveness in targeted markets and effectively managing balance sheet exposures.
Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to health advocacy as a means of creating sustainable solutions for employers, improving the health of the individuals that the Company serves, and lowering the costs of health care for all constituencies.
Details on the Company’s operational strategies are discussed further in the Health Care segment discussion of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section on page 62 of this Form 10-K.

 

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D. Health Care
CIGNA’s Health Care segment (“CIGNA HealthCare”) offers insured and self-funded medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated to provide individuals with comprehensive health care benefit programs. CIGNA HealthCare also provides disability and life insurance products that were historically sold in connection with certain experience-rated medical products. These products and services are provided and administered by subsidiaries of CIGNA Corporation. CIGNA HealthCare companies offer these products and services in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
CIGNA HealthCare is focused on helping to improve the health, well-being and sense of security of the individuals it serves. CIGNA HealthCare believes the most sustainable approach to enhancing quality and managing health care costs is to fully engage individuals in the decisions that affect their health and the health care services they receive. To assist individuals in making informed choices about health care for themselves and their families, CIGNA HealthCare makes available to its members actionable information about health and advocacy programs as well as about the cost and quality of health care services and supplies provided to them.
Underlying CIGNA HealthCare’s operations is a foundation of clinical expertise and an ability to provide quality service. CIGNA HealthCare’s strengths include its ability to: (1) integrate medical and specialty product offerings to achieve a more holistic and integrated approach to individuals’ health that promotes consistent care management; and (2) provide predictive modeling and other analytical tools (for example, through the Company’s exclusive access to analytical tools and algorithms developed by the University of Michigan), to assist in providing targeted outreach and health advocacy by CIGNA’s clinical professionals to CIGNA HealthCare members.
Principal Products and Services and Funding Arrangements
With the exception of Health Maintenance Organization (“HMO”) as well as Medicare Part D and Private Fee for Service products, each of CIGNA HealthCare’s products (as described below) is offered with multiple funding options (also described below). CIGNA may sell multiple products under the same funding arrangement to the same employer. Accordingly, the revenue table included in the Health Care section of the MD&A beginning on page 62 of this Form 10-K reflects both the product type and funding arrangement.

 

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Medical
CIGNA HealthCare provides a wide array of products and services to meet the needs of employers, other sponsors of health benefit plans and their plan participants (i.e., employees/members and their eligible dependents), and individuals, including:
  Network and Open Access Plus Plans . CIGNA HealthCare offers a product line of indemnity managed care benefit plans. Indemnity benefit plans in the managed care product line generally use meaningful coinsurance differences for “in-network” versus “out-of-network” care, give members the option of selecting a primary care physician, and use a national provider network, which is somewhat smaller than the national network used with the preferred provider (“PPO”) plan product line. The Network, Network Open Access, and Open Access Plus In-Network products cover only those services provided by CIGNA HealthCare participating (“in-network”) providers and emergency services provided by non-participating (“out-of-network”) providers. The Network point of service (“POS”), Network POS Open Access and Open Access Plus plans (“OAP”) cover health care services provided by participating, and non-participating health care providers, but the members’ coinsurance obligation is greater for out-of-network care.
  Preferred Provider Plans . CIGNA HealthCare also offers a PPO product line that features a broader national network with generally less favorable provider discounts than the managed care products described above, no option to select a primary care physician, and in-network and out-of-network coverage with greater member coinsurance liability for out-of-network services.
  Health Maintenance Organizations . HMOs are required by law in most states to provide coverage for all basic health services. They use various tools to facilitate the appropriate use of health care services through employed and/or contracted health care providers. HMOs control unit costs by negotiating rates of reimbursement with providers and by requiring that certain treatments be authorized for coverage in advance. CIGNA HealthCare offers HMO plans that require members to obtain all non-emergency services from participating providers as well as POS HMO plans that also provide a lesser level of insurance coverage for out-of-network care from non-participating providers. The out-of-network coverage is generally provided through separate insurance coverage that is sold with the HMO benefits.
  Voluntary Plans . CIGNA HealthCare’s voluntary medical products are offered to employers with 51 or more eligible employees and are designed to meet the insurance needs of uninsured hourly and part-time employees by offering more limited, (i.e., leaner benefits) and more affordable coverage than traditional medical plans.
  CIGNA Choice Fund ® , Health Reimbursement Arrangements (“HRAs”), Health Savings Accounts (“HSAs”) and Flexible Spending Accounts (“FSAs”) . In connection with many of the products described above, CIGNA HealthCare offers the CIGNA Choice Fund suite of consumer-directed products, including HRA, HSA and FSA options. An HRA allows plan sponsors to choose from a variety of benefit plan designs and for employees to fund un-reimbursed health care expenses with reimbursement account funds that can be rolled over from year to year. HSA plans allow plan sponsors to choose from a variety of benefit plan designs and funding options and combine a high deductible payment feature for a health plan with a tax-preferred savings account offering mutual fund investment options. Funds in an HSA can be used to pay the deductible and other eligible tax-deductible medical expenses and can be rolled over from year to year. In connection with its consumer-directed products, CIGNA HealthCare offers Custom Benefit Builder SM , a tool that allows members to customize plan options including co-payments and deductible levels, to create a personalized benefit design that meets their individual needs. The HRA and HSA products for employers with generally more than 50 but fewer than 250 employees are now available in 49 states. An FSA pays for certain health care-related expenses, that are either not covered or only partially covered by health care plans, with pretax contributions by employees. Unused FSA account funds cannot be rolled over from year to year; they are forfeited by the employee.
  Stop-Loss Coverage . CIGNA HealthCare offers stop-loss insurance coverage for self-insured plans. This stop-loss coverage reimburses the plan for claims in excess of a predetermined amount, either for individuals (“specific”) or the entire group (“aggregate”), or both. CIGNA HealthCare also offers stop-loss features in its experience-rated policies (discussed below).
  Shared Administration Services . CIGNA HealthCare provides Taft-Hartley trusts and other self-insured groups access to its national provider network and provides claim re-pricing and other services (e.g., utilization management).

 

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Specialty
Health Advocacy . CIGNA HealthCare offers medical management, disease management, and other health advocacy services to employers and other plan sponsors. Services are not only offered to members covered under CIGNA HealthCare administered plans but also to those individuals who have elected coverage under a plan offered through their employer by competing insurers/third party administrators. CIGNA offers a seamless integration of services to address the clinical and administrative challenges that are inherent in coordinating multiple vendors. Through its health advocacy programs, CIGNA HealthCare works to help: (1) healthy people stay healthy; (2) people change behaviors that are putting their health at risk; (3) people with existing health care issues access quality care and practice healthy self-care; and (4) people with a disabling illness or injury return to productive work quickly and safely.
CIGNA HealthCare offers a wide array of health advocacy programs and services to help individuals improve the health of the mind and body, including:
  early intervention by CIGNA’s network of approximately 2,350 clinical professionals;
  CIGNA’s online health assessment, powered by analytics from the University of Michigan Health Management Research Center, which helps members identify potential health risks and learn what they can do to live a healthier life;
  the CIGNA Well Aware for Better Health ® program, which helps patients with chronic conditions such as asthma, diabetes, depression and weight complications better manage their conditions;
  CIGNA Health Advisor ® , one of our fastest-growing offerings, which provides members with access to a personal health coach to help them reach their health and wellness goals;
  CIGNA’s Well Informed program, which uses clinical rules-based software to identify potential gaps and omissions in members’ health care through analysis of the Company’s integrated medical, behavioral, pharmacy and lab data allowing CIGNA HealthCare to communicate the gaps to the member and the member’s doctor; and
  CIGNA’s online coaching capabilities.
Behavioral Health . CIGNA arranges for the provision of behavioral health care services to individuals through its network of participating behavioral health care providers and offers behavioral health care management services, employee assistance programs, and work/life programs to employer and other groups sponsoring health benefit plans, HMOs, governmental entities and disability insurers. CIGNA Behavioral Health focuses on integrating its programs and services to facilitate customized, holistic care.
As of December 31, 2009, CIGNA’s behavioral national network had approximately 76,000 access points to independent psychiatrists, psychologists and clinical social workers and approximately 6,100 facilities and clinics that are reimbursed on a contracted fee-for-service basis.
Dental . CIGNA Dental Health offers a variety of dental care products including dental health maintenance organization plans, dental preferred provider organization (“DPPO”) plans, dental exclusive provider organization plans, traditional dental indemnity plans and a dental discount program. Employers and other groups can purchase CIGNA Dental Health products as stand-alone products or integrated with CIGNA HealthCare’s medical products. As of December 31, 2009, CIGNA Dental Health members totaled approximately 9.9 million, representing employees at more than one-third of all Fortune 100 companies. Managed dental care products are offered in 36 states and the District of Columbia through a network of independent providers that have contracted with CIGNA Dental Health to provide dental services to members.
CIGNA Dental Health members access care from one of the largest dental HMO and dental PPO networks in the U.S., with approximately 160,000 DPPO-contracted access points (approximately 75,500 unique providers) and approximately 45,400 dental HMO-contracted access points (approximately 14,000 unique providers).
CIGNA Dental Health stresses preventive dentistry; it believes that promoting preventive care contributes to a healthier workforce, an improved quality of life, increased productivity and fewer treatment claims and associated costs over time. CIGNA Dental Health offers members a dental treatment cost estimator to educate individuals on oral health and aid them in their dental health care decision-making.

 

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Pharmacy . CIGNA Pharmacy offers prescription drug plans to its insured and self-funded customers both in conjunction with its medical products and on a stand-alone basis. With a nationwide network of approximately 60,300 contracted pharmacies, CIGNA Pharmacy is a comprehensive pharmacy benefits manager offering clinical integration programs, specialty pharmacy solutions, and fast, efficient home delivery pharmacy capabilities that improve outcomes and reduce costs for a Return On Health ® .
Programs that reflect this integration of medical, behavioral and pharmacy offerings include:
  Well Informed . CIGNA’s Well Informed program focuses on the chronic conditions most likely to benefit from disciplined prescription therapy, such as asthma, diabetes, back pain and high cholesterol.
  Step Therapy is a program that encourages individuals who take prescription drugs to treat an ongoing medical condition to use generic and/or preferred brand drugs before progressing to higher cost brand-named drugs within the relevant therapeutic drug class. This is accomplished through claim management protocols, which may include communications with the individual and the individual’s physician.
  Specialty Pharmacy Solutions . Because it offers both medical and pharmacy benefit management products and services, CIGNA HealthCare is uniquely positioned to manage holistic care for individuals with chronic conditions. This approach allows individuals to access medication in the most appropriate setting based on their unique circumstances. This results in less confusion and disruption in care, which in turn promotes medication adherence and healthier outcomes.
  CIGNA Tel-Drug ® Home Delivery Pharmacy . CIGNA HealthCare also offers cost-effective mail order, telephone and on-line pharmaceutical fulfillment services through its home delivery operation. CIGNA Tel-Drug Home Delivery Pharmacy provides an individual-focused, efficient home delivery pharmacy with high standards of quality, accuracy and individual care relating to maintenance and specialty medications. Orders may be submitted through the mail, via phone or through the internet at myCIGNA.com.
  CIGNA HealthCare also offers a suite of online tools to individuals, including our award-winning Prescription Drug Price Quote Tool, which empowers individuals with actionable information that helps them maximize their benefits and lower their out-of-pocket costs.
Private Fee For Service. CIGNA’s Medicare Advantage private fee-for-service plan, CIGNA Medicare Access Plan, has been approved by the Centers for Medicare and Medicaid Services to be a replacement for Original Medicare. The CIGNA Medicare Access Plan offers the same benefits as Original Medicare Parts A & B, as well as supplemental benefits, including annual physicals, emergency worldwide coverage and health and wellness programs.
Medicare Part D . CIGNA’s Medicare Part D prescription drug program, CIGNA Medicare Rx ® , provides a number of plan options as well as service and information support to Medicare and Medicaid eligible members. CIGNA Medicare Rx is available in all 50 states and the District of Columbia.
Retail Pharmacies . CIGNA HealthCare operates 20 retail pharmacies, including on-site retail pharmacies for members to serve the needs of CIGNA HealthCare members.
CIGNA Onsite Health was formed in 2007. The Company operates onsite health centers at five CIGNA employee locations and expects to open several onsite health clinics at other employer locations during 2010. In addition, the Company has multiple health advocates at employer sites across the country. Onsite operations are projected to expand throughout 2010 and beyond.
Cost Containment Service. CIGNA administers cost containment programs with respect to health care services/supplies that are covered under benefit plans. These programs, which may involve contracted vendors, are intended to control health costs through the reduction of out-of-network utilization, the auditing of provider bills and recovery of overpayments from other insurance carriers or providers. CIGNA earns fees for providing or arranging these services.

 

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Vision. CIGNA Vision offers flexible, cost-effective PPO coverage that includes a range of both in and out-of-network benefits for routine vision services. CIGNA’s national vision care network, which consists of over 48,000 providers in approximately 21,800 locations, includes private practice ophthalmologist and optometrist offices, as well as retail eye care centers. Routine vision products are offered in conjunction with CIGNA HealthCare’s medical and dental product offerings.
Funding Arrangements
The segment’s health care products and services are offered through the following funding arrangements:
  Guaranteed Cost;
  Experience-rated (“Shared Returns SM ”, including minimum premium funding arrangements); and
  Administrative Services Only.
Guaranteed Cost . Under guaranteed cost funding arrangements, policyholders pay a fixed premium and CIGNA HealthCare bears the risk for claims and costs. The HMO product is offered only on a guaranteed cost basis.
Experience-rated (“Shared Returns SM ”, including minimum premium) . Under insurance policies using an experience-rated funding arrangement, a premium that typically includes a margin to partially protect against adverse claim fluctuations is determined at the beginning of the policy period. CIGNA HealthCare generally bears the risk if claims and expenses exceed this premium. If premiums exceed claims and expenses, any surplus amount is generally first used to offset prior deficits and otherwise generally returned to the policyholder. For additional discussion, see “Pricing, Reserves and Reinsurance” later within this section of the Form 10-K.
Under insurance policies using a minimum premium funding arrangement, instead of paying a fixed monthly premium, the group policyholder establishes and funds a bank account and authorizes the insurer to draw upon funds in the account to pay claims and other authorized expenses. The policyholder pays a significantly reduced monthly “residual” premium while the policy is in effect and a supplemental premium (to cover reserves for run-out claims and administrative expenses) upon termination. Minimum premium funding arrangements combine insurance protection with an element of self-funding. The policyholder is responsible for funding all claims up to a predetermined aggregate, maximum monthly amount, and CIGNA HealthCare bears the risk for claim costs incurred in excess of that amount. As with other experience-rated insurance products, CIGNA HealthCare may recover deficits from margins in future years if the policy is renewed.
Administrative Services Only . CIGNA HealthCare contracts with employers, unions and other groups sponsoring self-insured plans on an administrative services only (“ASO”) basis to administer claims and perform other plan related services. CIGNA HealthCare collects administrative service fees in exchange for providing these self-insured plans with access to CIGNA HealthCare’s applicable participating provider network and for providing other services and programs including: claim administration; quality management; utilization management; cost containment; health advocacy; 24-hour help line; 24/7 call center; case management; disease management; pharmacy benefit management; behavioral health care management services (through its provider networks); or any combination of these services. The self-insured plan sponsor is responsible for self-funding all claims, but may purchase stop-loss insurance from CIGNA HealthCare or other insurers for claims in excess of a predetermined amount, for either individuals (“specific”), the entire group (“aggregate”), or both.
In 2008, CIGNA purchased Great-West Healthcare, the healthcare division of Great-West Life & Annuity Insurance Company (“Great-West Healthcare”). See Note 3 to the Consolidated Financial Statements beginning on page 112 of this Form 10-K for details about this purchase.
Financial information, including premiums and fees, is presented in the Health Care section of the MD&A beginning on page 62 and in Note 22 to CIGNA’s Consolidated Financial Statements beginning on page 160 of this Form 10-K.

 

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Service and Quality
CIGNA HealthCare operates 11 service centers that together processed approximately 122 million medical claims in 2009. Satisfying customers and members is a primary business objective and critical to the Company’s success. To further this objective, in 2009, the Company made its call centers available 24 hours a day, seven days a week. As of December 31, 2009, CIGNA operates six member service centers that members can call toll-free about their healthcare benefits, wellness programs and claims. CIGNA HealthCare customer service representatives are empowered to immediately resolve a wide range of issues to help members obtain the most from their benefit plans. In addition, a customer service representative can resolve a member’s issue. If an issue cannot be resolved informally, CIGNA HealthCare has a formal appeals process that can be initiated by telephone or in writing and involves two levels of internal review. For those matters not resolved by internal reviews, CIGNA HealthCare members are offered the option of a voluntary external review of claims. The CIGNA HealthCare formal appeals process addresses member inquiries and appeals concerning initial coverage determinations based on medical necessity and other benefits/coverage determinations. CIGNA HealthCare’s formal appeals process meets National Committee for Quality Assurance (“NCQA”), Employee Retirement Income Security Act of 1974 (“ERISA”), Utilization Review Accreditation Commission (“URAC”) and/or applicable state regulatory requirements.
CIGNA HealthCare’s commitment to promoting quality care and service to its members is reflected in a variety of activities including: credentialing medical providers and facilities that participate in CIGNA HealthCare’s managed care and PPO networks; developing the CIGNA Care SM specialist physician designation described below; and participating in initiatives that provide information to members to enable educated health care decision-making.
Participating Provider Network . CIGNA HealthCare has an extensive national network of participating health care providers which, as of December 31, 2009, consisted of approximately 5,400 hospitals and approximately 612,000 providers as well as other facilities, pharmacies and vendors of health care services and supplies (these hospital and provider counts exclude the impact of the Great-West Healthcare acquisition). As part of the purchase of Great-West Healthcare, CIGNA acquired the participating provider network of Great-West Healthcare. In many cases, the providers in the Great-West Healthcare network were already in the CIGNA HealthCare participating provider network, however, the acquisition has expanded and strengthened CIGNA HealthCare’s network in some regions of the country. CIGNA HealthCare continues to consolidate the network it acquired from Great-West Healthcare with its existing participating provider network.
In most instances, CIGNA HealthCare contracts directly with the participating provider to provide covered services to members at agreed-upon rates of reimbursement. In some instances, however, CIGNA HealthCare companies contract with third parties for access to their provider networks. In addition, CIGNA HealthCare has entered into strategic alliances with several regional managed care organizations (Tufts Health Plan, HealthPartners, Inc., Health Alliance Plan, and MVP Health Plan) to gain access to their provider networks and discounts.
CIGNA Care SM . CIGNA Care is a benefit design option available for CIGNA HealthCare administered plans in 57 service areas across the country. CIGNA Care is a subset of participating physicians in certain specialties who are designated as CIGNA Care physicians based on specific clinical quality and cost-efficiency selection criteria. Members pay reduced co-payments or co-insurance when they receive care from a specialist designated as a CIGNA Care provider. CIGNA participating specialists are evaluated annually for the CIGNA Care designation.
Provider Credentialing . CIGNA HealthCare credentials physicians, hospitals and other health care providers in its participating provider networks using quality criteria which meet or exceed the standards of external accreditation or state regulatory agencies, or both. Typically, most providers are re-credentialed every three years.
Health Plan Credentialing . CIGNA continues to demonstrate its commitment to quality and has expanded its scope of external validation of its quality programs through nationally recognized accreditation organizations. Each of CIGNA’s 23 HMO and POS plans that have undergone an accreditation review has earned Excellent or Commendable status from the NCQA, a private, nonprofit organization dedicated to improving health care quality. CIGNA’s PPO and Open Access Plus plans in all 50 states have full accreditation status from NCQA. In addition to achieving outstanding accreditation outcomes for its HMO, POS, PPO and OAP products, CIGNA’s provider transparency, wellness, utilization management, case management and demand management programs have been awarded the highest outcomes possible. From NCQA, CIGNA earned Physician & Hospital Quality Certification and Wellness and Health Promotion Accreditation. From URAC, an independent, nonprofit health care accrediting organization dedicated to promoting health care quality through accreditation, certification and commendation, CIGNA has full accreditation for Health Utilization Management, Case Management and Health Call Centers.

 

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HEDIS ® Measures . In addition, CIGNA HealthCare participates in NCQA’s Health Plan Employer Data and Information Set (“HEDIS ® ”) Quality Compass Report. HEDIS ® Effectiveness of Care measures are a standard set of metrics to evaluate the effectiveness of managed care clinical programs. CIGNA HealthCare’s national results compare favorably to industry averages.
Technology . CIGNA HealthCare understands the critical importance of information technology to the level of service the Company is able to provide to its members and to the continued growth of its health care business. The health care marketplace is evolving and the level of service that is acceptable to consumers today may not be acceptable tomorrow. Therefore, CIGNA HealthCare continues to strategically invest in its information technology infrastructure and capabilities including technology essential to fundamental claim administration and customer service, as well as tools and Internet-enabled technology that support CIGNA HealthCare’s focus on engaging members in health care decisions.
For example, CIGNA HealthCare has developed a range of member decision support tools including:
  myCIGNA.com, CIGNA’s consumer Internet portal. The portal is personalized with each member’s CIGNA medical, dental and pharmacy plan information;
  myCignaPlans.com, a website that allows prospective members to compare plan coverage and pricing options, before enrolling, based on a variety of factors. The application gives members information on the total health care cost to them and their employer;
  Health Risk Assessment, an online interactive tool through which members can identify potential health risks and monitor their health status;
  a number of interactive online cost and quality information tools that compare hospital quality and efficiency information, prescription drug choices and average price estimates and member-specific average out-of-pocket cost estimates for certain medical procedures; and
  a special website designed for seniors that offers customized features as well as access to both the myCIGNA.com and cigna.com websites.
Pricing, Reserves and Reinsurance
Premiums and fees charged for HMO and most health insurance products and life insurance products are generally set in advance of the policy period and are typically guaranteed for one year (unless specified events occur, such as changes in benefits, significant changes in enrollment or laws affecting the coverage or costs). Premium rates for fully insured products are established either on a guaranteed cost basis or on a retrospectively experience-rated basis.
Charges to customers established on a guaranteed cost basis at the beginning of the policy period cannot be adjusted to reflect actual claim experience during the policy period. A guaranteed cost pricing methodology reflects assumptions about future claims, health care inflation (unit cost, location of delivery of care and utilization), effective medical cost management, expenses, credit risk, enrollment mix, investment returns, and profit margins. Claim and expense assumptions may be based in whole or in part on prior experience of the account or on a pool of accounts, depending on the group size and the statistical credibility of the experience. Generally, guaranteed cost groups are smaller and less statistically credible than retrospectively experience-rated groups. In addition, pricing for health care products that use networks of contracted providers reflects assumptions about the future claims impact on the reimbursement rates in the provider contracts. Premium rates may vary among accounts to reflect the anticipated contract mix, family size, industry, renewal date, and other cost-predictive factors. In some states, premium rates must be approved by the state insurance departments, and state laws may restrict or limit the use of rating methods.

 

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Premiums established for retrospectively experience-rated business may be adjusted for the actual claim and, in some cases, administrative cost experience of the account through an experience settlement process subsequent to the policy period. To the extent that the cost experience is favorable in relation to the prospectively determined premium rates, a portion of the initial premiums may be credited to the policyholder as an experience refund. If claim experience is adverse in relation to the initial premiums, CIGNA HealthCare may recover the resulting experience deficit, according to contractual provisions, through future premiums and experience settlements, provided the policy remains in force.
CIGNA HealthCare contracts on an ASO basis with customers who fund their own claims. CIGNA HealthCare charges these customers administrative fees based on the expected cost of administering their self-funded programs. In some cases, CIGNA HealthCare provides performance guarantees associated with meeting certain service related and other performance standards. If these standards are not met, CIGNA HealthCare may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. CIGNA HealthCare establishes liabilities for estimated payouts associated with these guarantees. See Note 23 to the Consolidated Financial Statements beginning on page 163 of this Form 10-K for details about these guarantees.
In addition to paying current benefits and expenses under HMO and health insurance policies, CIGNA HealthCare establishes reserves for amounts estimated to fund reported claims not yet paid, as well as claims incurred, but not yet reported. Also, liabilities are established for estimated experience refunds based on the results of retrospectively experience-rated policies and applicable contract terms.
As of December 31, 2009, approximately $1.0 billion, or 59% of the reserves of CIGNA HealthCare’s operations comprised liabilities that are likely to be paid within one year, primarily for medical and dental claims, as well as certain group disability and life insurance claims. The reserve amount expected to be paid within one year includes $206 million recoverable from certain ASO customers and from minimum premium policyholders. The remaining reserves relate primarily to contracts that are short term in nature, but have long term payouts and include liabilities for group long-term disability insurance benefits and group life insurance benefits for disabled and retired individuals, benefits paid in the form of both life and non-life contingent annuities to survivors and contractholder deposit funds.
CIGNA HealthCare credits interest on experience refund balances to retrospectively experience-rated policyholders through rates that are set by CIGNA HealthCare taking investment performance and market rates into consideration. Interest-crediting rates are set at CIGNA HealthCare’s discretion. Higher rates are credited to funds with longer expected payout terms reflecting the fact that higher yields are generally available on investments with longer maturities. For 2009, the rates of interest credited ranged from 2.25% to 4.0%, with a weighted average rate of approximately 2.7%.
The profitability of CIGNA HealthCare’s fully insured health care products depends on the adequacy of premiums charged relative to claims and expenses. For medical and dental products, profitability reflects the accuracy of cost projections for health care (unit costs and utilization), the adequacy of fees charged for administration and risk assumption and effective medical cost and utilization management.
CIGNA HealthCare reduces its exposure to large catastrophic losses under group life, disability and accidental death contracts by purchasing reinsurance from unaffiliated reinsurers.

 

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Markets and Distribution
CIGNA HealthCare offers products in the following markets:
  national accounts, which are multi-site employers generally with more than 5,000 employees;
  middle market, which is generally defined as multi-site employers with more than 250 but fewer than 5,000 employees, and single-site employers with more than 250 employees;
  “Select,” which generally includes employers with more than 50 but fewer than 250 employees;
  small business, which generally includes employers with 2-50 employees;
  individuals;
  government, which includes employees in federal, state and local governments, primary and secondary schools, and colleges and universities;
  Taft-Hartley plans, which includes members covered by union trust funds;
  seniors, which focuses on the health care needs of individuals 50 years and older;
  voluntary, which focuses on employers with hourly and part-time uninsured employees; and
  emerging markets, which includes non-CIGNA HealthCare payors to which leased network and other services are offered.
To date, the national and middle markets have comprised a significant amount of CIGNA HealthCare’s business. With the acquisition of Great-West Healthcare, the “Select,” small business, and emerging markets now constitute a larger share of CIGNA HealthCare’s business than before the acquisition.
CIGNA HealthCare employs sales representatives to distribute its products and services through insurance brokers and insurance consultants or directly to employers. CIGNA HealthCare also employs representatives to sell utilization review services, managed behavioral health care and employee assistance services directly to insurance companies, HMOs, third party administrators and employer groups. As of December 31, 2009, the field sales force for the products and services of this segment consisted of approximately 880 sales representatives in approximately 110 field locations.
Competition
CIGNA HealthCare’s business is subject to intense competition, and industry consolidation has created an even more competitive business environment. While no one competitor dominates the health care market, CIGNA HealthCare expects a continuing trend of consolidation in the industry given the current economic and political environment.
In certain geographic locations, some health care companies may have significant market share positions. A large number of health care companies and other entities compete in offering similar products. Competition in the health care market exists both for employers and other groups sponsoring plans and for the employees in those instances where the employer offers its employees the choice of products of more than one health care company. Most group policies are subject to annual review by the policyholder, who may seek competitive quotations prior to renewal.

 

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The principal competitive factors are: quality and cost-effectiveness of service and provider networks; effectiveness of medical care management; product responsiveness to the needs of customers and their employees; price; cost-containment services; technology; and effectiveness of marketing and sales. Financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor. For more information concerning insurance ratings, see “Ratings” in Section K beginning on page 32 of this Form 10-K. CIGNA HealthCare believes that its health advocacy capabilities, integrated approach to consumer engagement, breadth of product offerings, clinical care and medical management capabilities and funding options are strategic competitive advantages. These advantages allow CIGNA HealthCare to respond to the diverse needs of its customer base. CIGNA HealthCare also believes that its focus on helping to improve the health, well-being and sense of security of its members will allow it to distinguish itself from its competitors.
CIGNA HealthCare’s principal competitors are:
  other large insurance companies that provide group health and life insurance products;
  Blue Cross and Blue Shield organizations;
  stand-alone HMOs and PPOs;
  third-party administrators;
  HMOs affiliated with major insurance companies and hospitals; and
  national managed pharmacy, behavioral health and utilization review services companies.
Competition also arises from smaller regional or specialty companies with strength in a particular geographic area or product line, administrative service firms and, indirectly, self-insurers. In addition to these traditional competitors, a new group of competitors is emerging. These new competitors are focused on delivering employee benefits and services through Internet-enabled technology that allows consumers to take a more active role in the management of their health. This is accomplished primarily through financial incentives, access to enhanced medical quality data and other information sharing. The effective use of the Company’s health advocacy capabilities, decision support tools (some of which are web-based) and enabling technology are critical to success in the health care industry, and CIGNA HealthCare believes they will be competitive differentiators.
Industry Developments
Both state and federal lawmakers have supported a broad range of health care reform efforts. These efforts intensified in 2009 with major health care legislative proposals being considered in the U.S. Congress. The possible enactment of proposed reform legislation is uncertain but, if enacted, could affect the health care industry in general and CIGNA, specifically. To improve the United States’ (U.S.) healthcare system in a sustainable way, CIGNA believes that three fundamental issues need to be addressed; cost, quality and access. CIGNA is intensely committed to developing workable solutions for reforming the U.S. healthcare system and believes such solutions must first address the underlying drivers of health care costs. Through continued development and wider adoption of health advocacy programs, cost management and wellness initiatives, CIGNA believes the U.S. health care system can better provide all its citizens access to affordable quality healthcare. For more information concerning health care reform, see “Proposed Health Care Reform” in the Industry Developments and Other Matters section of the MD&A on page 79.

 

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E. Disability and Life
CIGNA’s Disability and Life segment (“CIGNA Disability and Life”) provides the following insurance products and their related services: group long-term and short-term disability insurance, group life insurance, workers’ compensation and disability case management, and accident and specialty insurance. These products and services are provided by subsidiaries of CIGNA Corporation. CIGNA Disability and Life markets products in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada.
Principal Products and Services
Disability
CIGNA Disability and Life markets group long-term and short-term disability insurance products and services. These products and services generally provide a fixed level of income to replace a portion of wages lost because of disability. CIGNA Disability and Life also provides assistance to the employee in returning to work and assistance to the employer in managing the cost of employee disability. Group disability coverage is typically employer-paid or a combination of employer and employee-paid, but may also include coverage paid for entirely by employees.
CIGNA Disability and Life, through its Intracorp ® subsidiary, also provides case management and related services to workers’ compensation insurers and employers who self-fund workers’ compensation and disability benefits.
CIGNA Disability and Life’s disability insurance products may be integrated with other disability benefit programs, behavioral programs, workers’ compensation, medical programs, social security advocacy, and leave of absence administration. CIGNA Disability and Life believes this integration provides customers with increased efficiency and effectiveness in disability claims management, enhances productivity and reduces overall costs to employers. Coordinating the administration of CIGNA Disability and Life disability and CIGNA HealthCare’s medical programs may provide enhanced opportunities to influence outcomes, reduce the cost of both medical and disability events and improve the return to work rate. CIGNA Disability and Life has formalized an integrated approach to health and wellness through CIGNA’s Disability and Healthcare Connect ® program. This program uses information from the CIGNA HealthCare and CIGNA Disability and Life databases to help identify, treat and manage disabilities before they become chronic, longer in duration and more costly. Proactive outreach from CIGNA Behavioral Health assists employees suffering from a mental health condition, either as a primary condition or as a result of another condition. CIGNA may receive fees for providing these integrated services to customers.
CIGNA Disability and Life is an industry leader in returning employees to work quickly. Shorter disability claim durations mean higher productivity and lower cost for employers and a better quality of life for their employees. Data from a recent industry customer satisfaction survey showed that CIGNA Disability and Life’s short-term and long-term disability claimant satisfaction levels meet and in certain metrics exceed those of our competitors.
Approximately 8,200 insured disability policies covering approximately 5.1 million lives were outstanding as of December 31, 2009.
Life Insurance
Group life insurance products include group term life and group universal life. Group term life insurance may be employer-paid basic life insurance, employee-paid supplemental life insurance or a combination thereof.
CIGNA Disability and Life provides group universal life insurance to employers. Group universal life insurance is a voluntary life insurance product in which the owner may accumulate cash value. The cash value earns interest at rates declared from time to time, subject to a minimum guaranteed contracted rate, and may be borrowed, withdrawn, or, within certain limits, used to fund future life insurance coverage.
Approximately 4,300 group life insurance policies covering approximately 4.7 million lives were outstanding as of December 31, 2009.

 

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Other Products and Services
CIGNA Disability and Life offers personal accident insurance coverage, which consists primarily of accidental death and dismemberment and travel accident insurance to employers. Group accident insurance may be employer-paid or employee-paid.
CIGNA Disability and Life also offers specialty insurance services that consist primarily of disability and life, accident, and medical insurance to professional associations, financial institutions, and participant organizations. Renewal rights to CIGNA’s block of student and participant accident insurance business were sold to an unaffiliated insurer during 2009.
Voluntary benefits are those paid by the employee and are offered at the employer’s worksite. CIGNA Disability and Life plans provide employers, among other services, flexible enrollment options, list billing, medical underwriting, and individual record keeping. CIGNA Disability and Life designed its voluntary offerings to offer employers a complete and simple way to manage their benefits, including personalized enrollment communication and administration of the benefits program.
Financial information, including premiums and fees, is presented in the Disability and Life section of the MD&A beginning on page 69 and in Note 22 to CIGNA’s Consolidated Financial Statements beginning on page 160 of this Form 10-K.
Pricing, Reserves and Reinsurance
CIGNA Disability and Life’s products and services are offered on a fully insured, experience-rated and ASO basis. Under fully insured arrangements, policyholders pay a fixed premium and CIGNA Disability and Life bears the risk for claims and costs. Under experience-rated funding arrangements, a premium that typically includes a margin to partially protect against adverse claim fluctuations is determined at the beginning of the policy period. CIGNA Disability and Life generally bears the risk if claims and expenses exceed this premium. If premiums exceed claims and expenses, any surplus amount is generally first used to offset prior deficits and is otherwise generally returned to the policyholder if surplus exceeds minimum contractual levels. With experience-rated insurance products, CIGNA Disability and Life may recover deficits from margins in future years if the policy is renewed. Under ASO arrangements, CIGNA Disability and Life contracts with groups sponsoring self-insured plans to administer claims and perform other plan related services in return for service fees. The self-insured plan sponsor is responsible for self funding all claims. The majority of CIGNA Disability and Life’s products and services are fully insured.
Premiums and fees charged for disability and life insurance products are generally established in advance of the policy period and are generally guaranteed for one to three years and selectively guaranteed for up to five years, but policies can in most cases be subject to early termination by the policyholder or by the insurance company.
Premium rates reflect assumptions about future claims, expenses, credit risk, investment returns and profit margins. Assumptions may be based in whole or in part on prior experience of the account or on a pool of accounts, depending on the group size and the statistical credibility of the experience, which varies by product.
Premiums for group universal life insurance products consist of mortality, administrative and surrender charges assessed against the policyholder’s fund balance. Interest credited and mortality charges for group universal life, and mortality charges on group variable universal life, may be adjusted prospectively to reflect expected interest and mortality experience. Mortality charges are subject to guaranteed maximum rates, based on standard mortality tables, which rates are stated in the policy.
In addition to paying current benefits and expenses, CIGNA Disability and Life establishes reserves in amounts estimated to be sufficient to pay reported claims not yet paid, as well as claims incurred but not yet reported. For liabilities with longer-term pay-out periods such as long-term disability, reserves represent the present value of future expected payments. CIGNA Disability and Life discounts these expected payments using assumptions for interest rates and the length of time over which claims are expected to be paid. The annual effective interest rate assumptions used in determining reserves for most of the long-term disability insurance business is 5% for claims that were incurred in 2009 and 4.75% for claims that were incurred in 2008. For group universal life insurance, CIGNA Disability and Life establishes reserves for deposits received and interest credited to the policyholder, less mortality and administrative charges assessed against the policyholder’s fund balance.

 

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The profitability of this segment’s products depends on the adequacy of premiums charged and investment returns relative to claims and expenses. The effectiveness of return to work programs and mortality levels also impact the profitability of disability insurance products. CIGNA Disability and Life’s previous claim experience and industry data indicate a correlation between disability claim incidence levels and economic conditions, with submitted claims rising under adverse economic conditions, although the impact of the current adverse economic conditions is not clear. For life insurance products, the degree to which future experience deviates from mortality, morbidity and expense assumptions also affects profitability.
In order to reduce its exposure to large individual and catastrophic losses under group life, disability and accidental death policies, CIGNA Disability and Life purchases reinsurance from unaffiliated reinsurers.
Markets and Distribution
CIGNA Disability and Life markets the group insurance products and services described above to employers, employees, professional and other associations and groups. In marketing these products, CIGNA Disability and Life employs a sales force to target customers with 50 or more employees and the products and services of this segment are primarily distributed through insurance brokers and consultants, along with some direct sales. As of December 31, 2009, the field sales force for the products and services of this segment consisted of approximately 200 sales professionals in 27 office locations.
Competition
The principal competitive factors that affect the CIGNA Disability and Life segment are underwriting and pricing, the quality and effectiveness of claims management, relative operating efficiency, investment and risk management, distribution methodologies and producer relations, the breadth and variety of products and services offered, and the quality of customer service. The Company believes that CIGNA Disability and Life’s claims management capabilities and integration with CIGNA HealthCare’s benefits provide a competitive advantage in this marketplace.
For certain products with longer-term liabilities, such as group long-term disability insurance, the financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor. For more information concerning insurance ratings, see “Ratings” in Section K beginning on page 32 of this Form 10-K.
The principal competitors of CIGNA’s group disability, life and accident businesses are other large and regional insurance companies that market and distribute these or similar types of products.
As of December 31, 2009, CIGNA is one of the top five providers of group disability, life and accident insurance in the United States, based on premiums.

 

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Industry Developments and Strategic Initiatives
The group insurance market remains highly competitive as the rising cost of providing medical coverage to employees has forced companies to re-evaluate their overall employee benefit spending. Demographic shifts have further driven demand for products and services that are sufficiently flexible to meet the evolving needs of employers and employees who want innovative, cost-effective solutions to their insurance needs. Employers continue to shift towards greater employee participatory coverage and voluntary purchases.
Employers are also expressing a growing interest in employee wellness, absence management and productivity and recognizing a strong link between health, productivity and their profitability. CIGNA is well-positioned to offer employers programs that promote a healthy lifestyle, offer assistance in returning to work and integrate health care and disability programs. CIGNA believes it is well positioned to deliver integrated solutions that address these broad employer and employee needs. CIGNA also believes that its strong disability management portfolio and fully integrated programs provide employers and employees tools to improve health status. This focus on managing the employee’s total absence enables CIGNA to increase the number and likelihood of interventions and minimize disabling events.
The disability industry is under continuing review by regulators and legislators with respect to its offset practices regarding Social Security Disability Insurance (“SSDI”). The Company has received one Congressional inquiry and has responded to the information request. Also, at least one state has considered legislation that would restrict the use of such offset provisions in disability policies. The Company is also involved in related pending civil litigation. If the industry is forced to change its offset SSDI procedures, the practices and products for this segment could be significantly impacted.

 

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F. International
CIGNA’s International segment (“CIGNA International”) offers life, accident and supplemental health insurance products as well as international health care products and services. These products and services are provided by subsidiaries of CIGNA Corporation, including foreign operating entities.
Principal Products and Services
Life, Accident and Supplemental Health Insurance
CIGNA International’s life, accident and supplemental health insurance products generally provide simple, affordable coverage of risks for the health and financial security of individuals. Supplemental health products provide a specified payment for a variety of health risks and include personal accident, accidental death, critical illness, hospitalization, dental, cancer and other dread disease coverages. Variable universal life insurance products are also included in the product portfolio. CIGNA International’s life, accident and supplemental health insurance products are offered in South Korea, Taiwan, the European Union, Hong Kong, Indonesia, China, New Zealand and Thailand.
International Health Care
CIGNA International’s health care businesses primarily consist of products and services to meet the needs of multinational companies and their expatriate employees and dependents. These benefits include medical, dental, vision, life, accidental death and dismemberment and disability products. The expatriate benefits products and services are offered through guaranteed cost, experience-rated, administrative services only, and minimum premium funding arrangements. For definitions of funding arrangements, see “Funding Arrangements” in Section D beginning on page 3 of this Form 10-K. The customers of CIGNA International’s expatriate benefits business are multinational companies and international organizations headquartered in the United States, Canada, Europe, the Middle East, Hong Kong, China and other international locations.
In addition, CIGNA International’s health care businesses include medical products, which are primarily provided through group benefits programs to local employees in the United Kingdom and Spain. These products include medical indemnity insurance coverage, with some offerings having managed care or administrative service aspects. These products generally provide an alternative or supplement to government provided national health care programs.
Financial information, including premiums and fees, is presented in the International section of the MD&A beginning on page 71 and in Note 22 to CIGNA’s Consolidated Financial Statements beginning on page 160 of this Form 10-K.
Pricing, Reserves and Reinsurance
Premiums for CIGNA International’s life, accident and supplemental health insurance products are based on assumptions about mortality, morbidity, customer retention, expenses and target profit margins, as well as interest rates. The profitability of these products is primarily driven by mortality, morbidity, and customer retention.
Fees for variable universal life insurance products consist of mortality, administrative, asset management and surrender charges assessed against the contractholder’s fund balance. Mortality charges on variable universal life may be adjusted prospectively to reflect expected mortality experience.
Premiums and fees for CIGNA International’s health care products reflect assumptions about future claims, expenses, membership demographics, investment returns, and profit margins. For products using networks of contracted providers, premiums reflect assumptions about the impact of provider contracts and utilization management on future claims. Most of the premium volume for the medical indemnity business is on a guaranteed cost basis. Other premiums are established on an experience-rated basis. Most contracts permit rate changes at least annually.
The profitability of health care products is dependent upon the accuracy of projections for health care inflation (unit cost, location of delivery of care, including currency of incurral and utilization), membership demographics, the adequacy of fees charged for administration and effective medical cost management.

 

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In addition to paying current benefits and expenses, CIGNA International establishes reserves in amounts estimated to be sufficient to settle reported claims not yet paid, claims incurred but not yet reported as well as future amounts payable on experience-rated arrangements. Additionally, for some individual life insurance and supplemental health insurance products, CIGNA International establishes policy reserves which reflect the present value of expected future obligations less the present value of expected future premiums attributable to policyholder obligations. CIGNA International defers acquisition costs, such as commissions, telemarketing, direct response marketing and policy fulfillment costs, incurred in the sales of long-duration life, accident and supplemental health products. For most products, these costs are amortized in proportion to premium revenue recognized, which is impacted by customer retention. For variable universal life products, acquisition costs are amortized in proportion to expected gross profits.
CIGNA International reduces its exposure to large and/or multiple losses arising out of a single occurrence by purchasing reinsurance from unaffiliated reinsurers.
Markets and Distribution
CIGNA International’s life, accident and supplemental health insurance products are generally marketed through distribution partners with whom the individual insured has an affinity relationship. These products are sold primarily through direct marketing channels, such as outbound telemarketing and in-branch bancassurance. Marketing campaigns are conducted through these channels under a variety of arrangements with affinity partners. These affinity partners primarily include banks, credit card companies and other financial institutions. CIGNA International also distributes directly to consumers via direct response television and the Internet. CIGNA International’s life, accident and supplemental health insurance businesses are located in South Korea, Taiwan, the European Union, Hong Kong, Indonesia, China, New Zealand and Thailand.
CIGNA International’s health care products are distributed through independent brokers and consultants, select partners and CIGNA International’s own sales personnel. The customers of CIGNA International’s expatriate benefits business are multinational companies and international organizations headquartered in the United States, Canada, Europe, the Middle East, Hong Kong, China and other international locations. In addition, CIGNA International’s health care businesses include medical products, which are provided through group and individual benefits programs in the United Kingdom and Spain.
For CIGNA International’s life, accident and supplemental health insurance products, a significant portion of premiums are billed and collected through credit cards. A substantial contraction in consumer credit could impact CIGNA International’s ability to retain existing policies and sell new policies. A decline in customer retention would result in both a reduction of revenue and an acceleration of the amortization of acquisition related costs.
South Korea represents the single largest geographic market for CIGNA International’s businesses. In 2009, South Korea generated 29% of CIGNA International’s revenues and 49% of its segment earnings. For information on the concentration of risk with respect to CIGNA International’s business in South Korea, see “Other Items Affecting International Results” in the International section of the MD&A beginning on page 71 of this Form 10-K.
Competition
Competitive factors in CIGNA International’s life, accident and supplemental health and expatriate benefits businesses include product and distribution innovation and differentiation, efficient management of marketing processes and costs, commission levels paid to distribution partners, and quality of claims and customer services.
The principal competitive factors that affect CIGNA International’s health care businesses are underwriting and pricing, relative operating efficiency, relative effectiveness in network development and medical cost management, product innovation and differentiation, broker relations, and the quality of claims and customer service. In most overseas markets, perception of financial strength is also an important competitive factor.
For the life, accident and supplemental health insurance line of business, competitors are primarily locally based insurance companies, including insurance subsidiaries of banks primarily in Asia and Europe. However, insurance company competitors in this segment primarily focus on traditional product distribution through captive agents, with direct marketing being a secondary objective. CIGNA International estimates that it has less than 2% market share of the total life insurance premiums in any given market in which it operates.

 

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With respect to the expatriate benefits business, CIGNA International is a market leader in the U.S. Its primary competitors include U.S.-based and European health insurance companies with global expatriate benefits operations. For the health care operations in the United Kingdom and Spain, the primary competitors are regional and local insurers, with CIGNA’s market share at less than 5% of the premiums of the total local health care market.
CIGNA International expects that the competitive environment will intensify as U.S. and Europe-based insurance and financial services providers pursue global expansion opportunities.
Industry Developments
Pressure on social health care systems and increased wealth and education in emerging markets is leading to higher demand for products providing health insurance and financial security. In the life, accident and supplemental health business, direct marketing is growing and attracting new competitors while industry consolidation among financial institutions and other affinity partners continues. Increased regulations requiring foreign workers to show proof of health insurance are creating opportunities for CIGNA International’s health care businesses. See “Risk Factors” beginning on page 35 of this Form 10-K for a discussion of risks related to CIGNA International.

 

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G. Run-off Reinsurance
Principal Products and Services
Until 2000, CIGNA offered reinsurance coverage for part or all of the risks written by other insurance companies (or “ceding companies”) under life and annuity policies (both group and individual) and accident policies (workers’ compensation, personal accident, and catastrophe coverages). The products and services related to these operations were offered by subsidiaries of CIGNA Corporation.
In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance businesses. CIGNA placed its remaining reinsurance businesses (including its accident, international life, and annuity reinsurance businesses) into run-off as of June 1, 2000, and stopped underwriting new reinsurance business.
CIGNA’s exposures stem primarily from its annuity reinsurance business, including its reinsurance of guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) contracts. Additional exposures arise from its reinsurance of workers’ compensation and other personal accident and catastrophic risks.
Life and Annuity Policies
Guaranteed Minimum Death Benefit Contracts
CIGNA’s reinsurance segment reinsured 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. CIGNA has equity and other market exposures as a result of this product. The Company purchased retrocessional protection that covers approximately 5% of the assumed risks. The Company also maintains a dynamic hedge program (“GMDB equity hedge program”) to substantially reduce the equity market exposures relating to GMDB contracts by entering into exchange-traded futures contracts.
For additional information about GMDB contracts, see “Guaranteed Minimum Death Benefits” under Run-off Reinsurance section of the MD&A beginning on page 73 and Note 7 to CIGNA’s Consolidated Financial Statements beginning on page 117 of this Form 10-K.
Guaranteed Minimum Income Benefit Contracts
In certain circumstances where CIGNA’s reinsurance operations reinsured the GMDB, CIGNA also reinsured GMIB under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds combined with minimum income and death benefits. All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. When annuitants elect to receive these minimum income benefits, CIGNA may be required to make payments which will vary based on changes in underlying mutual fund values and interest rates. CIGNA has retrocessional coverage for 55% of the exposures on these contracts, provided by two external reinsurers.
For additional information about GMIB contracts, see “Guaranteed Minimum Income Benefits” under Run-off Reinsurance section of the MD&A beginning on page 73 and Note 11 to CIGNA’s Consolidated Financial Statements beginning on page 132 of this Form 10-K.
Workers Compensation, Personal Accident and Catastrophe
CIGNA reinsured workers’ compensation and other personal accident and catastrophic risks in the London market and in the United States. CIGNA purchased retrocessional coverage in these markets to reduce the risk of loss on these contracts.

 

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Markets and Distribution
These products under CIGNA’s Run-off Reinsurance segment were sold principally in North America and Europe through a small sales force and through intermediaries.
Prior to 2000, CIGNA also purchased reinsurance to reduce the risk of losses on contracts that it had written. CIGNA determines its net exposure for run-off reinsurance contracts by estimating the portion of its policy and claim reserves that it expects will be recovered from its reinsurers (or “retrocessionaires”) and reflecting these in its financial statements as Reinsurance Recoverables, or, with respect to GMIB contracts discussed above, as Other Assets.
Other Risks
For more information on policy and claim reserves see the Run-off Reinsurance section of the MD&A beginning on page 73, and Notes 8 and 11 to CIGNA’s Consolidated Financial Statements beginning on pages 121 and 132 respectively of this Form 10-K. For more information on the risk associated with Run-off Reinsurance, see the Risk Factors beginning on page 35 of this Form 10-K, and the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K.

 

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H. Other Operations
Other Operations consists of:
  non-leveraged and leveraged corporate-owned life insurance;
  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.
The products and services related to these operations are offered by subsidiaries of CIGNA Corporation.
Corporate-owned Life Insurance (“COLI”)
Principal Products and Services
The principal products of the COLI business are permanent insurance contracts sold to corporations to provide coverage on the lives of certain of their employees. Permanent life insurance provides coverage that, when adequately funded, does not expire after a term of years. The contracts are primarily non-participating universal life policies. The key distinction between leveraged and non-leveraged COLI products is that, with leveraged COLI, the product design anticipates borrowing by the policy owner of a portion of the surrender value, while policy loans are not a significant feature of non-leveraged COLI.
Universal life policies typically provide flexible coverage and flexible premium payments. Policy cash values fluctuate with the amount of the premiums paid, mortality and expense charges assessed, and interest credited to the policy. Variable universal life policies are universal life contracts in which the cash values vary directly with the performance of a specific pool of investments underlying the policy.
The principal services provided by the COLI business are issuance and administration of the insurance policies (e.g., maintenance of records regarding cash values and death benefits, claims processing, etc.) as well as oversight of the investment management for separate account assets that support the variable universal life product.
Product Features
Cash values on universal life policies are credited interest at a declared interest rate that reflects the anticipated investment results of the assets backing these policies and may vary with the characteristics of each product. Universal life policies generally have a minimum guaranteed declared interest rate which may be cumulative from the issuance date of the policy. The declared interest rate may be changed monthly, but is generally changed less frequently. In lieu of credited interest rates, holders of certain universal life policies may elect to receive credited income based on changes in an equity index, such as the S&P 500 ® . No such elections have been made since 2004.
Cash values on variable universal life policies vary directly with the performance of a specific pool of investments underlying the policy. A limited number of variable universal life policies guarantee that the realized investment performance for a quarter, excluding the impact of unrealized gains/losses and the impact of credit-related events, will not be negative.
Mortality risk is retained according to guidelines established by CIGNA. To the extent a given policy carries mortality risk that exceeds these guidelines, reinsurance is purchased from third parties for the balance.
Pricing, Reserves, and Reinsurance
Fees for universal life insurance products consist of mortality, administrative and surrender charges assessed against the policyholder’s fund balance. Interest credited and mortality charges for universal life and mortality charges on variable universal life may be adjusted prospectively to reflect expected interest and mortality experience.
For universal life insurance, CIGNA establishes reserves for deposits received and interest credited to the contractholder, less mortality and administrative charges assessed against the contractholder’s fund balance.

 

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In order to reduce its exposure to large individual and catastrophe losses, CIGNA purchases reinsurance from unaffiliated reinsurers.
Markets and Distribution
From 2004 to 2008, the Company was not actively marketing and distributing COLI products. In 2008, the Company decided to re-enter the market for COLI products, and is actively pursuing new COLI business.
The principal markets for COLI products are regional to national account-sized corporations, including banks. CIGNA’s COLI products are offered through a select group of independent brokers with particular expertise in the bank market and in the use of COLI for the financing of benefit plan liabilities.
Competition
The principal competitive factors that affect CIGNA’s COLI business are pricing, service, product innovation and access to third-party distribution.
For CIGNA’s COLI business, competitors are primarily national life insurance companies, including insurance subsidiaries of banks.
CIGNA expects that the competitive environment will intensify as the economy recovers and competitors develop new investment strategies and product designs, and aggressively price their offerings to build distribution capacity and gain market share.
Industry Developments and Strategic Initiatives
The legislative environment surrounding COLI has evolved considerably over the past decade, and there are ongoing discussions at the state and federal levels that have the potential to impact the policyholder’s tax treatment and/or administrative requirements. The Pension Protection Act of 2006 included provisions related to the notice requirements given to insured employees and limited coverage to certain more highly compensated employees. These changes were widely viewed as clarification of existing rules or industry best practices.
Sale of Individual Life Insurance & Annuity and Retirement Benefits Businesses
CIGNA sold its individual life insurance and annuity business in 1998 and its retirement benefits business in 2004. Portions of the gains from these sales were deferred because the principal agreements to sell these businesses were structured as reinsurance arrangements. The deferred portion relating to the remaining reinsurance is being recognized at the rate that earnings from the sold businesses would have been expected to emerge, primarily over 15 years on a declining basis.
Because the individual life and annuity business was sold in an indemnity reinsurance transaction, CIGNA is not relieved of primary liability for the reinsured business and had reinsurance recoverables totaling $4.4 billion as of December 31, 2009. Effective as of December 14, 2007, the purchaser placed a significant portion of the assets supporting the reserves for the purchased business into a trust for the benefit of CIGNA which qualifies to support CIGNA’s credit for the reinsurance ceded under Regulation 114 of the New York Department of Insurance. Trust assets are limited to cash, certificates of deposits in U.S. banks, and securities specified by section 1404 (a) of the New York insurance law and consist primarily of fixed maturities. At December 31, 2009, the value of the trust assets secured approximately 90% of the reinsurance recoverable. The remaining balance is currently unsecured. If Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified minimum credit or claims paying rating, these reinsurers are required to fully secure the outstanding balance. S&P has assigned each of these companies a rating of AA-.
CIGNA’s sale of its retirement benefits business primarily took the form of an arrangement under which CIGNA reinsured with the purchaser of the retirement business the general account contractholder liabilities under an indemnity reinsurance arrangement and the separate account liabilities under modified coinsurance and indemnity reinsurance arrangements. Since the sale of the retirement benefits business in 2004, the purchaser of that business has entered into agreements with certain insured party contractholders (“novation agreements”), which relieved CIGNA of any remaining contractual obligations to the contractholders. As a result, CIGNA reduced reinsurance recoverables, contractholder deposit funds, and separate account balances for these obligations.

 

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The purchaser of the retirement benefits business deposited assets associated with the reinsurance of general account contracts into a trust (the “Ceded Business Trust”) to provide security to CIGNA for the related reinsurance recoverables. The purchaser is permitted to withdraw assets from the Ceded Business Trust equal to the reduction in CIGNA’s reserves whenever a reduction occurs. For example, reductions will occur when the purchaser enters into additional novation agreements and directly assumes liability to the insured party. Assets in the trust must be greater than or equal to general account statutory liabilities of the ceded business. Trust assets are limited to those types of investments that are permitted by the state of Connecticut for general account investing and consist primarily of fixed maturities. As of December 31, 2009, assets totaling $2.4 billion remained in the Ceded Business Trust, and the remaining reserves for the purchased business were $1.7 billion.
Settlement Annuity Business
CIGNA’s settlement annuity business is a run-off block of contracts. These contracts are primarily liability settlements with approximately 35% of the liabilities associated with payments that are guaranteed and not contingent on survivorship. In the case of the contracts that involve non-guaranteed payments, such payments are contingent on the survival of one or more parties involved in the settlement.
The settlement annuities business is premium deficient, meaning initial premiums were not sufficient to cover all claims and profit. Liabilities are estimates of the present value of benefits to be paid less the present value of investment income generated by the assets supporting the product including realized and unrealized capital gains. The Company estimates these liabilities based on assumptions for investment yields, mortality, and administrative expenses. Refer to Note 2 to CIGNA’s Consolidated Financial Statements beginning on page 103 of this Form 10-K for additional information regarding reserves for this business.
Other Risks
For more information, see the Other Operations section of the MD&A beginning on page 77 of this Form 10-K.

 

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I. Investments and Investment Income
CIGNA’s investment operations provide investment management and related services primarily for CIGNA’s corporate invested assets and the insurance-related invested assets in its General Account (“Invested Assets”). CIGNA acquires or originates, directly or through intermediaries, various investments including private placements, public securities, commercial mortgage loans, real estate and short-term investments. CIGNA’s Invested Assets are managed primarily by CIGNA subsidiaries and external managers with whom CIGNA’s subsidiaries contract.
The Invested Assets comprise a majority of the combined assets of the Health Care, Disability and Life, Run-off Reinsurance and Other Operations segments (collectively, the “Domestic Portfolios”). There are, in addition, portfolios containing Invested Assets that consist of the assets of the International segment (collectively, the “International Portfolios”). Additionally, CIGNA subsidiaries or external managers manage Separate Account assets on behalf of contractholders. These assets are legally segregated from the Company’s other businesses and are not included in the General Account Invested Assets. Income, gains and losses generally accrue directly to the contractholders.
Net investment income and realized investment gains (losses) are not reported separately in the investment operations. Instead, net investment income is included as a component of earnings for each of CIGNA’s operating segments (Health Care, Disability and Life, Run-off Reinsurance, Other Operations and International) and Corporate, net of the expenses attributable to the investment operations. Realized investment gains (losses) are reported for each of CIGNA’s operating segments.
Assets Under Management
CIGNA’s Invested Assets under management at December 31, 2009 totaled $19.8 billion. See Schedule I to CIGNA’s 2009 Consolidated Financial Statements on page FS-3 of this Form 10-K for more information as to the allocation to types of investments.
As of December 31, 2009, CIGNA’s separate account funds consisted of:
  $1.4 billion in separate account assets that are managed by the buyer of the retirement benefits business pursuant to reinsurance arrangements described in the Sales of Individual Life Insurance & Annuity and Retirement Benefits Businesses sections in Note 3 to the Consolidated Financial Statements beginning on page 112 of this Form 10-K;
  $2.6 billion in separate account assets, which constitute a portion of the assets of the CIGNA Pension Plan; and
  $3.3 billion in separate account assets, which primarily support certain corporate-owned life insurance, health care and disability and life products.
Types of Investments
CIGNA invests in a broad range of asset classes, including domestic and international fixed maturities and common stocks, commercial mortgage loans, real estate and short-term investments. Fixed maturity investments include publicly traded and private placement corporate bonds, government bonds, publicly traded and private placement asset-backed securities, and redeemable preferred stocks.
For the International Portfolios, CIGNA invests primarily in publicly traded fixed maturities, short-term investments and time deposits denominated in the currency of the relevant liabilities and surplus.
Fixed Maturities
CIGNA’s fixed maturities are 92% investment grade as determined by external rating agencies (for public investments) and by CIGNA (for private investments). These assets are well diversified by individual holding and industry sector. For information about below investment grade holdings, see the “Investment Assets” section of the MD&A beginning on page 87 of this Form 10-K.

 

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Commercial Mortgages and Real Estate
Commercial mortgage loan investments are subject to underwriting criteria addressing loan-to-value ratio, debt service coverage, cash flow, tenant quality, leasing, market, location and borrower’s financial strength. Such investments consist primarily of first mortgage loans on commercial properties and are diversified by property type, location and borrower. CIGNA invests primarily in commercial mortgages on fully completed and substantially leased commercial properties. Virtually all of CIGNA’s commercial mortgage loans are balloon payment loans, under which all or a substantial portion of the loan principal is due at the end of the loan term. CIGNA holds no direct residential mortgages. The weighted average loan-to-value ratio of the Company’s commercial mortgage loan portfolio, based on management’s annual valuation completed in the third quarter of 2009, was approximately 77% and the weighted average debt service coverage was approximately 1.5 times.
CIGNA enters into joint ventures with local partners to develop, lease, manage, and sell commercial real estate to maximize investment returns. CIGNA’s portfolio of real estate investments consists of properties under development and stabilized properties, and is diversified relative to property type and location. Additionally, CIGNA invests in third-party sponsored real estate funds to maximize investment returns and to maintain diversity with respect to its real estate related exposure.
CIGNA also could take possession of real estate through foreclosure of delinquent commercial mortgage loans. CIGNA rehabilitates, re-leases, and sells foreclosed properties, a process that usually takes from two to four years unless management considers a near-term sale preferable. As of December 31, 2009, CIGNA held $59 million of foreclosed properties.
Mezzanine and Private Equity Partnerships
CIGNA invests in limited partnership interests in partnerships formed and managed by seasoned, experienced fund managers with diverse mezzanine and private equity strategies.
Derivative Instruments
CIGNA generally uses derivative financial instruments to minimize its exposure to certain market risks. CIGNA has also written derivative instruments to minimize certain insurance customers’ market risks. In addition, to enhance investment returns, CIGNA may invest in indexed credit default swaps or other credit derivatives from time to time. However, as of December 31, 2009, CIGNA held no indexed credit default swaps or other credit derivatives. For information about CIGNA’s use of derivative financial instruments, see Note 13 to CIGNA’s 2009 Consolidated Financial Statements beginning on page 146 of this Form 10-K.
See also the “Investment Assets” section of the MD&A beginning on page 87, and Notes 1, 12, and 14 to the Consolidated Financial Statements beginning on pages 103, 141 and 149, respectively, of this Form 10-K for additional information about CIGNA’s investments.
Domestic Portfolios — Investment Strategy
As of December 31, 2009, the Domestic Portfolios had $18.3 billion in Invested Assets, allocated among fixed maturity investments (66%); commercial mortgage loan investments (19%); and policy loans, real estate investments, short-term investments and mezzanine and private equity partnership investments (15%).
CIGNA generally manages the characteristics of these assets to reflect the underlying characteristics of related insurance and contractholder liabilities and related capital requirements, as well as regulatory and tax considerations pertaining to those liabilities, and state investment laws. CIGNA’s domestic insurance and contractholder liabilities as of December 31, 2009, excluding liabilities of businesses sold through the use of reinsurance arrangements, were associated with the following products, and the Invested Assets are allocated proportionally as follows: other life and health, 51%; fully guaranteed annuity, 18%; and interest-sensitive life insurance, 31%.

 

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While the businesses and products supported are described elsewhere in this Form 10-K, the Invested Assets supporting the insurance and contractholder liabilities of each of the Company’s segments are as follows:
  assets supporting CIGNA’s Health Care segment are structured to emphasize investment income, and provide the necessary liquidity to meet cash flow requirements.
  assets supporting CIGNA’s Disability and Life segment are also structured to emphasize investment income, and provide necessary liquidity to meet cash flow requirements. Invested Assets supporting longer-term group disability insurance benefits and group life waiver of premium benefits are generally managed to an aggregate duration similar to that of the related benefit cash flows.
  assets supporting the Run-off Reinsurance segment with respect to reinsurance provided for guaranteed minimum death benefit contracts and guaranteed minimum income benefit contracts are structured to emphasize investment income, and provide the necessary liquidity to meet cash flow requirements. For information about CIGNA’s use of derivative financial instruments in the Run-off Reinsurance segment, see Notes 7 and 11 to CIGNA’s Consolidated Financial Statements beginning on pages 117 and 132 of this Form 10-K.
  assets supporting CIGNA’s Other Operations segment are associated primarily with fully guaranteed annuities (primarily settlement annuities) and interest-sensitive life insurance (primarily corporate-owned life insurance products). Because settlement annuities generally do not permit withdrawal by policyholders prior to maturity, the amount and timing of future benefit cash flows can be reasonably estimated so funds supporting these products are invested in fixed income investments whose aggregate duration generally matches the cash flows of the related benefits. As of December 31, 2009, the duration of assets that supported these liabilities was approximately 11.2 years. Invested Assets supporting interest-sensitive life insurance products are primarily fixed income investments and policy loans. Fixed income investments emphasize investment yield while meeting the liquidity requirements of the related liabilities.
Investment strategy and results are affected by the amount and timing of cash available for investment, competition for investments, economic conditions, interest rates and asset allocation decisions. CIGNA routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets and other factors. Such factors include industry sector considerations for fixed maturity investments and mezzanine and private equity partnership investments, and geographic and property-type considerations for commercial mortgage loan and real estate investments.
International Portfolios — Investment Strategy
As of December 31, 2009 the International Portfolios had $1.5 billion in Invested Assets, allocated among fixed maturity investments (93%), short-term investments (5%) and other investments (2%). The International Portfolios are primarily managed by external managers with whom CIGNA’s subsidiaries contract.
The characteristics of these assets are generally managed to reflect the underlying characteristics of related insurance and contractholder liabilities, as well as regulatory and tax considerations in the countries where CIGNA’s subsidiaries operate. CIGNA International’s Invested Assets are generally invested in the currency of related liabilities, typically the currency in which the subsidiaries operate and with an aggregate duration generally matching the duration of insurance liabilities and surplus. CIGNA’s investment policy allows the investment of subsidiary assets in U.S. dollars to the extent permitted by applicable regulation. CIGNA International’s Invested Assets as of December 31, 2009 were held primarily in support of statutory surplus and liabilities associated with the life, accident and supplemental health and healthcare products described in Section F on page 17 of this Form 10-K.

 

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J. Regulation
CIGNA and its subsidiaries are subject to federal, state and international regulations and CIGNA has established policies and procedures to comply with applicable requirements.
CIGNA’s insurance and HMO subsidiaries must be licensed by the jurisdictions in which they conduct business. These subsidiaries are subject to numerous state and federal regulations related to their business operations, including, but not limited to:
  the form and content of customer contracts including benefit mandates (including special requirements for small groups, generally under 50 employees);
  premium rates;
  the content of agreements with participating providers of covered services;
  producer appointment and compensation;
  claims processing and appeals;
  underwriting practices;
  reinsurance arrangements;
  unfair trade and claim practices;
  protecting the privacy and confidentiality of the information received from members;
  risk sharing arrangements with providers; and
  the operation of consumer-directed plans (including health savings accounts, health reimbursement accounts, flexible spending accounts and debit cards).
CIGNA and its international subsidiaries comply with regulations in international jurisdictions where foreign insurers are, in some countries, faced with greater restrictions than their domestic competitors. These restrictions may include discriminatory licensing procedures, compulsory cessions of reinsurance, required localization of records and funds, higher premium and income taxes, and requirements for local participation in an insurer’s ownership.
CIGNA and its subsidiaries are also subject to state and federal laws relating to business entities.
Regulatory agencies conduct routine and targeted market conduct examinations of CIGNA’s insurance and HMO subsidiaries to assess compliance with applicable laws and regulations. Other types of regulatory oversight predominantly as to CIGNA and its subsidiaries’ products and services are described below.
Regulation of Insurance Companies
Financial Reporting
Regulators closely monitor the financial condition of licensed insurance companies and HMOs. States regulate the form and content of statutory financial statements and the type and concentration of permitted investments. CIGNA’s insurance and HMO subsidiaries are required to file periodic financial reports with regulators in most of the jurisdictions in which they do business, and their operations and accounts are subject to examination by such agencies at regular intervals.

 

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Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds
Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies. In the United States, these associations levy assessments on member insurers licensed in a particular state to pay such claims.
Several states also require HMOs to participate in guaranty funds, special risk pools and administrative funds. For additional information about guaranty fund and other assessments, see Note 23 to CIGNA’s Consolidated Financial Statements beginning on page 163 of this Form 10-K.
Some states also require health insurers and HMOs to participate in assigned risk plans, joint underwriting authorities, pools or other residual market mechanisms to cover risks not acceptable under normal underwriting standards.
Solvency and Capital Requirements
Many states have adopted some form of the National Association of Insurance Commissioners (“NAIC”) model solvency-related laws and risk-based capital rules (“RBC rules”) for life and health insurance companies. The RBC rules recommend a minimum level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities incurred. If the ratio of the insurer’s adjusted surplus to its risk-based capital falls below statutory required minimums, the insurer could be subject to regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. During 2009, CIGNA’s HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with applicable RBC and non-U.S. surplus rules.
Effective December 31, 2009 the Company’s principal life insurance subsidiary, Connecticut General Life Insurance Company (“CGLIC”), implemented the NAIC’s Actuarial Guideline XLIII (also known as AG 43 or VACARVM), which is applicable to CGLIC’s statutory reserves for GMDB and GMIB contracts totaling $1.6 billion as of December 31, 2009. As provided under this guidance, CGLIC received approval from the State of Connecticut to grade-in the full effect of the guideline over a 3-year period. Accordingly, upon implementation at December 31, 2009, statutory surplus for CGLIC was reduced by $40 million. If the guidance had been fully implemented at December 31, 2009, statutory surplus would have been reduced by $110 million. Management does not anticipate that this implementation will have a material impact on the amount of dividends expected to be paid by CGLIC to the parent company in 2010. This implementation has no impact on measurement of the Company’s results of operations or financial condition as determined under GAAP.
Holding Company Laws
CIGNA’s domestic insurance companies and certain of its HMOs are subject to state laws regulating subsidiaries of insurance holding companies. Under such laws, certain dividends, distributions and other transactions between an insurance or HMO subsidiary and its affiliates may require notification to, or approval by, one or more state insurance commissioners.
Marketing, Advertising, and Products
In most states, CIGNA’s insurance companies and HMO subsidiaries are required to certify compliance with applicable advertising regulations on an annual basis. CIGNA’s insurance companies and HMO subsidiaries are also required in most states to file and secure regulatory approval of products prior to the marketing, advertising, and sale of such products. State and/or federal regulatory scrutiny of life and health insurance company and HMO marketing and advertising practices, including the adequacy of disclosure regarding products and their administration, may result in increased regulation. Product offerings, such as the CIGNA limited benefits plans issued by the Star HRG business acquired in July 2006, attracted increased regulatory scrutiny in 2009.

 

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Licensing Requirements
Pharmacy Licensure Laws
Certain CIGNA subsidiaries are pharmacies, which dispense prescription drugs to participants of benefit plans administered or insured by CIGNA subsidiary HMOs and insurance companies. These pharmacy-subsidiaries are subject to state licensing requirements and regulation.
International Licensure Laws
CIGNA International subsidiaries are often required to be licensed when entering new markets or starting new operations in certain jurisdictions. The licensure requirements for these CIGNA subsidiaries vary by country and are subject to change.
Claim Administration, Utilization Review and Related Services
Certain CIGNA subsidiaries contract for the provision of claim administration, utilization management and other related services with respect to the administration of self-insured benefit plans. These CIGNA subsidiaries may be subject to state third-party administration and other licensing requirements and regulation.
Federal Regulations
Employee Retirement Income Security Act
CIGNA subsidiaries sell most of their products and services to sponsors of employee benefit plans that are governed by ERISA. CIGNA subsidiaries may be subject to requirements imposed by ERISA on plan fiduciaries and parties in interest, including regulations affecting claim and appeals procedures for health, dental, disability, life and accident plans.
Medicare Regulations
Several CIGNA subsidiaries engage in businesses that are subject to federal Medicare regulations such as:
  those offering individual and group Medicare Advantage (HMO) coverage in Arizona;
  contractual arrangements with the federal government for the processing of certain Medicare claims and other administrative services; and
  those offering Medicare Pharmacy (Part D) and Medicare Advantage Private Fee For Service products that are subject to federal Medicare regulations.
Several CIGNA subsidiaries are also subject to reporting requirements pursuant to Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007.
Federal Audits of Government Sponsored Health Care Programs
Participation in government sponsored health care programs subjects CIGNA to a variety of federal laws and regulations and risks associated with audits conducted under these programs. These audits may occur in years subsequent to CIGNA providing the relevant services under audit. These risks may include reimbursement claims as well as potential fines and penalties. For example, the federal government requires Medicare and Medicaid providers to file detailed cost reports for health care services provided. These reports may be audited in subsequent years. CIGNA HMOs that contract to provide community-rated coverage to participants in the Federal Employees Health Benefit Plan may be required to reimburse the federal government if, following an audit, it is determined that a federal employee group did not receive the benefit of a discount offered by a CIGNA HMO to one of the two groups closest in size to the federal employee group. See “Health Care” in Section D beginning on page 3 of this Form 10-K for additional information about CIGNA’s participation in government health-related programs.

 

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Health Insurance Portability and Accountability Act Regulations
The federal Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”) impose several different requirements on health insurers, HMOs, health plans, health care providers and clearinghouses. Health insurers and HMOs are further subject to regulations related to guaranteed issuance (for groups with 50 or fewer lives), guaranteed renewal, and portability of health insurance.
HIPAA also imposes minimum standards for health plans, health insurers, health care providers and their vendors to safeguard the privacy and security of individually identifiable or protected health information (“PHI”). In 2009, HIPAA’s privacy and security requirements were expanded by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) which enhanced penalties for HIPAA violations and required regulated entities to provide notice of breaches of unsecured PHI. CIGNA has a project team addressing the provisions of HITECH.
HIPAA also establishes rules to standardize the format and content of certain electronic transactions, including but not limited to, eligibility and claims. In 2008, federal regulations were issued requiring entities subject to HIPAA to update their transaction formats for electronic data interchange from the current HIPAA 4010 standards to new HIPAA 5010 standards. CIGNA has launched a project to migrate to the required HIPAA 5010 standards by the January 1, 2012 effective date. Regulations were also issued in 2008 requiring a conversion from the ICD-9 diagnosis and procedure code set to the ICD-10 diagnosis and procedure code set. Implementation of the HIPAA 5010 standards is necessary to support the IDC-10 code set. CIGNA has initiated a project to deliver ICD-10 capabilities by the October 1, 2013 effective date.
Antitrust Regulations
CIGNA subsidiaries are also engaged in activities that may be scrutinized under federal and state antitrust laws and regulations. These activities include the administration of strategic alliances with competitors, information sharing with competitors and provider contracting.
Anti-Money Laundering Regulations
Certain CIGNA products (“Covered Products” as defined in the Bank Secrecy Act) are subject to U.S. Department of the Treasury anti-money laundering regulations. CIGNA has implemented anti-money laundering policies designed to ensure that its Covered Products are underwritten and sold in compliance with these regulations.
Investment-Related Regulations
Depending upon their nature, CIGNA’s investment management activities are subject to U.S. federal securities laws, ERISA, and other federal and state laws governing investment related activities. In many cases, the investment management activities and investments of individual insurance companies are subject to regulation by multiple jurisdictions.
Regulatory and Legislative Developments
The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the federal Departments of Labor and Justice, as well as the courts. In the growing area of consumer-driven plans, health savings accounts, health reimbursement accounts and flexible spending accounts are also regulated by the U.S. Department of the Treasury and the Internal Revenue Service. For information on Regulatory and Industry Developments, see page 79 in the MD&A and Note 23 to CIGNA’s Consolidated Financial Statements beginning on page 163 of this Form 10-K.
Federal and state regulation and legislation may affect CIGNA’s operations in a variety of ways. In addition to proposals discussed above related to increased regulation of the health care industry, other proposed measures that may significantly affect CIGNA’s operations include the expansion of the government’s role in the health care arena and alternative assessments and tax increases specific to the health care insurance industry or health care insurance products as part of federal health care reform initiatives, as well as other modifications of the Medicare program, and employee benefit regulation.
The economic and competitive effects of the legislative and regulatory proposals discussed above on CIGNA’s business operations will depend upon the final form of any such legislation or regulation.

 

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K. Ratings
CIGNA and certain of its insurance subsidiaries are rated by nationally recognized rating agencies. The significance of individual ratings varies from agency to agency. However, companies that are assigned ratings at the top end of the range have, in the opinion of the rating agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest capacity.
Insurance ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. The principal agencies that rate CIGNA’s insurance subsidiaries characterize their insurance rating scales as follows:
    A.M. Best Company, Inc. (“A.M. Best”), A++ to S (“Superior” to “Suspended”);
    Moody’s Investors Service (“Moody’s”), Aaa to C (“Exceptional” to “Lowest”);
    Standard & Poor’s Corp. (“S&P”), AAA to R (“Extremely Strong” to “Regulatory Action”); and
    Fitch, Inc. (“Fitch”), AAA to D (“Exceptionally Strong” to “Order of Liquidation”).
As of February 25, 2010, the insurance financial strength ratings for CIGNA subsidiaries, CGLIC and Life Insurance Company of North America (“LINA”) were as follows:
         
    CGLIC   LINA
    Insurance   Insurance
    Ratings (1)   Ratings (1)
 
       
A.M. Best
  A
(“Excellent,”
3 rd of 16)
  A
(“Excellent,”
3 rd of 16)
 
       
Moody’s
  A2
(“Good,”
6 th of 21)
  A2
(“Good,”
6 th of 21)
 
       
S&P
  A
(“Strong,”
6 th of 21)
  (Not Rated)
 
       
Fitch
  A
(“Strong,”
6 th of 24)
  A
(“Strong,”
6 th of 24)
 
     
(1)   Includes the rating assigned, the agency’s characterization of the rating and the position of the rating in the agency’s rating scale (e.g., CGLIC’s rating by A.M. Best is the 3 rd highest rating awarded in its scale of 16).

 

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Debt ratings are assessments of the likelihood that a company will make timely payments of principal and interest. The principal agencies that rate CIGNA’s senior debt characterize their rating scales as follows:
    Moody’s, Aaa to C (“Exceptional” to “Lowest”);
    S&P, AAA to D (“Extremely Strong” to “Default”); and
    Fitch, AAA to D (“Highest” to “Default”).
The commercial paper rating scales for those agencies are as follows:
    Moody’s, Prime-1 to Not Prime (“Superior” to “Not Prime”);
    S&P, A-1+ to D (“Extremely Strong” to “Default”); and
    Fitch, F-1+ to D (“Very Strong” to “Distressed”).
As of February 25, 2010, the debt ratings assigned to CIGNA Corporation by the following agencies were as follows:
Debt Ratings (1)
CIGNA CORPORATION
         
        Commercial
    Senior Debt   Paper
Moody’s
  Baa2
(“Adequate,”
9 th of 21)
  P2
(“Strong,”
2 nd of 4)
S&P
  BBB
(“Adequate,” 9 th of 22)
  A2
(“Good,”
3 rd of 7)
Fitch
  BBB
(“Good,”
9 th of 24)
  F2
(“Moderately Strong,”
3 rd of 7)
 
     
(1)   Includes the rating assigned, the agency’s characterization of the rating and the position of the rating in the applicable agency’s rating scale.
CIGNA is committed to maintaining appropriate levels of capital in its subsidiaries to support financial strength ratings that meet customers’ expectations, and to improving the earnings of the health care business. Lower ratings at the parent company level increase the cost to borrow funds. Lower ratings of CGLIC and LINA could adversely affect new sales and retention of current business.

 

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L. Miscellaneous
CIGNA and its principal subsidiaries are not dependent on business from one or a few customers. No customer accounted for 10% or more of CIGNA’s consolidated revenues in 2009. CIGNA and its principal subsidiaries are not dependent on business from one or a few brokers or agents. In addition, CIGNA’s insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to its approval and acceptance.
CIGNA had approximately 29,300, 30,300, and 26,600 employees as of December 31, 2009, 2008 and 2007, respectively.

 

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Item 1A.   RISK FACTORS
As a large company operating in a complex industry, CIGNA encounters a variety of risks and uncertainties including those identified in this Risk Factor discussion and elsewhere in this report. CIGNA devotes resources to developing enterprise-wide risk management processes, in addition to the risk management processes within its businesses. These factors represent risks and uncertainties that could have a material adverse effect on CIGNA’s business, liquidity, results of operations or financial condition. These risks and uncertainties are not the only ones CIGNA faces. Other risks and uncertainties that CIGNA does not know about now, or that the Company does not now think are significant and does not appropriately identify and manage, may impair its business or the trading price of its securities. The following are significant risks identified by CIGNA.
Future performance of CIGNA’s business will depend on the Company’s ability to execute on its strategic and operational initiatives effectively.
The future performance of CIGNA’s business will depend in large part on CIGNA’s ability to execute effectively and implement its growth strategy. These strategic and operational initiatives include (1) growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals.
Successful execution of these strategic and operational initiatives depends on a number of factors including:
  differentiating CIGNA’s products and services from those of its competitors by leveraging its health advocacy capabilities and other strengths in targeted markets, geographies and buyer segments;
  developing and introducing new products or programs, because of the inherent risks and uncertainties associated with product development, particularly in response to government regulation or the increased focus on consumer directed products;
  identifying and introducing the proper mix or integration of products that will be accepted by the marketplace;
  attracting and retaining sufficient numbers of qualified employees;
  effectively managing balance sheet exposures;
  improving medical cost competitiveness in targeted markets; and
  further reducing CIGNA HealthCare’s operating expenses.
If these initiatives fail or are not executed effectively, it could harm the Company’s consolidated financial position and results of operations. For example, if not managed effectively, the plan to reduce operating expenses could cut necessary resources and the Company’s talent pool and, consequently, could have long-term effects on the business by decreasing or slowing improvements in its products and limiting its ability to retain or hire key personnel.
If CIGNA does not adequately invest in and effectively execute on improvements in its information technology infrastructure and improve its functionality, it will not be able to deliver the services required in the evolving marketplace at a competitive cost.
CIGNA’s success in executing on its consumer engagement strategy depends on the Company’s continued improvements to its information technology infrastructure and customer service offerings. The marketplace is evolving and the level of service that is acceptable to customers today will not necessarily be acceptable tomorrow. The Company must continue to invest in long-term solutions that will enable it to meet customer expectations. CIGNA’s success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support the Company’s business processes in a cost-efficient and resource-efficient manner. CIGNA also must develop new systems to meet the current market standard and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and customer needs. System development projects are long term in nature, may be more costly than expected to complete and may not deliver the expected benefits upon completion.

 

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CIGNA’s business depends on its ability to properly maintain the integrity or security of its data or to strategically implement new information systems.
CIGNA’s business depends on effective information systems and the integrity and timeliness of the data it uses to run its business. CIGNA’s business strategy requires providing members and providers with Internet-enabled products and information to meet their needs. CIGNA’s ability to adequately price its products and services, establish reserves, provide effective and efficient service to its customers, and to timely and accurately report its financial results also depends significantly on the integrity of the data in its information systems. If the information CIGNA relies upon to run its businesses were found to be inaccurate or unreliable due to fraud or other error, or if CIGNA were to fail to maintain effectively its information systems and data integrity, the Company could have problems with, among other things: operational disruptions, which may impact customers, physicians and other health care providers; determining medical cost estimates and establishing appropriate pricing; retaining and attracting customers; and regulatory compliance.
If CIGNA were unable to maintain the security of any sensitive data residing on the Company’s systems, whether due to its own actions or those of any vendors, CIGNA’s reputation would be adversely affected and the Company could be exposed to litigation or other actions, fines or penalties.
If CIGNA fails to manage successfully its outsourcing projects and key vendors, CIGNA’s business could be disrupted .
CIGNA takes steps to monitor and regulate the performance of independent third parties who provide services or to whom the Company delegates selected functions. These third parties include information technology system providers, independent practice associations, call center and claim service providers and specialty service providers.
Arrangements with key vendors may make CIGNA’s operations vulnerable if third parties fail to satisfy their obligations to the Company, including their obligations to maintain and protect the security and confidentiality of the Company’s information and data, as a result of their performance, changes in their own operations, financial condition, or other matters outside of CIGNA’s control. In addition, to the extent CIGNA outsources selected services or selected functions to third parties in foreign jurisdictions, the Company could be exposed to risks inherent in conducting business outside of the United States, including international economic and political conditions, additional costs associated with complying with foreign laws and fluctuations in currency values. Further, CIGNA may not fully realize on a timely basis the anticipated economic and other benefits of the outsourcing projects or other relationships it enters into with key vendors, which could result in substantial costs or other operational or financial problems for the Company. Terminating or transitioning arrangements with key vendors could result in additional costs and a risk of operational delays, potential errors and possible control issues as a result of the termination or during the transition phase.
In 2006, CIGNA entered into an agreement with IBM pursuant to which IBM operates certain software applications and significant portions of CIGNA’s information technology infrastructure, including the provision of services relating to its call center application, enterprise content management, risk-based capital analytical infrastructure and voice and data communications network. The 2006 contract with IBM includes several service level agreements, or SLAs, related to issues such as performance and job disruption with significant financial penalties if these SLAs are not met. However, the Company may not be adequately indemnified against all possible losses through the terms and conditions of the agreement and the fees paid could be a subject of dispute between the parties. In addition, some of CIGNA’s termination rights are contingent upon payment of a fee, which may be significant. If CIGNA’s relationship with IBM is abruptly terminated, the Company’s customers may experience disruption of service.

 

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Sustained or significant deterioration in economic conditions could significantly impact the Company’s customers.
The Company is exposed to risks associated with the potential financial instability of its customers, many of which could be adversely affected by volatile conditions in the financial markets. Customers could experience cash flow problems and other financial difficulties in times of a sustained or significant deterioration in the economy. As a result, they may modify, delay or cancel plans to purchase the Company’s products, may make changes in the mix of products purchased that are unfavorable to the Company, or may be forced to reduce their workforces. Specifically, higher unemployment rates as a result of a prolonged economic downturn has lead and may continue to lead to lower enrollment in the Company’s employer group plans, lower enrollment in our non-employer individual plans and a higher number of employees opting out of CIGNA’s employer group plans. The adverse economic conditions could also cause employers to stop offering certain health care coverage as an employee benefit or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs. In addition, the economic downturn could negatively impact the Company’s employer group renewal prospects and our ability to increase premiums and could result in cancellation of products and services by customers. This could also result in increased unemployment and an increase in the number of claims submitted. All of these developments could lead to a decrease in CIGNA’s membership levels and premium and fee revenues. Further, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to the Company.
A downgrade in the financial strength ratings of CIGNA’s insurance subsidiaries could adversely affect new sales and retention of current business, and a downgrade in CIGNA’s debt ratings would increase the cost of borrowed funds and affect ability to access capital.
Financial strength, claims paying ability and debt ratings by recognized rating organizations are an important factor in establishing the competitive position of insurance companies and health benefits companies. Ratings information by nationally recognized ratings agencies is broadly disseminated and generally used throughout the industry. CIGNA believes the claims paying ability and financial strength ratings of its principal insurance subsidiaries are an important factor in marketing its products to certain of CIGNA’s customers. In addition, CIGNA Corporation’s debt ratings impact both the cost and availability of future borrowings, and accordingly, its cost of capital. Each of the rating agencies reviews CIGNA’s ratings periodically and there can be no assurance that current ratings will be maintained in the future. In addition, a downgrade of these ratings could make it more difficult to raise capital and to support business growth at CIGNA’s insurance subsidiaries.
A description of CIGNA Corporation ratings, other subsidiary ratings, as well as more information on these ratings, is included in “Ratings” in Section K beginning on page 32 of this Form 10-K.
Unfavorable claims experience related to workers’ compensation and personal accident insurance exposures in CIGNA’s Run-off Reinsurance business could result in losses .
Unfavorable claims experience related to workers’ compensation and personal accident insurance exposures in CIGNA’s Run-off
Reinsurance business is possible and could result in future losses. Further, CIGNA could have losses attributable to its inability to recover amounts from retrocessionaires or ceding companies either due to disputes with the retrocessionaires or ceding companies or their financial condition. If CIGNA’s reserves for amounts recoverable from retrocessionaires or ceding companies, as well as reserves associated with underlying reinsurance exposures are insufficient, it could result in losses.

 

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CIGNA’s equity hedge program for its guaranteed minimum death benefits contracts could fail to reduce the risk of stock market declines.
As part of its Run-off Reinsurance business, CIGNA reinsured a guaranteed minimum death benefit under certain variable annuities issued by other insurance companies. CIGNA maintains a hedge program to reduce equity market risks related to these contracts by selling domestic and foreign-denominated exchange-traded futures contracts. The purpose of this program is to reduce the adverse effects of potential future domestic and international stock market declines on CIGNA’s liabilities for these contracts. Under the program, increases in liabilities under the annuity contracts from a declining equity market are offset by gains on the futures contracts. However, the program will not perfectly offset the change in the liability in part because the market does not offer futures contracts that exactly match the diverse mix of equity fund investments held by contractholders. The impact of this mismatch may be higher in periods of significant volatility and may result in higher losses to the Company. In addition, the number of futures contracts used in the program is adjusted only when certain tolerances are exceeded and in periods of highly volatile equity markets when actual volatility exceeds the expected volatility assumed in the liability calculation, losses will result. Further, CIGNA could have difficulty in entering into appropriate futures contracts. See “Run-off Reinsurance” in Section G beginning on page 20 of this Form 10-K for more information on the program.
Actual experience could differ significantly from CIGNA’s assumptions used in estimating CIGNA’s liabilities for reinsurance contracts covering guaranteed minimum death benefits or minimum income benefits.
CIGNA estimates reserves for guaranteed minimum death benefit and minimum income benefit exposures based on assumptions regarding lapse, partial surrender, mortality, interest rates, volatility, reinsurance recoverables, and, for minimum income benefit exposures, annuity income election rates. These estimates are currently based on CIGNA’s experience and future expectations. CIGNA monitors actual experience to update these reserve estimates as necessary. CIGNA regularly evaluates the assumptions used in establishing reserves and changes its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. In addition, the Company could have losses attributable to its inability to recover amounts from retrocessionaires. See Notes 7 and 11 to CIGNA’s Consolidated Financial Statements beginning on pages 117 and 132, respectively of this Form 10-K, for more information on assumptions used for the Company’s guaranteed minimum death benefit and minimum income benefit exposures.
Significant stock market declines could result in larger net liabilities for guaranteed minimum death benefit contracts or for guaranteed minimum income benefit contracts, the recognition of additional pension obligations and increased funding for those obligations, and increased pension plan expenses.
The Company calculates a provision for expected future partial surrenders as part of the liability for guaranteed minimum death benefit contracts. As equity markets decline, the amount of guaranteed death benefit exposure increases and the equity hedge program is designed to offset the corresponding change in the liability. If a contractholder withdraws substantially all of its mutual fund investments, the liability increases reflecting the lower assumed future premiums, the lower likelihood of lapsation, and the lower likelihood of account values recovering sufficiently to reduce death benefit exposure in future periods. These effects are not covered by the Company’s equity hedge program. Thus if equity markets decline, the provision for expected future partial surrenders increases and there is no corresponding offset from the hedge program. As equity markets decline, the claim amounts that the Company expects to pay out for the guaranteed minimum income benefit business increases resulting in increased net liabilities and related losses.
CIGNA currently has unfunded obligations in its frozen pension plan. A significant decline in the value of the plan’s equity and fixed income investments or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which could increase CIGNA’s expenses and reduce the cash available to CIGNA, including its subsidiaries. See Note 10 to CIGNA’s Consolidated Financial Statements beginning on page 126 of this Form 10-K for more information on the Company’s obligations under the pension plan.

 

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Significant changes in market interest rates affect the value of CIGNA’s financial instruments that promise a fixed return or benefit and the value of particular assets and liabilities.
As an insurer, CIGNA has substantial investment assets that support insurance and contractholder deposit liabilities. Generally low levels of interest rates on investments, such as those experienced in United States financial markets during recent years, have negatively impacted the level of investment income earned by the Company in recent periods, and such lower levels of investment income would continue if these lower interest rates were to continue.
Substantially all of the Company’s investment assets are in fixed interest-yielding debt securities of varying maturities, fixed redeemable preferred securities and commercial mortgage loans. The value of these investment assets can fluctuate significantly with changes in market conditions. A rise in interest rates could reduce the value of the Company’s investment portfolio and increase interest expense if CIGNA were to access its available lines of credit.
The Company is also exposed to interest rate and equity risk based upon the discount rate and expected long-term rate of return assumptions associated with the Company’s pension and other post-retirement obligations. Sustained declines in interest rates could have an adverse impact on the funded status of the Company’s pension plans and the Company’s re-investment yield on new investments.
Changes in interest rates may also impact the discount rate and expected long-term rate of return assumptions associated with the Company’s guaranteed minimum death benefit liabilities. Significant, sustained declines in interest rates could cause the Company to reduce these long-term assumptions, resulting in increased liabilities.
In addition, changes in interest rates impact the assumed market returns and the discount rate used in the fair value calculations for the Company’s liabilities for guaranteed minimum income benefits. Significant interest rate declines could significantly increase the Company’s liabilities for these contracts.
As the 7-year Treasury rate (claim interest rate) declines, the claim amounts that the Company expects to pay out for the guaranteed minimum income benefit business increases. For a subset of the business, there is a contractually guaranteed floor of 3% for the claim interest rate. Significant interest rate declines could significantly increase the Company’s net liabilities for guaranteed minimum income benefit contracts because of increased exposures.
New accounting pronouncements or guidance could require CIGNA to change the way in which it accounts for operations.
The Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies may issue new accounting standards or pronouncements, or changes in the interpretation of existing standards or pronouncements, from time to time, which could have a significant effect on CIGNA’s reported results of operations and financial condition.
CIGNA faces risks related to litigation and regulatory investigations.
CIGNA is routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other legal matters arising in the ordinary course of the business of administering and insuring employee benefit programs. Such legal matters include benefit claims, breach of contract actions, tort claims, and disputes regarding reinsurance arrangements. In addition, CIGNA incurs and likely will continue to incur liability for claims related to its health care business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against the industry.
Court decisions and legislative activity may increase CIGNA’s exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. CIGNA currently has insurance coverage for some of these potential liabilities. Other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be sufficient to cover the entire damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. It is possible that the resolution of one or more of the legal matters and claims described in this risk factor could result in losses material to CIGNA’s consolidated results of operations, liquidity or financial condition.

 

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A description of material legal actions and other legal matters in which CIGNA is currently involved is included under “Legal Proceedings” in Item 3 beginning on page 44, Note 23 to CIGNA’s Consolidated Financial Statements beginning on page 163 of this Form 10-K and “Regulation” in Section J beginning on page 28. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence or existing law can occur. CIGNA believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously.
CIGNA’s business is subject to substantial government regulation, which, along with new regulation, could increase its costs of doing business and could adversely affect its profitability.
CIGNA’s business is regulated at the international, federal, state and local levels. The laws and rules governing CIGNA’s business and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force CIGNA to change how it does business, restrict revenue and enrollment growth, increase health care, technology and administrative costs including pension costs and capital requirements, take other actions such as changing its reserve levels with respect to certain reinsurance contracts, change business practices in disability payments and increase CIGNA’s liability in federal and state courts for coverage determinations, contract interpretation and other actions.
CIGNA must comply with the various regulations applicable to its business. In addition, CIGNA must obtain and maintain regulatory approvals to market many of its products, to increase prices for certain regulated products and to consummate some of its acquisitions and divestitures. Delays in obtaining or failure to obtain or maintain these approvals could reduce the Company’s revenue or increase its costs.
For further information on regulatory matters relating to CIGNA, see “Regulation” in Section J beginning on page 28 and “Legal Proceedings” in Item 3 beginning on page 44 of this Form 10-K.
CIGNA operates a pharmacy benefit management business, primary care clinics and a staff model HMO, which are subject to a number of risks and uncertainties, in addition to those CIGNA faces with its health care business.
CIGNA’s pharmacy benefit management business is subject to federal and state regulation, including federal and state anti-remuneration laws, ERISA, HIPAA and laws related to the operation of Internet and mail-service pharmacies.
The Company’s pharmacy benefit management business would also be adversely affected by an inability to contract on favorable terms with pharmaceutical manufacturers and could suffer claims and reputational harm in connection with purported errors by CIGNA’s mail order or retail pharmacy businesses. Disruptions at any of the Company’s pharmacy business facilities due to failure of technology or any other failure or disruption to these systems or to the infrastructure due to fire, electrical outage, natural disaster, acts of terrorism or some other catastrophic event could reduce CIGNA’s ability to process and dispense prescriptions and provide products and services to customers.
The Company employs physicians, nurse practitioners, nurses and other health care professionals at onsite low acuity and primary care clinics it operates for the Company’s customers (as well as certain clinics for Company employees). The Company also owns and operates medical facilities in the Phoenix, Arizona metropolitan area, including multispecialty health care centers, outpatient surgery and urgent care centers, low acuity clinics, laboratory, pharmacy and other operations that employ primary care as well as specialty care physicians and other types of health care professionals. As a direct employer of health care professionals and as an operator of primary and low-acuity care clinics and other types of medical facilities, the Company is subject to liability for negligent acts, omissions, or injuries occurring at one of its clinics or caused by one of its employees. Even if any claims brought against the Company were unsuccessful or without merit, it would have to defend against such claims. The defense of any such actions may be time-consuming and costly, and may distract management’s attention. As a result, CIGNA may incur significant expenses and the Company’s financial results could be adversely affected.

 

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CIGNA faces competitive pressure, particularly price competition, which could result in premiums which are insufficient to cover the cost of the healthcare services delivered to its members and inadequate medical claims reserves.
While health plans compete on the basis of many factors, including service quality of clinical resources, claims administration services and medical management programs, and quality and sufficiency of provider networks, CIGNA expects that price will continue to be a significant basis of competition. CIGNA’s customer contracts are subject to negotiation as customers seek to contain their costs, and customers may elect to reduce benefits in order to constrain increases in their benefit costs. Such an election may result in lower premiums for the Company’s products, although it may also reduce CIGNA’s costs. Alternatively, the Company’s customers may purchase different types of products that are less profitable, or move to a competitor to obtain more favorable premiums.
In addition, significant merger and acquisition activity has occurred in the health care industry giving rise to speculation and uncertainty regarding the status of companies, which potentially can affect marketing efforts and public perception. Consolidation may make it more difficult for the Company to retain or increase customers, to improve the terms on which CIGNA does business with its suppliers, or to maintain its competitive position or increase profitability. Factors such as business consolidations, strategic alliances, legislative reform and marketing practices create pressure to contain premium price increases, despite increasing medical costs. For example, the Gramm-Leach-Bliley Act gives banks and other financial institutions the ability to affiliate with insurance companies, which may lead to new competitors with significant financial resources in the insurance and health benefits fields.
If CIGNA does not compete effectively in its markets, if CIGNA sets rates too high in highly competitive markets to keep or increase its market share, if membership does not increase as it expects, or if it declines, or if CIGNA loses accounts with favorable medical cost experience while retaining or increasing membership in accounts with unfavorable medical cost experience, CIGNA’s product margins and growth could be adversely affected.
CIGNA’s profitability depends, in part, on its ability to accurately predict and control future health care costs through underwriting criteria, provider contracting, utilization management and product design. Premiums in the health care business are generally fixed for one-year periods. Accordingly, future cost increases in excess of medical cost projections reflected in pricing cannot generally be recovered in the current contract year through higher premiums. Although CIGNA bases the premiums it charges on its estimate of future health care costs over the fixed premium period, actual costs may exceed what was estimated and reflected in premiums. Factors that may cause actual costs to exceed premiums include: medical cost inflation; higher than expected utilization of medical services; the introduction of new or costly treatments and technology; and membership mix.
CIGNA records medical claims reserves for estimated future payments. The Company continually reviews estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and makes necessary adjustments to its reserves. However, actual health care costs may exceed what was estimated.
Public perception of CIGNA’s products and practices as well as of the health benefits industry, if negative, could reduce enrollment in CIGNA’s health benefits programs.
The health care industry in general, and CIGNA specifically, are subject to negative publicity, which can arise either from perceptions regarding the industry or CIGNA’s business practices or products. This risk may be increased as CIGNA offers new products, such as products with limited benefits or an integrated line of products targeted at market segments beyond those in which CIGNA traditionally has operated. Negative publicity may adversely affect the CIGNA brand and its ability to market its products and services, which could reduce the number of enrollees in CIGNA’s health benefits programs.
Large-scale public health epidemics, bio-terrorist activity, natural disasters or other extreme events could cause CIGNA’s covered medical and disability expenses, pharmacy costs and mortality experience to rise significantly, and in severe circumstances, could cause operational disruption.
If widespread public health epidemics such as an influenza pandemic, bio-terrorist or other attack, or catastrophic natural disaster were to occur, CIGNA’s covered medical and disability expenses, pharmacy costs and mortality experience could rise significantly, depending on the government’s actions and the responsiveness of public health agencies and insurers. In addition, depending on the severity of the situation, a widespread outbreak could curtail economic activity in general, and CIGNA’s operations in particular, which could result in operational and financial disruption to CIGNA. Such disruption could, among other things, impact the timeliness of claims and revenue.

 

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CIGNA’s business depends on the uninterrupted operation of its systems and business functions, including information technology and other business systems.
CIGNA’s business is highly dependent upon its ability to perform, in an efficient and uninterrupted fashion, its necessary business functions, such as: claims processing and payment; internet support and customer call centers; and the processing of new and renewal business. A power outage, pandemic, or failure of one or more of information technology, telecommunications or other systems could cause slower system response times resulting in claims not being processed as quickly as clients desire, decreased levels of client service and client satisfaction, and harm to CIGNA’s reputation. In addition, because CIGNA’s information technology and telecommunications systems interface with and depend on third-party systems, CIGNA could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration of CIGNA’s ability to pay claims in a timely manner, provide customer service, write and process new and renewal business, or perform other necessary corporate functions. This could result in a materially adverse effect on CIGNA’s business results and liquidity.
A security breach of CIGNA’s computer systems could also interrupt or damage CIGNA’s operations or harm CIGNA’s reputation. In addition, CIGNA could be subject to liability if sensitive customer information is misappropriated from CIGNA’s computer systems. These systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any publicized compromise of security could result in a loss of customers or a reduction in the growth of customers, increased operating expenses, financial losses, additional litigation or other claims, which could have a material adverse effect on CIGNA’s business.
CIGNA is focused on further developing its business continuity program to address the continuation of core business operations. While CIGNA continues to test and assess its business continuity program to satisfy the needs of CIGNA’s core business operations and addresses multiple business interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event.
Global market, economic and geopolitical conditions may cause fluctuations in equity market prices, interest rates and credit spreads which could impact the Company’s ability to raise or deploy capital as well as affect the Company’s overall liquidity.
If the capital markets and credit market experience extreme volatility and disruption, there could be downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. Extreme disruption in the credit markets could adversely impact the Company’s availability and cost of credit in the future. In addition, unpredictable or unstable market conditions could result in reduced opportunities to find suitable opportunities to raise capital.
CIGNA is subject to potential changes in the political environment, which could adversely affect the markets for its products.
Policy changes on the local, state and federal level, such as the expansion of the government’s role in the health care arena and alternative assessments and tax increases specific to the health care insurance industry or health care insurance products as part of federal health care reform initiatives, could fundamentally change the dynamics of CIGNA’s industry.
CIGNA faces risks in successfully managing the integration of Great-West Healthcare (or any other acquisition).
CIGNA acquired Great-West Healthcare with the expectation that the acquisition will result in various benefits, including, among others, a broader distribution and provider network in certain geographic areas, an expanded range of health benefits and products, cost savings, increased profitability of the acquired business by improving its total medical cost position, and achievement of operating efficiencies. Achieving the anticipated benefits of the acquisition is subject to a number of uncertainties, including whether CIGNA integrates Great-West Healthcare in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could limit CIGNA’s ability to grow membership, particularly in the “Select” market, result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy.
CIGNA faces intense competition to attract and retain key people.
CIGNA would be adversely impacted if it failed to attract additional key people and retain current key people, as this could result in the inability to effectively execute the Company’s key initiatives and business strategy.

 

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CIGNA would be adversely affected if its prevention, detection or control systems fail to detect and implement required changes to maintain regulatory compliance or prevent fraud.
Failure of CIGNA’s prevention, detection or control systems related to regulatory compliance and compliance with CIGNA’s internal policies, including data systems security and unethical conduct by managers and employees, could adversely affect CIGNA’s reputation and also expose it to litigation and other proceedings, fines and penalties. Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights. The regulations and contractual requirements applicable to us and other participants are complex and subject to change. Although the Company believes its compliance efforts are adequate, ongoing vigorous law enforcement and the highly technical regulatory scheme mean that its compliance efforts in this area will continue to require significant resources.
In addition, provider or member fraud that is not prevented or detected could impact CIGNA’s medical costs or those of its self-insured customers. Further, during an economic downturn, CIGNA’s segments, including HealthCare, Disability and Life and International, may see increased fraudulent claims volume which may lead to additional cost because of an increase in disputed claims and litigation.
The Company’s international operations face political, legal, operational, regulatory, economic and other risks that present unique challenges and could negatively affect those operations or our long-term growth.
The Company’s international operations face political, legal, operational, regulatory, economic and other risks, including government intervention and censorship that the Company does not face in its domestic operations. CIGNA International faces the risk of discriminatory regulation, nationalization or expropriation of assets, price controls or other pricing issues and exchange controls or other restrictions that prevent it from transferring funds from these operations out of the countries in which it operates or converting local currencies that CIGNA International holds into U.S. dollars or other currencies. Additionally, foreign currency exchange rates and fluctuations may have an impact on the future costs or on future sales and cash flows from the Company’s international operations, and any measures that it may implement to reduce the effect of volatile currencies and other risks of its international operations may not be effective. Some of CIGNA’s foreign insurance operations are, and are likely to continue to be, in emerging markets where these risks are heightened. In addition, CIGNA International relies on local sales forces for some of its operations in these countries and may encounter labor problems and less flexible employee relationships which can be difficult and expensive to terminate. In some countries, CIGNA International voluntarily operates or is required to operate with local business partners with the resulting risk of managing partner relationships to the business objectives.
The Company is currently planning to expand its international operations in markets where it currently operates and in targeted new markets. This may require considerable management time before any significant revenues and earnings are generated.
International operations also require the Company to devote significant management resources to implement its controls and systems in new markets, to comply with the U.S. anti-bribery and anti-corruption as well as anti-money laundering provisions and similar laws in local jurisdictions and to overcome logistical and other challenges based on differing languages, cultures and time zones.

 

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Item 1B.   UNRESOLVED STAFF COMMENTS
None.
Item 2.   PROPERTIES
CIGNA’s headquarters, including staff support operations, along with CIGNA Disability and Life Insurance, the domestic office of CIGNA International, and portions of CIGNA HealthCare, are located in approximately 460,000 square feet of leased office space at Two Liberty Place, 1601 Chestnut Street, Philadelphia, Pennsylvania. CIGNA HealthCare is located in approximately 825,000 square feet of owned office space in the Wilde Building, located at 900 Cottage Grove Road, Bloomfield, Connecticut. In addition, CIGNA owns or leases office buildings, or parts thereof, throughout the United States and in other countries. CIGNA believes its properties are adequate and suitable for its business as presently conducted. For additional information concerning leases and property, see Notes 2 and 21 to CIGNA’s Consolidated Financial Statements beginning on pages 103 and 159 of this Form 10-K. This paragraph does not include information on investment properties.
Item 3.   LEGAL PROCEEDINGS
The information contained under “Litigation and Other Legal Matters” in Note 23 to CIGNA’s 2009 Financial Statements which begins on page 163 of this Form 10-K, is incorporated herein by reference.
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

 

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Executive Officers of the Registrant
All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed below.
WILLIAM L. ATWELL, 59, President of CIGNA International beginning September 2008; Managing Director of Atwell and Associates, LLC from January 2006 until August 2008; and Executive Vice President of The Charles Schwab Corporation from August 2000 to December 2005.
DAVID M. CORDANI, 44, Chief Executive Officer of CIGNA beginning December 2009; President of CIGNA beginning June 2008; Chief Operating Officer of CIGNA from June 2008 until December 2009; President, CIGNA HealthCare from July 2005 until June 2008; Senior Vice President, Customer Segments & Marketing, CIGNA HealthCare from July 2004 until July 2005; Senior Vice President and Chief Financial Officer, CIGNA HealthCare, from September 2002 until July 2004; and a Director of CIGNA since October 2009.
ANNMARIE T. HAGAN, 49, Executive Vice President and Chief Financial Officer of CIGNA beginning May 2009; Vice President, Chief Accounting Officer and Controller of CIGNA from July 2008 until May 2009; and Vice President and Chief Accounting Officer of CIGNA from March 2003 until July 2008.
MATTHEW G. MANDERS, 48, President, CIGNA, US Service, Clinical and Specialty beginning January 2010; President, CIGNA HealthCare, Total Health, Productivity, Network & Middle Market from June 2009 until January 2010; Customer Segments from July 2006 until June 2009; and President, CIGNA HealthCare, Middle Market Segment from August 2004 until July 2006.
JOHN M. MURABITO, 51, Executive Vice President of CIGNA beginning August 2003, with responsibility for Human Resources and Services.
CAROL ANN PETREN, 57, Executive Vice President and General Counsel of CIGNA beginning May 2006, and Senior Vice President and Deputy General Counsel of MCI from August 2003 until March 2006.
MICHAEL WOELLER, 57, Executive Vice President and Chief Information Officer of CIGNA beginning October 2007; Vice Chairman and Senior Vice President and Chief Information Officer, Canadian Imperial Bank of Commerce from April 2000 until October 2007.

 

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PART II
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The information under the caption “Quarterly Financial Data—Stock and Dividend Data” appears on page 169 and the number of shareholders of record as of December 31, 2009 appears under the caption “Highlights” on page 47 of this Form 10-K. CIGNA’s common stock is listed with, and trades on, the New York Stock Exchange under the symbol “CI.”
Issuer Purchases of Equity Securities
The following table provides information about CIGNA’s share repurchase activity for the quarter ended December 31, 2009:
                                 
Issuer Purchases of Equity Securities  
                            Approximate dollar value of  
    Total # of             Total # of shares     shares that may yet be  
    shares             purchased     purchased  
    purchased     Average price     as part of publicly     as part of publicly announced  
Period   (1)     paid per share     announced program (2)     program (3)  
October 1-31, 2009
    220     $ 28.83       0     $ 448,919,605  
November 1-30, 2009
    1,879     $ 30.38       0     $ 448,919,605  
December 1-31, 2009
    959     $ 32.91       0     $ 448,919,605  
 
                       
Total
    3,058     $ 31.06       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 Company’s equity compensation plans. Employees tendered 220 shares in October, 1,879 shares in November, and 959 shares in December.
 
(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 $449 million as of December 31, 2009 and February 25, 2010.
 
(3)   Approximate dollar value of shares is as of the last date of the applicable month.

 

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Item 6.   SELECTED FINANCIAL DATA
Highlights
                                         
(Dollars in millions, except per share amounts)   2009     2008     2007     2006     2005  
Revenues
                                       
Premiums and fees and other revenues
  $ 16,161     $ 17,004     $ 15,376     $ 13,987     $ 14,449  
Net investment income
    1,014       1,063       1,114       1,195       1,358  
Mail order pharmacy revenues
    1,282       1,204       1,118       1,145       883  
Realized investment gains (losses)
    (43 )     (170 )     16       219       (6 )
 
                             
Total revenues
  $ 18,414     $ 19,101     $ 17,624     $ 16,546     $ 16,684  
 
                             
Results of Operations:
                                       
Health Care
  $ 731     $ 664     $ 679     $ 653     $ 688  
Disability and Life
    284       273       254       226       227  
International
    183       182       176       138       109  
Run-off Reinsurance
    185       (646 )     (11 )     (14 )     (64 )
Other Operations
    86       87       109       106       339  
Corporate
    (142 )     (162 )     (97 )     (95 )     (12 )
Realized investment gains (losses), net of taxes and noncontrolling interest
    (26 )     (110 )     10       145       (11 )
 
                             
Shareholders’ income from continuing operations
    1,301       288       1,120       1,159       1,276  
Income from continuing operations attributable to noncontrolling interest
    3       2       3             1  
 
                             
Income from continuing operations
    1,304       290       1,123       1,159       1,277  
Income (loss) from discontinued operations, net of taxes
    1       4       (5 )     (4 )     349  
 
                             
Net income
  $ 1,305     $ 294     $ 1,118     $ 1,155     $ 1,626  
 
                             
 
                                       
Shareholders’ income per share from continuing operations:
                                       
Basic
  $ 4.75     $ 1.04     $ 3.91     $ 3.46     $ 3.30  
Diluted
  $ 4.73     $ 1.03     $ 3.86     $ 3.43     $ 3.26  
Shareholders’ net income per share:
                                       
Basic
  $ 4.75     $ 1.05     $ 3.89     $ 3.45     $ 4.20  
Diluted
  $ 4.73     $ 1.05     $ 3.84     $ 3.42     $ 4.15  
Common dividends declared per share
  $ 0.04     $ 0.04     $ 0.04     $ 0.03     $ 0.03  
Total assets
  $ 43,013     $ 41,406     $ 40,065     $ 42,399     $ 44,893  
Long-term debt
  $ 2,436     $ 2,090     $ 1,790     $ 1,294     $ 1,338  
Shareholders’ equity
  $ 5,417     $ 3,592     $ 4,748     $ 4,330     $ 5,360  
Per share
  $ 19.75     $ 13.25     $ 16.98     $ 14.63     $ 14.74  
Common shares outstanding (in thousands)
    274,257       271,036       279,588       98,654       121,191  
Shareholders of record
    8,888       9,014       8,696       9,117       9,440  
Employees
    29,300       30,300       26,600       27,100       28,000  
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Board’s (“FASB”) updated earnings per share guidance. Prior year amounts have been restated. See Note 4 to the Consolidated Financial Statements for additional information.
Effective January 1, 2009, the Company adopted the FASB’s updated guidance on accounting for noncontrolling interests. Prior years’ net income, income from continuing operations, and revenues have been restated. See Note 2(B) to the Consolidated Financial Statements for additional information.
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. For additional information, see the Health Care section of the Management’s Discussion and Analysis beginning on page 62 of this Form 10-K.
In 2008, the Company recorded significant charges related to the guaranteed minimum income benefits and guaranteed minimum death benefits businesses as well as an after-tax litigation charge of $52 million in Corporate related to the CIGNA pension plan. For additional information, see the Run-off Reinsurance section of the Management’s Discussion and Analysis beginning on page 73 and Note 23 to the Consolidated Financial Statements.
During 2007, CIGNA completed a three-for-one stock split of CIGNA’s common shares. Per share figures for 2006 and 2005 reflect the stock split.
Pro forma common shares outstanding, calculated as if the stock split had occurred at the beginning of the prior periods, were as follows: 295,963 in 2006 and 363,573 in 2005.

 

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDEX
         
    48  
 
       
    52  
 
       
    55  
 
       
       
 
       
    62  
 
       
    69  
 
       
    71  
 
       
    73  
 
       
    77  
 
       
    78  
 
       
    78  
 
       
    79  
 
       
    80  
 
       
    87  
 
       
    93  
 
       
    95  
INTRODUCTION
In this filing and in other marketplace communications, CIGNA Corporation and its subsidiaries (the “Company”) make certain forward-looking statements relating to the Company’s financial condition and results of operations, as well as to trends and assumptions that may affect the Company. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2010”). Actual results may differ from the Company’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis (“MD&A”), including in the Cautionary Statement beginning on page 95 of this Form 10-K. The forward-looking statements contained in this filing represent management’s estimate as of the date of this filing. Management does not assume any obligation to update these estimates.
Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications 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.

 

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Ongoing Operations
The Company’s ability to increase revenue, shareholders’ net income and operating cash flows from ongoing operations is directly related to progress on the execution of its strategic initiatives, the success of which is measured by certain key factors, including the Company’s ability to:
  profitably price products and services at competitive levels that reflect emerging experience;
  maintain and grow its customer base;
  cross sell its various health and related benefit products;
  invest available cash at attractive rates of return for appropriate durations;
  reduce other operating expenses in the Health Care segment; and
  effectively deploy capital.
Strategy
As a global health service organization, CIGNA’s mission remains focused on helping the people it serves improve their health, well-being and sense of security. CIGNA’s long-term growth strategy is based on: (1) growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals.
CIGNA expects to focus on the following areas it believes represent the markets or areas with the most potential for profitable growth:
  In the Health Care segment, the Company is concentrating on: (1) further enhancing its geographic focus in the middle market in order to create geographic density; (2) growing the “Select” market, which generally includes employers with more than 50 but fewer than 250 employees, by leveraging the Company’s customer knowledge, differentiated service model, product portfolio and distribution model; and (3) engaging those national account employers who share and will benefit from the Company’s value proposition of using health advocacy and employee engagement to increase productivity, performance and the health outcomes of their employees.
  In the Disability and Life segment, CIGNA’s strategy is to grow its Disability business by fully leveraging the key components of its industry-leading disability management model to reduce medical costs for its clients and return their employees to work sooner through: (1) early claim notification and outreach, (2) a full suite of clinical and return-to-work resources, and (3) specialized case management services.
  In the International segment, the Company is targeting growth through: (1) product and channel expansion in its life, accident and health business in key Asian geographies, (2) the introduction of new expatriate benefits products, and (3) further geographic expansion.
The Company plans to improve its strategic and financial flexibility by driving further reductions in its Health Care operating expenses, improving its medical cost competitiveness in targeted markets and effectively managing balance sheet exposures.
Also, in connection with CIGNA’s long-term business strategy, the Company remains committed to health advocacy as a means of creating sustainable solutions for employers, improving the health of the individuals that the Company serves, and lowering the costs of health care for all constituencies.

 

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Run-off Operations
Effectively managing the various exposures of its run-off operations is important to the Company’s ongoing profitability, operating cash flows and available capital. The results are influenced by a range of economic factors, especially movements in equity markets and interest rates. In order to substantially reduce the impact of equity market movements on the liability for guaranteed minimum death benefits (“GMDB”, also known as “VADBe”), the Company operates an equity hedge program. The Company actively monitors the performance of the hedge program, and evaluates the cost/benefit of hedging other risks. Results are also influenced by behavioral factors, including future partial surrender election rates for GMDB contracts, annuity election rates for guaranteed minimum income benefits (“GMIB”) contracts, annuitant lapse rates, as well as the collection of amounts recoverable from retrocessionaires. The Company actively studies policyholder behavior experience and adjusts future expectations based on the results of the studies, as warranted. The Company also performs regular audits of ceding companies to ensure that premiums received and claims paid properly reflect the underlying risks, and to maximize the probability of subsequent collection of claims from retrocessionaires. Finally, the Company monitors the financial strength and credit standing of the retrocessionaires and establishes or collects collateral when warranted.
Summary
The Company’s overall results are influenced by a range of economic and other factors, especially:
  cost trends and inflation for medical and related services;
  utilization patterns of medical and other services;
  employment levels;
  the tort liability system;
  developments in the political environment both domestically and internationally, including efforts to reform the U.S. health care system;
  interest rates, equity market returns, foreign currency fluctuations and credit market volatility, including the availability and cost of credit in the future; and
  federal, state and international regulation.
The Company regularly monitors the trends impacting operating results from the above mentioned key factors to appropriately respond to economic and other factors affecting its operations. The Company’s ability to achieve its financial objectives is dependent upon its ability to effectively execute on its strategy and to appropriately respond to emerging economic, industry and company-specific trends. See the Health Care section of the MD&A beginning on page 62 of this Form 10-K for further discussion on the Company’s plans to execute on its strategic initiatives.
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”). See Note 3 to the Consolidated Financial Statements for additional information.

 

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Initiatives to Lower Operating Expenses
As part of its strategy, the Company has undertaken several initiatives to realign its organization and consolidate support functions in an effort to increase efficiency and responsiveness to customers and to reduce costs.
During 2008 and 2009, the Company conducted a comprehensive review to reduce the operating expenses of its ongoing businesses (“cost reduction program”). As a result, the Company recognized severance-related and real estate charges in other operating expenses.
Severance charges in 2008 and 2009 resulted from reductions of approximately 2,350 positions in the Company’s workforce.
Cost reduction activity for 2008 and 2009 was as follows:
                         
Pre-tax (In millions)   Severance     Real estate     Total  
Fourth quarter 2008 charge (balance carried to January 1, 2009)
  $ 44     $ 11     $ 55  
 
                 
Second quarter
    14             14  
Third quarter
    10             10  
Fourth quarter
    20             20  
 
                 
Subtotal — 2009 charges
    44             44  
Less: Payments
    55       3       58  
 
                 
Balance, December 31, 2009
  $ 33     $ 8     $ 41  
 
                 
The Health Care segment recorded $37 million pre-tax ($24 million after-tax) of the 2009 charges and $44 million pre-tax ($27 million after-tax) of the 2008 charge. The remainder of the 2009 and 2008 charges were reported as follows: Disability and Life: $5 million pre-tax ($4 million after-tax) in 2009 and $3 million pre-tax ($2 million after-tax) in 2008; and International: $2 million pre-tax ($1 million after-tax) in 2009 and $8 million pre-tax ($6 million after-tax) in 2008.
Substantially all severance is expected to be paid by the end of 2010. Upon completion of the job eliminations, the Company expects annualized after-tax savings from this cost reduction program to be approximately $130 million in 2011 and beyond. A portion of the savings was realized in 2009 while most is expected to be realized in 2010.

 

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CONSOLIDATED RESULTS OF OPERATIONS
The Company measures the financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations before after-tax realized investment results. Adjusted income from operations is defined as consolidated segment earnings (loss) excluding special items (defined below) and the results of the GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the Company’s businesses and permits analysis of trends in underlying revenue, expenses and shareholders’ net income. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is shareholders’ income from continuing operations.
Summarized below is a reconciliation between shareholders’ income from continuing operations and adjusted income from operations.
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 16,041     $ 16,253     $ 15,008  
Net investment income
    1,014       1,063       1,114  
Mail order pharmacy revenues
    1,282       1,204       1,118  
Other revenues
    120       751       368  
Realized investment gains (losses)
    (43 )     (170 )     16  
 
                 
Total revenues
    18,414       19,101       17,624  
Benefits and expenses
    16,516       18,719       15,990  
 
                 
Income from continuing operations before taxes
    1,898       382       1,634  
Income taxes
    594       92       511  
 
                 
Income from continuing operations
    1,304       290       1,123  
Less: income from continuing operations attributable to noncontrolling interest
    3       2       3  
 
                 
Shareholders’ income from continuing operations
    1,301       288       1,120  
Less: realized investment gains (losses), net of taxes
    (26 )     (110 )     10  
 
                 
Segment earnings
    1,327       398       1,110  
Less: adjustments to reconcile to adjusted income from operations:
                       
Results of GMIB business (after-tax):
                       
Charge on adoption of fair value measurements for GMIB contracts
          (131 )      
Results of GMIB business excluding charge on adoption
    209       (306 )     (91 )
Special items (after-tax):
                       
Curtailment gain (See Note 10 to the Consolidated Financial Statements)
    30                      
Cost reduction charges (See Note 6 to the Consolidated Financial Statements)
    (29 )     (35 )      
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    20             23  
Charges related to litigation matters (See Note 23 to the Consolidated Financial Statements)
          (76 )      
 
                 
Adjusted income from operations
  $ 1,097     $ 946     $ 1,178  
 
                 
Summarized below is adjusted income from operations by segment:
                         
(In millions)                  
Adjusted Income (Loss) From Operations   2009     2008     2007  
Health Care
  $ 729     $ 715     $ 679  
Disability and Life
    279       275       248  
International
    182       188       174  
Run-off Reinsurance
    (24 )     (209 )     80  
Other Operations
    85       87       104  
Corporate
    (154 )     (110 )     (107 )
 
                 
Total
  $ 1,097     $ 946     $ 1,178  
 
                 

 

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Overview of 2009 Consolidated Results of Operations
Shareholders’ income from continuing operations for the year ended December 31, 2009 was significantly higher than 2008, reflecting improved adjusted income from operations, as explained below, as well as the following:
  substantially improved results in the GMIB business due to improved equity market conditions and generally higher interest rates;
  improved realized investment results, also reflecting better market conditions during 2009; and
  the favorable year over year impact of the following special items as noted in the above table: completion of the IRS examination; the curtailment gain on the pension plan; and the absence of litigation charges in 2009.
Adjusted income from operations increased 16% in 2009 compared with 2008, primarily reflecting significantly improved results in the Run-off Reinsurance segment due to a lower amount of reserve strengthening for the GMDB business in 2009 compared with 2008. This result was primarily due to improved equity market conditions in 2009. Also, in the aggregate, adjusted income from operations from the Company’s ongoing operating segments (Health Care, Disability and Life, and International) improved slightly in 2009 over 2008. These favorable effects were partially offset by higher unallocated costs (including interest) reported in Corporate.
Overview of 2008 Consolidated Results of Operations
Shareholders’ income from continuing operations for the year ended December 31, 2008 declined significantly compared with 2007, reflecting lower adjusted income from operations as explained below, as well as the following:
  higher losses in the GMIB business, reflecting the deterioration in the financial markets in 2008 and the effect of adopting new fair value guidance;
  significant net realized investment losses primarily due to impairments caused largely by the deterioration in the financial markets. These losses were partially offset by gains on the sale of real estate; and
  special charges for litigation and cost reduction matters discussed below.
Adjusted income from operations decreased 20% in 2008 compared with 2007 due to losses in the GMDB business resulting from the adverse equity market conditions in 2008, partially offset by higher earnings in each of the Company’s ongoing operating segments.
Special Items and GMIB
Management does not believe that the special items noted in the table above are representative of the Company’s underlying results of operations. Accordingly, the Company excluded these special items from adjusted income from operations 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.
Special items for 2009 included a curtailment gain resulting from the decision to freeze the pension plan (see Note 10 to the Consolidated Financial Statements for additional information), cost reduction charges related to the previously announced 2008 cost reduction program (see the Introduction section of the MD&A beginning on page 48 of this Form 10-K), and benefits resulting from the completion of the 2005 and 2006 IRS examinations (see Note 19 to the Consolidated Financial Statements for additional information).
Special items for 2008 included a cost reduction charge related to the previously announced 2008 cost reduction program (see the Introduction section of the MD&A beginning on page 48 of this Form 10-K), a litigation matter related to the CIGNA Pension Plan (see Note 23 to the Consolidated Financial Statements for additional information) reported in Corporate and charges related to certain other litigation matters, which are reported in the Health Care segment.
The special item for 2007 consisted of previously unrecognized tax benefits resulting from the completion of the IRS examination for the 2003 and 2004 tax years.
The Company also excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable. See the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K for more information on the effect of capital market assumption changes on shareholders’ net income. Because of this volatility, and since the GMIB business is in run-off, management does not believe that its results are meaningful in assessing underlying results of operations.

 

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Outlook for 2010
The Company expects 2010 adjusted income from operations to be comparable to or slightly higher than 2009. Information is not available for management to reasonably estimate the future results of the GMIB business or realized investment results due in part to interest rate and stock market volatility and other internal and external factors. This outlook includes an assumption that GMDB (also known as “VADBe”) results will be approximately break-even for full-year 2010, reflective of the Company’s view that the long-term reserve assumptions are appropriate and assumes that capital markets remain stable during the year. In addition, the Company is not able to identify or reasonably estimate the financial impact of special items in 2010 however they may include potential adjustments associated with cost reduction, litigation, and tax-related items.
The Company’s outlook for 2010 is subject to the factors cited in the Cautionary Statement beginning on page 95 of this Form 10-K and the sensitivities discussed in the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K. If unfavorable equity market and interest rate movements occur, the Company could experience losses related to investment impairments and the GMIB and GMDB businesses. These losses could adversely impact the Company’s consolidated results of operations and financial condition by potentially reducing the capital of the Company’s insurance subsidiaries and reducing their dividend-paying capabilities.
Revenues
Total revenues decreased by 4% in 2009, compared with 2008, and increased by 8% in 2008 compared with 2007. Changes in the components of total revenue are described more fully below.
Premiums and Fees
Premiums and fees decreased by 1% in 2009, compared with 2008, reflecting membership declines in Health Care resulting from higher unemployment and the unfavorable effect of foreign currency translation in International, offset by the absence of premium and fees from the acquired business in the first quarter of 2008 since this business was acquired April 1, 2008.
Premiums and fees increased by 8% in 2008, compared with 2007 reflecting the impact of the acquired business, growth in the Disability and Life segment, as well as growth and rate increases in the International segment. See segment reporting discussions for additional details.
Net Investment Income
Net investment income decreased by 5% in 2009, compared with 2008, primarily due to lower income from real estate funds and security partnerships, unfavorable foreign exchange rates and lower investment yields partially offset by higher invested assets.
Net investment income decreased by 5% in 2008, compared with 2007, primarily due to lower yields driven by declines in short-term interest rates, commercial mortgage pre-payment fees, and income from security partnerships.
Mail Order Pharmacy Revenues
Mail order pharmacy revenues increased by 6% in 2009, compared with 2008, primarily due to rate increases and by 8% in 2008, compared with 2007 due to increased script volume and rate increases.
Other Revenues
Other revenues include the impact of futures contracts associated with the GMDB equity hedge program. In 2009, the Company reported losses of $282 million associated with the GMDB equity hedge program, compared with gains of $333 million in 2008. The losses in 2009 primarily reflected increases in stock market values, while the gains in 2008 primarily reflected declines in stock market values. Excluding the impact of the futures contracts associated with the GMDB equity hedge program, Other revenues decreased 4% in 2009, compared with 2008, primarily reflecting declines in amortization of deferred gains on the sales of the retirement benefits and individual life insurance and annuity businesses.
Excluding the impact of the futures contracts associated with the GMDB equity hedge program, Other revenues increased 5% in 2008, compared with 2007, primarily reflecting the impact of the acquired business. In 2008, the Company reported a gain of $333 million associated with the GMDB equity hedge program, compared with a loss of $32 million in 2007.

 

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Realized Investment Results
Realized investment results in 2009 were significantly improved compared to 2008 primarily due to:
  lower asset write-downs on fixed maturities largely reflecting improved market conditions;
  gains on sales of fixed maturities and equities in 2009 compared with losses in 2008; and
  gains on hybrid securities in 2009 compared with losses in 2008 (changes in fair value for these securities are reported in realized investment results).
These favorable effects were partially offset by higher impairments of investments in real estate entities and commercial mortgage loans in 2009 due to the impact of the continued weak economic environment on the commercial real estate market and the absence of significant gains on the sales of real estate ventures reported during 2008.
Realized investment results in 2008 were lower than in 2007, primarily due to higher losses associated with asset write-downs and increases in valuation allowances primarily due to higher interest rates and credit losses resulting from adverse economic conditions during 2008. In addition, the Company had higher losses on sales of fixed maturities and equity securities. These losses were partially offset by higher gains on sales of real estate investments held in joint ventures.
See Note 14 to the Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the consolidated financial statements. Management considers an accounting estimate to be critical if:
  it requires assumptions to be made that were uncertain at the time the estimate was made; and
  changes in the estimate or different estimates that could have been selected could have a material effect on the Company’s consolidated results of operations or financial condition.
Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the disclosures presented below.
In addition to the estimates presented in the following table, there are other accounting estimates used in the preparation of the Company’s consolidated financial statements, including estimates of liabilities for future policy benefits other than those identified in the following table, as well as estimates with respect to goodwill, unpaid claims and claim expenses, postemployment and postretirement benefits other than pensions, certain compensation accruals, and income taxes.
Management believes the current assumptions used to estimate amounts reflected in the Company’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions used in estimating amounts reflected in the Company’s consolidated financial statements, the resulting changes could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s liquidity and financial condition.
See Note 2 to the Consolidated Financial Statements for further information on significant accounting policies that impact the Company.

 

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Balance Sheet Caption /        
Nature of Critical Accounting Estimate   Assumptions / Approach Used   Effect if Different Assumptions Used
Future policy benefits — Guaranteed minimum death benefits (“GMDB” also known as “VADBe”)

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 December 31, 2009 (representing the amount payable if all of approximately 590,000 contractholders had submitted death claims as of that date) was approximately $7 billion.

Liabilities for future policy benefits for these contracts as of December 31 were as follows (in millions):

      2009 — $1,285
     2008 $1,609
  The Company estimates these liabilities based on assumptions for lapse, partial surrender, mortality, interest rates (mean investment performance and discount rate), and volatility. These assumptions are based on the Company’s experience and future expectations over the long-term period. The Company monitors actual experience to update these estimates as necessary.

Lapse refers to the full surrender of an annuity prior to a contractholder’s death.

Partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining any available death benefit coverage in effect at the time of the withdrawal. Once a partial surrender is made, the liability increases reflecting lower future assumed premiums, a lower likelihood of lapse, and a lower likelihood of account values recovering sufficiently to reduce the death benefit exposure in future periods. These effects are not covered by the Company’s GMDB equity hedge program. Market declines could expose the Company to higher amounts of death benefit exposure that can be retained by contractholders subsequent to a significant partial surrender and to higher election rates of future partial surrenders. Thus, if equity markets decline, the Company’s liability for partial surrenders increases and there is no corresponding offset from the hedge program. The election rate for expected future partial surrenders is updated quarterly based on emerging experience.

Interest rates include both (a) the mean investment performance assumption, and (b) the liability discount rate assumption. The mean investment performance for underlying equity mutual funds considers the Company’s GMDB equity hedge program which reflects the average short-term interest rate to be earned over the life of the program. The mean investment performance for underlying fixed income mutual funds considers the expected market return over the life of the contracts.
  Current assumptions used to estimate these liabilities are detailed in Note 7 to the Consolidated Financial Statements. Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur. If these unfavorable assumption changes were to occur, the approximate after-tax decrease in shareholders’ net income would be as follows: 

     5% increase in mortality rates $30 million
     10% decrease in lapse rates $25 million
     10% increase in election rates for future partial surrenders $5 million
     50 basis point decrease in interest rates:
     Mean Investment Performance $20 million
     Discount Rate $25 million
     10% increase in volatility $20 million

As of December 31, 2009, if contractholder account values invested in underlying equity mutual funds declined by 10% due to equity market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders would be approximately $10 million.

As of December 31, 2009, if contractholder account values invested in underlying bond/money market mutual funds declined by 2% due to bond/money market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders and an increase in unhedged exposure would be approximately $10 million.

The amounts would be reflected in the Run-off Reinsurance segment.
 
       
 
  Volatility refers to the degree of variation of future market returns of the underlying mutual fund investments.    
 
       
 
Health Care medical claims payable

Medical claims payable for the Health Care segment include both reported claims and estimates for losses incurred but not yet reported.

Liabilities for medical claims payable as of December 31 were as follows (in millions):

      2009 — gross $921; net $715
     2008 — gross $924; net $713

These liabilities are presented above both gross and net of reinsurance and other recoverables.

These liabilities generally exclude amounts for administrative services only business.

See Note 5 to the Consolidated Financial Statements for additional information.
  The Company develops estimates for Health Care medical claims payable using actuarial principles and assumptions based on historical and projected claim payment patterns, medical cost trends, which are impacted by the utilization of medical services and the related costs of the services provided (unit costs), benefit design, seasonality, and other relevant operational factors. The Company consistently applies these actuarial principles and assumptions each reporting period, with consideration given to the variability of these factors, and 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.

The Company’s estimate of the liability for medical claims incurred but not yet reported is primarily calculated using historical claim payment patterns and expected medical cost trends. The Company analyzes the historical claim payment patterns by comparing the dates claims were incurred, generally the dates services were provided, to the dates claims were paid to determine “completion factors”, which are a measure of the time to process claims. A completion factor is calculated for each month of incurred claims. The Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the ultimate liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data.
  For the year ended December 31, 2009, actual experience differed from the Company’s key assumptions, resulting in $43 million of favorable incurred claims related to prior years’ medical claims payable or 0.6% of the current year incurred claims as reported for the year ended December 31, 2008. For the year ended December 31, 2008, actual experience differed from the Company’s key assumptions, resulting in $60 million of favorable incurred claims related to prior years’ medical claims, or 0.9% of the current year incurred claims reported for the year ended December 31, 2007. Specifically, the favorable impact is due to faster than expected completion factors and lower than expected medical cost trends, both of which included an assumption for moderately adverse experience.

The corresponding impact of favorable prior year development on net income was not material for the year ended December 31, 2009. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in shareholders’ net income.

 

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Balance Sheet Caption /        
Nature of Critical Accounting Estimate   Assumptions / Approach Used   Effect if Different Assumptions Used
 
  The difference between this estimate of the ultimate liability and the current paid claims data is the estimate of the remaining claims to be paid for each incurral month. These monthly estimates are aggregated and included in the Company’s Health Care medical claims payable at the end of each reporting period. Completion factors are used to estimate the health care medical claims payable for all months where claims have not been completely resolved and paid, except for the most recent month as described below.    
 
       
 
  Completion factors are impacted by several key items including changes in the level of claims processed electronically versus manually (auto-adjudication), changes in provider claims submission rates, membership changes and the mix of products. As noted, the Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period. It is possible that the actual completion rates for the current period will develop differently from historical patterns, which could have a material impact on the Company’s medical claims payable and net income.    
 
       
 
  Claims incurred in the most recent month have limited paid claims data, since a large portion of health care claims are not submitted to the Company for payment in the month services have been provided. This makes the completion factor approach less reliable for claims incurred in the most recent month. As a result, in any reporting period, for the estimates of the ultimate claims incurred in the most recent month, the Company primarily relies on medical cost trend analysis, which reflects expected claim payment patterns and other relevant operational considerations. Medical cost trend is impacted by several key factors including medical service utilization and unit costs and the Company’s ability to manage these factors through benefit design, underwriting, provider contracting and the Company’s medical management initiatives. These factors are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior.    
 
       
 
  Because historical trend factors are often not representative of current claim trends, the trend experienced for the most recent history along with an analysis of emerging trends, have been taken into consideration in establishing the liability for medical claims payable at December 31, 2009 and 2008. It is possible that the actual medical trend for the current period will develop differently from the expected, which could have a material impact on the Company’s medical claims payable and net income.    
 
       
 
  For each reporting period, the Company evaluates key assumptions by comparing the assumptions used in establishing the medical claims payable to actual experience. When actual experience differs from the assumptions used in establishing the liability, medical claims payable are increased or decreased through current period net income. Additionally, the Company evaluates expected future developments and emerging trends which may impact key assumptions. The estimation process involves considerable judgment, reflecting the variability inherent in forecasting future claim payments. The adequacy of these estimates is highly sensitive to changes in the Company’s key assumptions, specifically completion factors, which are impacted by actual or expected changes in the submission and payment of medical claims, and medical cost trends, which are impacted by actual or expected changes in the utilization of medical services and unit costs.    
 

 

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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 (“GMIB”)


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(B) to the Consolidated Financial Statements, the Company implemented new guidance for fair value measurements on January 1, 2008. At adoption, the Company was required to change certain assumptions to reflect those that it believes a hypothetical market participant would use to determine an exit price. 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 as of December 31, were as follows (in millions):

      2009 — $903
     2008 $1,757

As of December 31, estimated amounts receivable related to these contracts from two external reinsurers, were as follows (in millions):

      2009 — $482
     2008 $953
  The Company considers the various assumptions used to estimate the fair values of assets and liabilities associated with these contracts in two categories: 1) capital market inputs; and 2) future annuitant behavior and other assumptions.

Capital market inputs include market returns and discount rates, claim interest rates and market volatility. This group of assumptions is largely based on market-observable inputs.

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 and other inputs, and includes annuity election rates, lapse, mortality, nonperformance risk (for both the Company and its retrocessionnaires), and a risk and profit charge. This group of assumptions is based on the Company’s experience, industry data, and management’s judgment.

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.

Nonperformance risk refers to the market’s perception that either the Company will not fulfill its GMIB liability (own credit) or the Company will not collect on its GMIB retrocessional coverage (reinsurer credit risk).

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. The Company’s results of operations are expected to be volatile in future periods because most capital market assumptions will be based largely on market-observable inputs at the close of each period including interest rates and market implied volatilities.

Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur. If these unfavorable assumption changes were to occur, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be as follows:

     50 basis point decrease in interest rates (which are aligned with LIBOR) used for projecting market returns and discounting $15 million
     50 basis point decrease in interest rates used for projecting claim exposure (7-year Treasury rates) $25 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% increase to the risk and profit charge — $3 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 invested in underlying equity mutual funds as of December 31, 2009 declined by 10% due to equity market performance, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be approximately $20 million. If annuitants’ account values invested in underlying bond/money market/mutual funds as of December 31, 2009 declined by 2% due to bond/money market performance, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be approximately $2 million.

If credit default swap spreads used to evaluate the nonperformance risk of the Company were to narrow or the credit rating of its principal life insurance subsidiary were to improve, it would cause a decrease in the discount rate of the GMIB liability, resulting in an unfavorable impact to earnings. If the discount rate decreased by 25 bps due to this, the approximate after-tax decrease in shareholders’ net income would be approximately $10 million.
   

 

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Balance Sheet Caption /        
Nature of Critical Accounting Estimate   Assumptions / Approach Used   Effect if Different Assumptions Used
 
      If credit default swap spreads used to evaluate the nonperformance risk of the Company’s GMIB retrocessionnaires were to widen or the retrocessionnaires’ credit ratings were to weaken, it would cause an increase in the discount rate of the GMIB asset, resulting in an unfavorable impact to earnings. If the discount rate increased by 25 bps due to this, the approximate after-tax decrease in shareholders’ net income would be approximately $5 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 in GMIB expense.
 
 
       
Reinsurance recoverables — Reinsurance recoverables in Run-off Reinsurance

Collectability of reinsurance recoverables requires an assessment of risks that such amounts will not be collected, including risks associated with reinsurer default and disputes with reinsurers regarding applicable coverage.

Gross and net reinsurance recoverables in the Run-off Reinsurance segment as of December 31, were as follows (in millions):
  The amount of reinsurance recoverables in the Run-off Reinsurance segment, net of reserves, represents management’s best estimate of recoverability, including an assessment of the financial strength of reinsurers.   A 10% reduction of net reinsurance recoverables due to uncollectability at December 31, 2009, would reduce shareholders’ net income by approximately $10 million after-tax.

The amounts would be reflected in the Run-off Reinsurance segment.

See Note 8 to the Consolidated Financial Statements for additional information.
         
      2009 — gross $127; net $121
     2008 — gross $180; net $169
       
 
 
       
Accounts payable, accrued expenses and other liabilities — pension liabilities

These liabilities are estimates of the present value of the qualified and nonqualified pension benefits to be paid (attributed to employee service to date) net of the fair value of plan assets. The accrued pension benefit liability as of December 31 was as follows (in millions):

      2009 — $1,513
     2008 — $1,853

See Note 10 to the Consolidated Financial Statements for additional information.
  The Company estimates these liabilities and the related expense with actuarial models using various assumptions including discount rates and an expected long-term return on plan assets.

Discount rates are set by applying actual annualized yields at various durations from the Citigroup Pension Liability curve, without adjustment, to the expected cash flows of the pension liabilities.

The expected long-term return on plan assets for the domestic qualified pension plan is developed considering actual historical returns, expected long-term market conditions, plan asset mix and management’s investment strategy. In addition, to measure pension costs the Company uses a market-related asset value method for domestic qualified pension plan assets invested in non-fixed income investments, which are approximately 80% of total plan assets. This method recognizes the difference between actual and expected returns in the non-fixed income portfolio over 5 years, a method that reduces the short-term impact of market fluctuations on pension cost. At December 31, 2009, the market-related asset value was approximately $3.3 billion compared with a market value of $2.9 billion.
  Using past experience, the Company expects that it is reasonably possible that a favorable or unfavorable change in these key assumptions of 50 basis points could occur. An unfavorable change is a decrease in these key assumptions with resulting impacts as discussed below.

If discount rates for the qualified and nonqualified pension plans decreased by 50 basis points:

     annual pension costs for 2010 would decrease by approximately $3 million, after-tax; and
     the accrued pension benefit liability would increase by approximately $200 million as of December 31, 2009 resulting in an after-tax decrease to shareholders’ equity of approximately $130 million as of December 31, 2009.

If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2010 would increase by approximately $10 million, after-tax.

If the Company used the market value of assets to measure pension costs as opposed to the market-related value, annual pension cost for 2010 would increase by approximately $30 million, after-tax.
   

 

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Balance Sheet Caption /        
Nature of Critical Accounting Estimate   Assumptions / Approach Used   Effect if Different Assumptions Used
 
  The accumulated unrecognized actuarial loss of $1.6 billion at December 31, 2009 primarily reflects the significant decline in the value of equity securities during 2008. The actuarial loss is adjusted for unrecognized changes in market-related asset values and amortized over the average remaining life expectancy of plan participants if the adjusted loss exceeds 10% of the market-related value of plan assets or 10% of the projected benefit obligation, whichever is greater. As of December 31, 2009, approximately $0.7 billion of the adjusted actuarial loss exceeded 10% of the projected benefit obligation. As a result, approximately $16 million after-tax will be expensed in 2010 net income. For the year ended December 31, 2009, $22 million after-tax was expensed in net income.

  If the December 31, 2009 fair values of domestic qualified plan assets decreased by 10%, the accrued pension benefit liability would increase by approximately $285 million as of December 31, 2009 resulting in an after-tax decrease to shareholders’ equity of approximately $185 million.

An increase in these key assumptions would result in impacts to annual pension costs, the accrued pension liability and shareholders’ equity in an opposite direction, but similar amounts.
 
Investments — Fixed maturities


     Recognition of losses from “other- than-
     temporary” impairments of public and
     private placement fixed maturities


To assess whether a fixed maturity’s decline in fair value below its amortized cost is other than temporary, the Company evaluates the expected recovery in value and its intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery.

When the Company does not expect to recover a fixed maturity’s amortized cost, its fair value and expected future cash flows must be estimated by management to record an impairment loss. The credit portion of an impairment loss is recognized in net income and measured as the difference between a fixed maturity’s amortized cost and the net present value of its projected future cash flows. The non-credit portion, if any, is recognized in a separate component of shareholders’ equity.

See Note 2 (C) to the Consolidated Financial Statements for additional information regarding the Company’s accounting policies for fixed maturities.
  When evaluating whether a loss is other than temporary, the Company considers factors including;

   length of time and severity of decline;
   financial health and specific near term prospects of the issuer;
   changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and
   the Company’s intent to sell or the likelihood of a required sale prior to recovery.

Management estimates other-than-temporary impairments based on fair values using quoted market prices for public securities with active markets and generally the present value of future cash flows for private placement bonds and other public securities. Expected future cash flows for each fixed maturity are based on the Company’s assessment of qualitative and quantitative factors, including the probability of default, and the estimated timing and amount of any recovery in value. See Note 11 to the Consolidated Financial Statements for a discussion of the Company’s fair value measurements.

The Company recognized other-than-temporary impairments of investments in fixed maturities as follows (in millions, after-tax):

  For all fixed maturities with cost in excess of their fair value, if this excess was determined to be other-than-temporary, shareholders’ net income for the year ended December 31, 2009 would have decreased by approximately $86 million after-tax.

For private placement bonds considered impaired, a decrease of 10% of all expected future cash flows for the impaired bonds would reduce shareholders’ net income by approximately $2 million after-tax.
 
 
   2009 $31
  2008 — $138
  2007 — $20

See Note 12 to the Consolidated Financial Statements for a discussion of the Company’s review of declines in fair value.
   

 

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Balance Sheet Caption /        
Nature of Critical Accounting Estimate   Assumptions / Approach Used   Effect if Different Assumptions Used
Investments — Commercial Mortgage Loans — Valuation Reserves

Recognition of losses from valuation reserves for impaired commercial mortgage loans


To determine whether a commercial mortgage loan is impaired, the Company evaluates the likelihood of collecting all interest and principal payments in accordance with the contractual terms of the original loan agreement. When it is probable that the Company will not collect amounts due according to the terms of the original loan agreement, a loan is considered impaired and the Company must estimate the fair value of the underlying property to measure an impairment loss. An impairment loss is recorded using a valuation allowance for an impaired commercial mortgage loan’s carrying value in excess of the estimated fair value of its underlying property. Changes to valuation reserves are recorded in Realized investment gains (losses).

See Note 2 (C) to the Consolidated Financial Statements for additional information regarding the Company’s accounting policies for commercial mortgage loans.
  The Company’s evaluation of the likelihood of collecting all contractual payments and the collateral fair value for commercial mortgage loans is a qualitative and quantitative process which is subject to uncertainties. The Company carefully evaluates all facts and circumstances for each loan and its supporting collateral.

When evaluating the likelihood of collecting the contractual payments of a commercial mortgage loan, the Company considers factors including:

   financial statements, budgets and operating plans for the property;
   inspection reports of the property completed by third party servicers;
   debt service coverage of the underlying collateral;
   the borrower’s continuing financial commitment to the property; and
   conditions and factors pertinent to the property and its local market.

When it becomes probable that all contractual payments will not be collected according to the terms of the original loan agreement, the Company calculates the estimated fair value of the underlying property based on a 10-year discounted cash flow analysis. Factors key to this valuation include the following:

  If property values declined by 10% across the commercial mortgage loan portfolio as of December 31, 2009, approximately 20% of the portfolio’s loans would have carrying values in excess of their underlying properties’ fair values totaling approximately $85 million. And if each of these loans were considered impaired as of December 31, 2009, shareholders’ net income would decrease by approximately $55 million after-tax.

If underlying property values declined by 10% for impaired commercial mortgage loans with valuation reserves as of December 31, 2009, shareholders’ net income would decrease by approximately $8 million after-tax.
 
 
   net operating income of the property;
   rental and growth rates for the property and its local market;
   capital requirements for the property; and
   current market discount and capitalization rates.
   
 
       
 
  These evaluations are based primarily on an in-depth review of the commercial mortgage loan portfolio which is completed annually in the third quarter. The Company updates this annual review as material changes in these factors are identified.

The Company recognized impairment losses from commercial mortgage loan valuation reserves as follows (in millions, after-tax):
   
 
       
 
 
   2009 — $11
  2008 — $0
  2007 — $0
   
 
       
 
  See the Investment Assets section of the MD&A beginning on page 87 for discussion of the Company’s problem and potential problem mortgage loans and Note 12 to the Consolidated Financial Statements for further information surrounding impaired commercial mortgage loans.    

 

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SEGMENT REPORTING
Operating segments generally reflect groups of related products, but the International segment is generally based on geography. The Company measures the financial results of its segments using “segment earnings (loss),” which is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses. “Adjusted income from operations” for each segment is defined as segment earnings excluding special items and the results of the Company’s GMIB business. Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the segment and permits analysis of trends. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is segment earnings. Each segment provides a reconciliation between segment earnings and adjusted income from operations.
Health Care Segment
Segment Description
The Health Care segment includes medical, dental, behavioral health, prescription drug and other products and services that may be integrated to provide consumers with comprehensive health care solutions. This segment also includes group disability and life insurance products that were historically sold in connection with certain experience-rated medical products. These products and services are offered through a variety of funding arrangements such as guaranteed cost, retrospectively experience-rated and administrative services only arrangements.
The Company measures the operating effectiveness of the Health Care segment using the following key factors:
  segment earnings and adjusted income from operations;
  membership growth;
  sales of specialty products to core medical customers;
  changes in operating expenses per member; and
  medical expense as a percentage of premiums (medical care ratio) in the guaranteed cost business.
Results of Operations
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 11,384     $ 11,665     $ 10,666  
Net investment income
    181       200       202  
Mail order pharmacy revenues
    1,282       1,204       1,118  
Other revenues
    262       267       250  
 
                 
Segment revenues
    13,109       13,336       12,236  
Mail order pharmacy cost of goods sold
    1,036       961       904  
Benefits and other expenses
    10,943       11,359       10,295  
 
                 
Benefits and expenses
    11,979       12,320       11,199  
 
                 
Income before taxes
    1,130       1,016       1,037  
Income taxes
    399       352       358  
 
                 
Segment earnings
    731       664       679  
Less: special items (after-tax) included in segment earnings:
                       
Curtailment gain (See Note 10 to the Consolidated Financial Statements)
    25              
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
    (24 )     (27 )      
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    1              
Charge related to litigation matters (See Note 23 to the Consolidated Financial Statements)
          (24 )      
 
                 
Adjusted income from operations
  $ 729     $ 715     $ 679  
 
                 
Realized investment gains (losses), net of taxes
  $ (19 )   $ (13 )   $ 14  
 
                 

 

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The Health Care segment’s adjusted income from operations for 2009, as compared with 2008, was favorably impacted by the absence of a $7 million after-tax adjustment related to a large experience-rated life and non-medical account in run-out recorded in the first quarter of 2008.
Excluding this item, adjusted income from operations for 2009 was slightly higher than 2008 reflecting:
  lower operating expenses, excluding the impact of an additional quarter from the acquired business (effective April 1, 2008), primarily driven by cost reduction initiatives and pension plan changes, partially offset by higher management incentive compensation and higher information technology spend;
  higher stop loss earnings largely from the acquired business (effective April 1, 2008), tempered by lower margins on the remaining book; and
  improved specialty earnings.
These favorable effects were largely offset by:
  lower membership;
  lower guaranteed cost earnings primarily reflecting a higher medical care ratio driven by unfavorable prior year development, as well as higher in-year claims due, in part to H1N1 flu-related claims; and
  lower investment income primarily reflecting lower income from real estate funds.
The Health Care segment’s adjusted income from operations in 2008, as compared with 2007, was favorably impacted by lower management incentive compensation expense of $21 million after-tax.
Excluding the items mentioned above, adjusted income from operations increased in 2008 compared with 2007 due to:
  earnings from the acquired business (effective April 1, 2008);
  higher service fees due to membership growth and rate increases;
  favorable specialty earnings due to increased sales to core medical customers as well as strong performance in the direct specialty business; and
  improved Medicare Part D results due in part to increased membership.
These favorable effects were partially offset by:
  lower membership and a higher medical care ratio in the guaranteed cost business;
  lower medical margins in the experience-rated business; and
  higher operating expenses reflecting spending on operational improvement initiatives, including segment expansion and investments in information technology, partially offset by expense reductions in certain areas, primarily service operations.

 

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Revenues
The table below shows premiums and fees for the Health Care segment:
                         
(In millions)   2009     2008     2007  
Medical:
                       
Guaranteed cost excluding voluntary/limited benefits (1),(2)
  $ 3,148     $ 3,504     $ 3,877  
Voluntary/limited benefits
    232       200       160  
Experience-rated (2),(3)
    1,699       1,953       1,877  
Stop loss
    1,274       1,197       589  
Dental
    731       785       773  
Medicare
    595       400       349  
Medicare Part D
    342       327       326  
Other (4)
    515       518       473  
 
                 
Total medical
    8,536       8,884       8,424  
Life and other non-medical
    179       184       235  
 
                 
Total premiums
    8,715       9,068       8,659  
Fees (2),(5)
    2,669       2,597       2,007  
 
                 
Total premiums and fees
  $ 11,384     $ 11,665     $ 10,666  
 
                 
     
(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 and 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 $41 million in 2009, $69 million in 2008, and $61 million in 2007.
Premiums and fees decreased by 2% in 2009, compared with 2008, primarily reflecting lower membership largely due to disenrollment resulting from higher unemployment. This impact was partially offset by:
  rate actions across all products;
  increases in fees relating to specialty products;
  membership growth in the Medicare private fee for service and Voluntary products; and
  the impact of the acquired business (effective April 1, 2008).
Premiums and fees increased 9% in 2008, compared with 2007, primarily reflecting:
  the impact of the acquired business (effective April 1, 2008);
  increases in the experience-rated business due to rate increases;
  higher other medical premiums due to increased sales to core medical customers and rate increases in specialty business; and
  higher service fees due to increased membership and rate increases.
These factors were partially offset by a decrease in the guaranteed cost business which was due to membership declines largely in commercial HMO business partially offset by rate increases.
Net investment income decreased by 10% in 2009 compared with 2008 primarily reflecting lower income from real estate funds partially offset by higher invested assets. Net investment income decreased by 1% in 2008 compared with 2007 primarily reflecting lower yields partially offset by higher average assets.
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.

 

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Benefits and Expenses
Health Care segment benefits and expenses consist of the following:
                         
(In millions)   2009     2008     2007  
Medical claims expense
  $ 6,927     $ 7,252     $ 6,798  
Other benefit expenses
    169       193       225  
Mail order pharmacy cost of goods sold
    1,036       961       904  
Other operating expenses
    3,847       3,914       3,272  
 
                 
Total benefits and expenses
  $ 11,979     $ 12,320     $ 11,199  
 
                 
Medical claims expense decreased by 4% in 2009 compared with 2008 largely due to lower membership, particularly in the experience-rated and guaranteed cost businesses. This impact was partially offset by growth in Medicare membership and increases in medical expenses due to medical cost inflation as well as H1N1 flu-related claims.
Medical claims expense increased 7% in 2008 compared with 2007 largely due to the impact of the acquired business.
Other benefit expenses include expenses associated with life, long-term disability and other non-medical products. These expenses have decreased 12% in 2009 compared with 2008 and 14% in 2008 compared with 2007, primarily reflecting the continued run-off of this business, as the Health Care segment no longer actively markets these products.
Other operating expenses include expenses related to:
  both retail and mail order pharmacy;
 
  disease management;
 
  voluntary and limited benefits;
 
  Medicare claims administration businesses; and
 
  integration costs associated with the acquired business.
Excluding the items noted above, as well as special items, other operating expenses increased slightly in 2009, compared with 2008, primarily due to expenses related to the acquired business (effective April 1, 2008), higher management incentive compensation and higher information technology spend, mostly offset by cost reduction initiatives and pension plan changes as a result of the comprehensive review of ongoing expenses, as well as lower volume-related expenses. Other operating expenses increased in 2008, compared with 2007, primarily reflecting expenses related to the acquired business and higher spending on operational improvement initiatives, including market segment expansion and investments in information technology. This increase was partially offset by lower management incentive compensation expenses in 2008.

 

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Other Items Affecting Health Care Results
Medical Membership
The Health Care segment’s medical membership includes any individual for whom the Company retains medical underwriting risk, who uses the Company’s network for services covered under their medical coverage or for whom the Company administers medical claims. As of December 31, estimated medical membership was as follows:
                         
(In thousands)   2009     2008     2007  
Guaranteed cost excluding voluntary/limited benefits (1)
    780       891       1,038  
Voluntary/limited benefits
    221       201       180  
Medicare
    52       35       31  
 
                 
Total guaranteed cost
    1,053       1,127       1,249  
Experience-rated (2)
    761       864       907  
Service
    9,226       9,688       8,013  
 
                 
Total medical membership
    11,040       11,679       10,169  
 
                 
     
(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 Health Care segment’s medical membership was 5.5% as of December 31, 2009 when compared with December 31, 2008. The decrease was primarily driven by disenrollment across all funding arrangements as a result of higher unemployment. The net increase in medical membership of 15% as of December 31, 2008 compared with December 31, 2007 was due to the acquisition of Great-West Healthcare, effective April 1, 2008.
Operational Strategies
The Health Care segment is focused on several operational strategies including improving the efficiency of its operations, while growing its customer base in targeted markets and meeting the needs of its customers. Savings generated from the reduction of operating expenses will provide the financial flexibility and capital to make investments that will enable the Company to enhance its capabilities, particularly in product development and the delivery of customer service, health advocacy and related technology. These capabilities are critical to enabling the Health Care segment to execute on its strategies to achieve profitable growth and retain customers. Successful execution of these operational strategies is critical to maintaining and improving its competitive position in the healthcare marketplace.
The operational strategies currently underway are discussed below.
Reducing operating expenses. The Company operates in an intensely competitive marketplace and its ability to establish a competitive cost structure over time is crucial to achieving its overall strategy. Accordingly, the Health Care segment is focused on reducing operating expenses, while investing prudently in technology and service capabilities to drive future growth.
The Health Care segment’s operating expenses are comprised of three components and are approximately allocated as follows: healthcare (70%), specialty and market segment expansion (20%), and premium taxes/commissions (10%).
    The healthcare component is the primary focus of the cost reduction activity. This component includes:
    fulfillment activities, which are comprised of service operations, technology, and medical and network management;
    customer acquisition, which represent costs for sales and account management, underwriting, and marketing and product development; and
    staff functions, which represent finance, legal and human resources.
    The specialty and market segment expansion and the premium tax/commission expense components would increase over time as revenues grow. Specialty includes pharmacy, Medicare Part D, disease management, dental and behavioral coverages.

 

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In 2009, excluding the impact of Great-West Healthcare, the Health Care segment significantly reduced healthcare operating expenses and expects to continue to meaningfully reduce these over time. These reductions are, and will continue to be, driven by actions in the following areas:
    employment-related savings;
    vendor management and procurement actions;
    reduction of the Health Care segment’s real estate footprint;
    leveraging technology to drive operating efficiencies; and
    targeted outsourcing actions.
The Health Care segment expects to drive reductions in its operating expenses while remaining focused on its other business strategies including investing in areas that are critical to the Company’s growth initiatives and segment expansions, ensuring continued excellence in customer service and clinical programs, and leveraging technology to drive further operating efficiencies.
Profitable growth and customer retention. The Health Care segment continues to focus on retaining profitable relationships, expanding on those relationships and growing profitable new business by focusing on:
    targeted market segments where buyers value our health improvement capabilities;
    targeted geographic regions where the Company already has a strong market presence and competitive networks;
    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; and
    increasing penetration of our specialty healthcare programs and services and cross-selling products sold primarily by other segments of the Company.
The Health Care segment is focused on market segment and product expansion. With respect to market segment expansion, the focus is predominantly in the “Middle Market” (employers with generally more than 250 but fewer than 5,000 employees), “Select” (employers with generally more than 50 but fewer than 250 employees), and “Individual” market segments. The Health Care segment is focusing on several strategic growth industries and targeting key geographic markets within the Select and Middle Market segments that align with our competitive strengths. The Health Care segment expects to grow its presence in these market segments by leveraging its customer knowledge, differentiated service model, product portfolio and distribution model. The Health Care segment continues to increase its penetration into the Individual market segment and will refine its strategy for this market segment pending the outcome of health care reform legislation. In the “National” market segment (multi-site, multi-state commercial employers with generally more than 5,000 employees), the Company will selectively focus on clients that value its differentiated product offering. These clients include those seeking engagement and incentive based programs designed to improve health, and those that purchase multiple products and services from a single company.
Driving additional cross-selling is also key to the Company’s integrated benefits value proposition. The Company is expanding network access for its dental product and improving network flexibility to drive better alignment with customers’ needs including increasing disability and pharmacy penetration across the entire book.
Offering products that meet emerging customer and market trends. In addition to designing lower cost plan offerings to meet emerging customer and market trends, enhancements to the Company’s suite of products (CIGNA Choice Fund ® CIGNA Health Advisor, CIGNA Incentive Points Program, CIGNA Choicelinx/Custom Benefit Builder) offer various options to customers and employers that are key to our customer engagement strategy. By providing tools to our customers which will facilitate access and greater understanding of their healthcare choices, customers are better equipped to make effective health related decisions. CIGNA’s Cost of Care Estimator, Quicken Health and improvements to customer Explanation of Benefits and Health Statements are a part of the Company’s strategy to engage the individual by making information more available and easier to understand.

 

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Effectively managing medical costs. The Health Care segment operates under a centralized medical management model, which helps improve the health, well being and sense of security of its members, while reducing infrastructure expenses and driving productivity.
The Health Care segment 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 it 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 to strengthen its networks in targeted markets, enhancing clinical capabilities and engaging its customers and clients/employers. In connection with the April 2008 Great-West Healthcare acquisition, the Company continues to integrate its offerings onto one extensive preferred provider network, in order to offer access to a broad range of utilization review and case management services at a competitive medical cost.
Delivering superior service to customers and health care professionals. The Company is focused on delivering consistent, reliable and superior service to customers, health care professionals and clients. The Company believes that further enhancing service can improve customer retention and, when combined with useful health information and tools, can help motivate customers to become more engaged in their personal health. This will help to promote healthy outcomes thereby removing cost from the healthcare system. The evolution of the consumer-driven health care market is driving increased product and service complexity and is raising customers’ expectations with respect to service levels, which is expected to require significant investment, management attention and heightened interaction with customers.
The Company continues to focus on the development and enhancement of its service model that is capable of meeting the challenges brought on by the increasing product and service complexity and the heightened expectations of health care customers. The Company continues to make significant investments in the development and implementation of systems and technology to improve the provider service experience for customers and health care professionals (e.g. opening its Call Center 24/7), thereby enhancing its capabilities and improving its competitive position.

 

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Disability and Life Segment
Segment Description
The Disability and Life segment includes group disability, life, accident and specialty insurance and case management for disability and workers’ compensation.
Key factors for this segment are:
  premium growth, including new business and customer retention;
  net investment income;
  benefits expense as a percentage of earned premium (loss ratio); and
  other operating expense as a percentage of earned premiums and fees (expense ratio).
Results of Operations
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 2,634     $ 2,562     $ 2,374  
Net investment income
    244       256       276  
Other revenues
    113       117       131  
 
                 
Segment revenues
    2,991       2,935       2,781  
Benefits and expenses
    2,598       2,553       2,435  
 
                 
Income before taxes
    393       382       346  
Income taxes
    109       109       92  
 
                 
Segment earnings
    284       273       254  
Less: special items (after-tax) included in segment earnings:
                       
Curtailment gain (See Note 10 to the Consolidated Financial Statements)
    4              
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
    (4 )     (2 )      
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    5             6  
 
                 
Adjusted income from operations
  $ 279     $ 275     $ 248  
 
                 
Realized investment (losses), net of taxes
  $ (1 )   $ (48 )   $ (5 )
 
                 
The Disability and Life segment’s adjusted income from operations increased 1% in 2009 compared to 2008 reflecting:
  favorable claims experience in the disability insurance business and the favorable after-tax impact of disability reserve studies of $20 million in 2009 compared with $8 million in 2008. The results in 2008 also included a $3 million favorable after-tax impact of a reinsurance settlement. The favorable claims experience and reserve study impacts are largely driven by continued strong disability claims management programs;
  improved claims experience in the accident business including the favorable after-tax impact of reserve studies of $5 million in 2009 compared with $3 million in 2008; and
  higher premiums and fees in the disability and life businesses.
Largely offsetting these factors were:
  lower results in the group life insurance business in 2009 primarily due to less favorable current year life claims experience, partially offset by the favorable after-tax impact of reserve studies of $9 million in 2009 compared with $3 million in 2008;
  a higher operating expense ratio, including a litigation expense charge of $4 million;
  lower net investment income; and
  the absence of the 2008 favorable after-tax impact of specialty reserve studies of $2 million.

 

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The Disability and Life segment’s adjusted income from operations increased 11% in 2008 compared to 2007 reflecting:
  improved claims experience in the disability insurance business and the favorable after-tax impact of disability reserve studies of $8 million in 2008 compared with $12 million in 2007. The results in 2008 also included a $3 million favorable after-tax impact of a reinsurance settlement. The favorable claims experience and reserve study impacts are largely driven by continued strong disability claims management programs;
  improved claims experience in the specialty business including the favorable after-tax impact of reserve studies of $2 million in 2008 compared with an unfavorable impact of $10 million in 2007;
  a lower expense ratio due to effective operating expense management and lower management incentive compensation; and
  business growth resulting in increased premiums and fees in the disability, life and accident businesses.
These factors were partially offset by:
  lower results in the group life insurance business due to less favorable life claims experience and lower year over year favorable after-tax impacts of reserve studies of $3 million in 2008 compared with $7 million in 2007;
  less favorable accident claims experience driven by higher average new claims size. Group accident results included the favorable after-tax impact of reserve studies of $3 million in both 2008 and 2007; and
  lower net investment income.
Revenues
Premiums and fees increased by 3% in 2009 reflecting disability and life sales growth and solid persistency, partially offset by lower employment levels at the customers we serve, the Company’s exit from a large, low-margin assumed government life reinsurance program and the sale of the renewal rights for the student and participant accident business. Premiums and fees increased by 8% in 2008 reflecting new sales growth and solid customer retention in the disability, life and accident lines of business, partially offset by less favorable customer retention in the specialty line of business.
Net investment income decreased by 5% in 2009 reflecting lower yields and lower security and real estate partnership income. Net investment income decreased by 7% in 2008 reflecting lower yields and lower security partnership income.
Benefits and Expenses
Excluding the pre-tax impact of the reserve studies, expense charge and special items noted above, benefits and expenses increased 3% in 2009 compared with 2008, primarily reflecting:
  disability and life business growth;
  less favorable life claims experience driven by the higher average size of death claims; and
  a higher expense ratio in 2009 compared with 2008 reflecting strategic investments in the claim operations and information technology initiatives partially offset by a continued focus on operating expense management and lower disability and workers’ compensation case management expenses.
These effects were partially offset by:
  more favorable accident claim experience, driven by lower new claims;
  more favorable disability claims experience resulting from higher resolutions driven by strong disability management programs partially offset by higher new claims; and
  the Company’s exit from the government life insurance program and sale of the renewal rights for the student and participant accident business.

 

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Excluding the pre-tax impact of the reserve studies, reinsurance settlement and cost reduction charge noted above, benefits and expenses increased 5% in 2008 compared with 2007, reflecting:
  business growth in the disability, life and accident lines of business; and
  less favorable claims experience in the life and accident businesses.
These effects were partially offset by:
  favorable claims experience in the disability and specialty businesses; and
  a lower expense ratio, driven by continued focus on operating expense management, lower disability and workers’ compensation case management expenses and lower management incentive compensation expenses.
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);
  operating expense as a percentage of earned premium (expense ratio); and
  impact of foreign currency movements.
Results of Operations
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 1,882     $ 1,870     $ 1,800  
Net investment income
    69       79       77  
Other revenues
    22       18       7  
 
                 
Segment revenues
    1,973       1,967       1,884  
Benefits and expenses
    1,717       1,679       1,610  
 
                 
Income before taxes
    256       288       274  
Income taxes
    70       104       96  
Income attributable to noncontrolling interest
    3       2       2  
 
                 
Segment earnings
    183       182       176  
Less: special items (after-tax) included in segment earnings:
                       
Cost reduction charge (See Note 6 to the Consolidated Financial Statements)
    (1 )     (6 )      
Curtailment gain (See Note 10 to the Consolidated Financial Statements)
    1              
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    1             2  
 
                 
Adjusted income from operations
  $ 182     $ 188     $ 174  
 
                 
Impact of foreign currency movements included in segment earnings
  $ (15 )   $ (13 )   $ 4  
 
                 
Realized investment gains (losses), net of taxes
  $ 2     $ (3 )   $ 1  
 
                 

 

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During the second quarter of 2009, the Company’s International segment implemented a capital management 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. The International segment’s adjusted income from operations reflected favorable tax adjustments of $14 million from the implementation of this strategy for 2009. In addition to the implementation effect, adjusted income from operations also reflects $8 million from the ongoing impact of the lower tax rate on the permanently invested earnings for 2009. Excluding the impact of the South Korean tax adjustments and foreign currency movements, the International segment’s adjusted income from operations decreased 7% for 2009, compared with 2008. The decrease was primarily driven by unfavorable claims experience in the life, accident and supplemental health insurance business and the expatriate employee benefits business. The unfavorable effects were partially offset by revenue growth and competitively strong margins in both businesses. The impact of foreign currency movements was calculated by comparing the reported results to what the results would have been had the exchange rates remained constant with the prior year’s comparable period exchange rates. Special items were generally not denominated in foreign currency.
Excluding the impact of foreign currency movements noted in the table above, the International segment’s adjusted income from operations increased 16% in 2008 compared with 2007, primarily due to continued growth in the life, accident and supplemental health insurance business and the expatriate employee benefits business, as well as continued competitively strong margins.
Revenues
Premiums and fees. Excluding the effect of foreign currency movements, premiums and fees were $2,042 million in 2009 compared with reported premiums of $1,870 million in 2008, an increase of 9%. The increase was primarily attributable to 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. Excluding the effect of foreign currency movements, premiums and fees were $1,971 million in 2008 compared with reported premiums of $1,800 million in 2007, an increase of 10%. This increase was primarily attributable to new sales growth in the life, accident and supplemental health insurance operations, particularly in Taiwan and South Korea, and membership growth in the expatriate employee benefits business.
To exclude the effect of foreign currency movements, premiums and fees were calculated using the prior years’ comparable period exchange rates, allowing foreign currency neutral comparison to the prior years’ reported premiums and fees.
Net investment income decreased by 13% in 2009 compared with 2008. The decrease was primarily due to unfavorable foreign currency movements, particularly in South Korea. Net investment income increased by 3% in 2008 compared with 2007. The increase was primarily due to higher asset levels offset by unfavorable foreign currency movements.
Benefits and Expenses
Benefits and expenses increased by 2% in 2009, compared with 2008. The increase was primarily driven by higher loss ratios, business growth and increased amortization of deferred acquisition costs, partially offset by foreign currency movements.
Benefits and expenses increased by 4% in 2008 compared with 2007, primarily due to business growth in all lines of business, partially offset by foreign currency movements, primarily in South Korea. Loss ratios decreased in 2008 in the life, accident and supplemental health business due to favorable claims experience.
Expense ratios decreased in 2009 reflecting effective expense management. Expense ratios increased slightly in 2008 in the life, accident and supplemental health business and the expatriate benefits business as a result of higher expenses to support growth initiatives and expansion. Expense ratios in the life, accident and health and expatriate benefits businesses continue to be strong due to effective expense management.
Other Items Affecting International Results
For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated 29% of the segment’s revenues and 49% of the segment’s earnings in 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 segment’s results and the Company’s consolidated financial results.

 

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Run-off Reinsurance Segment
Segment Description
The Company’s reinsurance operations were discontinued and are now an inactive business in run-off mode since the sale of the U.S. individual life, group life and accidental death reinsurance business in 2000. This segment is predominantly comprised of GMDB, GMIB, workers’ compensation and personal accident reinsurance products.
The determination of liabilities for GMDB and GMIB requires the Company to make critical accounting estimates. In 2008, the Company updated the assumptions for GMIB and the effects of hypothetical changes in those assumptions in connection with the implementation of the FASB’s fair value disclosure and measurement guidance (ASC 820). 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 11 to the Consolidated Financial Statements. The Company also provides the effects of hypothetical changes in those assumptions in the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K.
The Company excludes the results of the GMIB business from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions. The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable. See the “Critical Accounting Estimates” section of the MD&A beginning on page 55 of this Form 10-K for more information on the effect of capital market assumption changes on shareholders’ net income.
Results of Operations
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 29     $ 43     $ 60  
Net investment income
    113       104       93  
Other revenues
    (283 )     331       (47 )
 
                 
Segment revenues
    (141 )     478       106  
Benefits and expenses
    (419 )     1,499       160  
 
                 
Income (loss) before income taxes (benefits)
    278       (1,021 )     (54 )
Income taxes (benefits)
    93       (375 )     (43 )
 
                 
Segment earnings (loss)
    185       (646 )     (11 )
Less: results of GMIB business (after-tax) included in segment earnings (loss):
                       
Charge on adoption of fair value measurements for GMIB contracts
          (131 )      
Results of GMIB business excluding charge on adoption
    209       (306 )     (91 )
 
                 
Adjusted income (loss) from operations
  $ (24 )   $ (209 )   $ 80  
 
                 
Realized investment gains (losses), net of taxes
  $ (2 )   $ (19 )   $ 2  
 
                 
Overview of 2009 Results
Overall segment results, including GMIB, improved significantly in 2009 compared with 2008. Segment earnings were favorably affected by substantially higher results from the GMIB business reflecting improved equity markets and generally higher interest rates. In addition, adjusted income from operations for Run-off Reinsurance improved significantly in 2009 compared with 2008 due to significantly reduced losses in the GMDB business ($52 million after-tax for 2009, compared with $267 million for 2008) resulting from a substantially lower amount of reserve strengthening. The improvement in GMDB results in 2009 primarily reflected the recovery and stabilization of the financial markets. Adjusted income from operations also included the favorable after-tax impact of reserve studies for the workers compensation and personal accident business of $16 million in 2009 and $30 million in 2008.

 

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Overview of 2008 Results
Segment loss for 2008 reflected significant losses from the GMIB business of $437 million, including a charge of $131 million related to the implementation of new fair value accounting guidance in 2008. Excluding this charge, GMIB losses in 2008 primarily reflected the declines in equity market and interest rates and increased market volatility.
In addition, adjusted loss from operations for Run-off Reinsurance was significantly higher in 2008 primarily reflecting a loss in the GMDB business of $267 million after-tax primarily reflecting reserve strengthening. This loss was primarily related to declines in equity markets and interest rates and increased market volatility. Adjusted loss from operations for Run-off Reinsurance in 2008 compared with 2007 was also negatively impacted by 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 of $282 million in 2009 from futures contracts used in the GMDB equity hedge program (see Note 7 to the Consolidated Financial Statements), compared with pre-tax gains of $333 million in 2008 and pre-tax losses of $32 million in 2007. 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 Company held futures contract positions related to this program with a notional amount of $1.0 billion at December 31, 2009.
Benefits and Expenses
Benefits and expenses were comprised of the following:
                         
(In millions)   2009     2008     2007  
GMIB (income) expense
  $ (304 )   $ 690     $ 147  
Other benefits and expenses
    (115 )     809       13  
 
                 
Benefits and expenses
  $ (419 )   $ 1,499     $ 160  
 
                 
GMIB (Income) Expense. Under the GAAP guidance for fair value measurements, the Company’s results of operations are expected to be volatile in future periods because capital market assumptions needed to estimate the assets and liabilities for the GMIB business are based largely on market-observable inputs at the close of each reporting period including interest rates (LIBOR swap curve) and market-implied volatilities. See Note 11 to the Consolidated Financial Statements for additional information about assumptions and asset and liability balances related to GMIB.
For 2009 the pre-tax income for GMIB was $304 million, and was primarily due to the following factors:
  increases in interest rates: $248 million;
  increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures: $98 million;
  specific adjustments to nonperformance risk for the Company net of nonperformance risk of its reinsurers: $16 million; and
  updates to the risk and profit charge estimates: $30 million.
These favorable effects were partially offset by:
  higher than expected claim experience: $26 million;
  increases to the annuitization assumption, reflecting higher utilization experience: $21 million;
  updates to the lapse assumption: $14 million;
  updates to fund correlation assumptions: $4 million; and
  other amounts, including experience varying from assumptions, model and in-force updates: $23 million.

 

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GMIB expense in 2008 includes a pre-tax charge of $202 million for the adoption of the FASB’s fair value disclosure and measurement guidance, which is discussed in Notes 2(B) and 11 to the Consolidated Financial Statements.
Excluding the charge on adoption of the FASB’s fair value disclosure and measurement guidance, the GMIB business generated additional pre-tax expense of $488 million in 2008 primarily as a result of:
  decreases in interest rates since December 31, 2007: $232 million;
  the impact of declines in underlying account values in the period, driven by declines in equity markets and bond fund returns during 2008, resulting in increased exposure: $158 million;
  updates to the risk and profit charge estimate: $50 million;
  updates to other assumptions that are used in the fair value calculation: $25 million; and
  other amounts including the compounding effects of declines in interest rates and equity markets, as well as experience varying from assumptions: $23 million.
Excluding the charge to update assumptions for annuity elections and lapse rates, the GMIB business generated additional pre-tax expense of $61 million in 2007, primarily the result of unfavorable annuitization and lapse experience.
The GMIB liabilities and related assets are calculated using a complex internal model and assumptions from the viewpoint of a hypothetical market participant. This resulting liability (and related asset) is higher than the Company believes will ultimately be required to settle claims primarily because market-observable interest rates are used to project growth in account values of the underlying mutual funds to estimate fair value from the viewpoint of a hypothetical market participant. The Company’s payments for GMIB claims are expected to occur over the next 15 to 20 years and will be based on actual values of the underlying mutual funds and the 7-year Treasury rate at the dates benefits are elected. Management does not believe that current market-observable interest rates reflect actual growth expected for the underlying mutual funds over that timeframe, and therefore believes that the recorded liability and related asset do not represent what management believes will ultimately be required as this business runs off.
However, significant declines in mutual fund values that underlie the contracts (increasing the exposure to the Company) together with declines in the 7-year treasury rates (used to determine claim payments) similar to what occurred during 2008 would increase the expected amount of claims that would be paid out for contractholders who choose to annuitize. It is also possible that such unfavorable market conditions would have an impact on the level of contractholder annuitizations, particularly if these unfavorable market conditions persisted for an extended period.
Other Benefits and Expenses. Other benefits and expenses reflected income for 2009, compared to expense during 2008. This fluctuation reflects the impact of significant improvements in the equity markets on guaranteed minimum death benefit contracts, compared with equity market declines during 2008. 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.
Although 2009 benefit expenses included reserve strengthening of $73 million ($47 million after-tax) to increase GMDB reserves, no additional reserve strengthening was required for GMDB after the first quarter, primarily due to the stabilization and recovery of equity markets. The components of the first quarter reserve strengthening were:
  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 Company’s long-term assumption for mean investment performance.

 

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During 2008, the Company recorded additional other benefits expenses of $412 million ($267 million after-tax) primarily to strengthen GMDB reserves following an analysis of experience and reserve assumptions. These amounts were due to:
  adverse impacts of overall market declines of $210 million ($136 million after-tax). This includes (a) $185 million ($120 million after-tax) related to the provision for partial surrenders, including $40 million ($26 million after-tax) for an increase in the assumed election rates for future partial surrenders and (b) $25 million ($16 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 due to turbulent equity market conditions. Volatility risk is not covered by the GMDB equity hedge program. Also, the equity market volatility, particularly during the second half of the year, impacted the effectiveness of the hedge program. In aggregate, these volatility-related impacts totaled $182 million ($118 million after-tax). The GMDB equity hedge program is designed so that changes in the value of a portfolio of actively managed futures contracts will offset changes in the liability resulting from equity market movements. In periods of equity market declines, the liability will increase; the program is designed to produce gains on the futures contracts to offset the increase in the liability. However, the program will not perfectly offset the change in the liability, in part because the market does not offer futures contracts that exactly match the diverse mix of equity fund investments held by contractholders, and because there is a time lag between changes in underlying contractholder mutual funds, and corresponding changes in the hedge position. In 2008, the impact of this mismatch was higher than most prior periods due to the relatively large changes in market indices from day to day. In addition, the number of futures contracts used in the program is adjusted only when certain tolerances are exceeded and in periods of highly volatile equity markets when actual volatility exceeds the expected volatility assumed in the liability calculation, losses will result. These conditions have had an adverse impact on earnings, and during 2008, the increase in the liability due to equity market movements was only partially offset by the results of the futures contracts; and
  adverse interest rate impacts. Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance generating an additional $14 million ($9 million after-tax).
See Note 7 to the Consolidated Financial Statements for additional information about assumptions and reserve balances related to GMDB.
Segment Summary
The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on ceding companies’ claim payments. For GMDB and GMIB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and policyholder behavior. For workers’ compensation and personal accident, the claim payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from retrocessionaires may not be known with certainty for some time.
The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of December 31, 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 Company’s consolidated results of operations and could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to the Company.

 

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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.
COLI has contributed the majority of the earnings in 2009, 2008 and 2007 for Other Operations. Federal legislation enacted in 1996 affected certain policies sold by the COLI business by eliminating on a prospective basis the tax deduction for policy loan interest for most leveraged COLI products. There have been no sales of this particular product since 1997. As a result of an Internal Revenue Service initiative to settle tax disputes regarding leveraged products, some customers have surrendered their policies and management expects earnings associated with these products to continue to decline. Management does not expect this initiative to have a significant impact on the future operating results of the segment.
Results of Operations
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Premiums and fees
  $ 112     $ 113     $ 108  
Net investment income
    407       414       437  
Other revenues
    64       71       82  
 
                 
Segment revenues
    583       598       627  
Benefits and expenses
    466       468       473  
 
                 
Income before taxes
    117       130       154  
Income taxes
    31       43       45  
 
                 
Segment earnings
    86       87       109  
Less: special items (after-tax) included in segment earnings:
                       
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    1             5  
 
                 
Adjusted income from operations
  $ 85     $ 87     $ 104  
 
                 
Realized investment (losses), net of taxes
  $ (6 )   $ (27 )   $ (2 )
 
                 
Adjusted income from operations for Other Operations declined in 2009 compared with 2008, reflecting a continued decline in deferred gain amortization associated with the sold businesses offset by increased COLI earnings driven by higher investment income and improved operating expenses.
Adjusted income from operations for Other Operations declined in 2008 compared with 2007, reflecting lower results from the COLI business driven by less favorable mortality and lower interest margins. Interest margins decreased due to the movement of assets from the general account to separate accounts, and lower interest rates. In addition, the continuing decline in deferred gain amortization associated with sold businesses contributed to lower earnings.
Revenues
Net investment income . Net investment income decreased 2% in 2009 compared with 2008, primarily reflecting lower average invested assets and lower real estate income. Net investment income decreased 5% in 2008 compared with 2007 primarily reflecting lower average invested assets due in part to the movement of assets from the general account to separate accounts in the COLI business as well as lower interest rates.
Other revenues . Other revenues decreased 10% in 2009 compared with 2008 and decreased 13% in 2008 compared with 2007 primarily due to lower deferred gain amortization related to the sold retirement benefits and individual life insurance and annuity businesses. The amount of the deferred gain amortization recorded was $32 million in 2009, $38 million in 2008 and $47 million in 2007.

 

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Corporate
Description
Corporate reflects amounts not allocated to other 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.
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Segment loss
  $ (142 )   $ (162 )   $ (97 )
Less: special items (after-tax) included in segment loss:
                       
Charge related to litigation matter (See Note 23 to the Consolidated Financial Statements)
          (52 )      
Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)
    12             10  
 
                 
Adjusted loss from operations
  $ (154 )   $ (110 )   $ (107 )
 
                 
Corporate’s adjusted loss from operations was higher in 2009, compared with 2008, primarily reflecting:
  higher net interest expense attributable to lower average invested assets and increased debt used for general corporate purposes, including the repayment of some of the Company’s outstanding commercial paper issued to finance the acquired business;
  higher directors’ deferred compensation expenses caused by an increase in the Company’s stock price during 2009 compared with a decrease during 2008; and
  spending on certain strategic initiatives.
Corporate’s adjusted loss from operations was higher in 2008, compared with 2007, primarily reflecting higher net interest expense attributable to lower average invested assets and increased debt to finance the acquired business. These factors were partially offset by lower directors’ deferred compensation expenses caused by a decline in the Company’s stock price in 2008.
DISCONTINUED OPERATIONS
Description
Discontinued operations represent results associated with certain investments or businesses that have been sold or are held for sale.
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Income before income (taxes) benefits
  $     $ 3     $ 25  
Income (taxes) benefits
    1       1       (7 )
 
                 
Income from operations
    1       4       18  
Impairment loss, net of tax
                (23 )
 
                 
Income (loss) from discontinued operations, net of taxes
  $ 1     $ 4     $ (5 )
 
                 
Discontinued operations for 2009 primarily represents a tax benefit from a past divestiture resolved at the completion of the 2005 and 2006 IRS examinations.
Discontinued operations for 2008 primarily represents a gain of $3 million after-tax from the settlement of certain issues related to a past divestiture.

 

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Discontinued operations for 2007 primarily reflects:
  impairment losses related to the dispositions of several Latin American insurance operations as discussed in Note 3 to the Consolidated Financial Statements; and
  realized gains on the disposition of certain directly-owned real estate investments as discussed in Note 14 to the Consolidated Financial Statements.
INDUSTRY DEVELOPMENTS AND OTHER MATTERS
Proposed Health Care Reform
Addressing the affordability and availability of health insurance, including reducing the number of uninsured, is a major initiative of President Obama and the U.S. Congress, and proposals that may address these issues are pending in the U.S. Congress. The proposals vary and include measures that would change the dynamics of the health care industry and/or the employer’s role in the provision of benefits, such as the potential creation of a new government-run health plan(s) that would compete with the Company and other private health plans; the potential creation of federal or state-level exchanges (or similar constructs) that could serve as a distribution mechanism and/or additional regulatory structure for certain segments of the health care market; potential changes to medical coverage, such as expansion of eligibility under existing public programs, minimum medical benefit ratios for health plans, and mandatory issuance of insurance coverage; requirements that would limit the ability of health plans and insurers to vary premiums based on assessments of underlying risk; and new taxes and assessments specific to health care insurers and/or certain benefit plan designs. Any comprehensive health care reform package enacted will likely be phased in over a number of years and would be subject to a broader regulatory process. Because of the unsettled nature of these initiatives and the numerous steps required to implement them the Company remains uncertain as to the ultimate impact these changes will have on its business. For additional discussion regarding our risks related to health care reform, see “Item 1A. Risk Factors” beginning on page 35 of this Form 10-K.
Other Matters
The disability industry is under continuing review by regulators and legislators with respect to its offset practices regarding Social Security Disability Insurance (“SSDI”). There has been specific inquiry as to the industry’s role in providing assistance to individuals with their applications for SSDI. The Company has received one Congressional inquiry and has responded to the information request. Also, legislation prohibiting the offset of SSDI payments against private disability insurance payments for prospectively issued policies was introduced but not enacted in the Connecticut state legislature. The Company is also involved in related pending litigation. If the industry is forced to change its offset SSDI procedures, the practices and products for the Company’s Disability and Life segment could be significantly impacted.
In 1998, the Company sold its individual life insurance and annuity business to The 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 $4.4 billion as of December 31, 2009. Lincoln has secured approximately 90% of its reinsurance obligations under these arrangements by placing assets into a trust which qualifies under Regulation 114 of the New York Insurance Department.
The Company’s remaining reinsurance recoverables from Lincoln are unsecured. If Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified financial strength rating, at the Company’s request, Lincoln is contractually required to provide additional assurance that it will meet its reinsurance obligations, to include placing assets in a trust to secure these remaining reinsurance recoverables. S&P has assigned each of these reinsurers a rating of AA-.

 

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LIQUIDITY AND CAPITAL RESOURCES
                         
(In millions)                  
Financial Summary   2009     2008     2007  
Short-term investments
  $ 493     $ 236     $ 21  
Cash and cash equivalents
  $ 924     $ 1,342     $ 1,970  
Short-term debt
  $ 104     $ 301     $ 3  
Long-term debt
  $ 2,436     $ 2,090     $ 1,790  
Shareholders’ equity
  $ 5,417     $ 3,592     $ 4,748  
Liquidity
The Company maintains liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
  claim and benefit payments to policyholders; and
 
  operating expense requirements, primarily for employee compensation and benefits.
The Company’s subsidiaries normally meet their operating requirements by:
 
  maintaining appropriate levels of cash, cash equivalents and short-term investments;
 
  using cash flows from operating activities;
 
  selling investments;
 
  matching investment durations to those estimated for 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
 
  pension plan funding.
The parent normally meets its liquidity requirements by:
  maintaining appropriate levels of cash, cash equivalents and short-term investments;
 
  collecting dividends from its subsidiaries;
 
  using proceeds from issuance of debt and equity securities; and
 
  borrowing from its subsidiaries.
Cash flows for the years ended December 31, were as follows:
                         
(In millions)   2009     2008     2007  
Operating activities
  $ 745     $ 1,656     $ 1,342  
Investing activities
  $ (1,485 )   $ (2,572 )   $ 269  
Financing activities
  $ 307     $ 314     $ (1,041 )
Cash flows from operating activities consist of cash receipts and disbursements for premiums and fees, mail order pharmacy and other revenues, gains (losses) recognized in connection with the Company’s GMDB equity hedge program, investment income, taxes, and benefits and expenses.
Because certain income and expense transactions do not generate cash, and because cash transactions related to revenue and expenses may occur in periods different from when those revenues and expenses are recognized in shareholders’ net income, cash flows from operating activities can be significantly different from shareholders’ net income.

 

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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.
2009:
Operating activities
For the year ended December 31, 2009, cash flows from operating activities were less than net income by $560 million. Net income contains certain after-tax non-cash income and expense items, including:
  GMIB income of $209 million;
 
  a curtailment gain of $30 million, net of a cost reduction charge of $29 million;
 
  tax benefits related to the IRS examination of $20 million;
 
  depreciation and amortization charges of $174 million; and
 
  realized investment losses of $26 million.
Cash flows from operating activities were lower than net income excluding the non-cash items noted above by $530 million. This decrease was primarily due to pre-tax cash outflows of $282 million associated with the GMDB equity hedge program which did not affect shareholders’ net income and pre-tax contributions to the domestic pension plans of approximately $410 million, partially offset by the favorable effect of the pension contributions on tax payments.
Cash flows from operating activities decreased by $911 million in 2009 compared with 2008. Excluding the results of the GMDB equity hedge program (which did not affect net income), cash flows from operating activities decreased by $296 million. This decrease in 2009 primarily reflects pre-tax contributions to the qualified domestic pension plan of approximately $410 million for 2009 compared with none for 2008, partially offset by the favorable effect of the pension contributions on tax payments.
Investing activities
Cash used in investing activities was $1.5 billion. This use of cash primarily consisted of net purchases of investments of $1.2 billion and net purchases of property and equipment of $307 million.
Financing activities
Cash provided from financing activities primarily consisted of net proceeds from the issuance of long-term debt of $346 million, partially offset by repayments of short-term debt, principally commercial paper, of $199 million. Financing activities also included net deposits to contractholder deposit funds of $89 million and proceeds on issuances of common stock of $30 million.

 

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2008:
Operating activities
For the year ended December 31, 2008, cash flows from operating activities were greater than net income by $1.4 billion. Net income contains certain after-tax non-cash income and expense items, including:
  GMIB expense of $437 million including the effect of adoption of new fair value measurement guidance of $131 million;
 
  GMDB charges of $267 million;
 
  litigation accruals of $76 million and cost reduction charges of $35 million;
 
  depreciation and amortization charges of $159 million; and
 
  realized investment losses of $110 million.
Cash flows from operating activities were higher than net income excluding the non-cash items noted above by $278 million. This increase was primarily due to cash inflows associated with the GMDB equity hedge program of $333 million.
Cash flows from operating activities increased by $314 million in 2008 compared with 2007. Excluding the results of the GMDB equity hedge program (which did not affect net income), cash flows from operating activities decreased by $51 million. This decrease in 2008 primarily reflects higher payments for certain prepaid expenses in 2008.
Investing activities
Cash used in investing activities was $2.6 billion, consisting of $1.3 billion to fund the acquisition of Great-West Healthcare, net purchases of investments of $988 million and net purchases of property and equipment of $257 million.
Financing activities
Cash provided from financing activities primarily consisted of proceeds from the net issuance of short-term debt of $298 million and long-term debt of $297 million. 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 $91 million, proceeds from the issuance of common stock under the Company’s stock plans of $37 million and dividends on and repurchases of common stock of $392 million.
Interest Expense
Interest expense on long-term debt, short-term debt and capital leases was as follows:
                         
(In millions)   2009     2008     2007  
Interest expense
  $ 166     $ 146     $ 122  
                   
The increase in interest expense in 2009 was primarily due to the issuance of debt used for general corporate purposes, including the repayment of some of the Company’s outstanding commercial paper issued to finance the acquired business.
The increase in 2008 was primarily due to the issuance of debt in connection with the Great-West Healthcare acquisition.

 

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Capital Resources
The Company’s capital resources (primarily retained earnings and the proceeds from the issuance of debt and equity securities) provide protection for policyholders, furnish the financial strength to underwrite insurance risks and facilitate continued business growth.
Management, guided by regulatory requirements and rating agency capital guidelines, determines the amount of capital resources that the Company maintains. Management allocates resources to new long-term business commitments when returns, considering the risks, look promising and when the resources available to support existing business are adequate.
The Company prioritizes its use of capital resources to:
  provide capital necessary to support growth and maintain or improve the financial strength ratings of subsidiaries;
  consider acquisitions that are strategically and economically advantageous; and
  return capital to investors through share repurchase.
The availability of capital resources will be impacted by equity and credit market conditions. Extreme volatility in credit or equity market conditions may reduce the Company’s ability to issue debt or equity securities. Significant volatility and deterioration of the equity markets during 2008 resulted in reduced retained earnings and the capital available for growth, acquisitions, and share repurchase.
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 treasury locks. See Note 13 to the Consolidated Financial Statements for further information. Interest is payable on May 1 and November 1 of each year beginning November 1, 2009. The proceeds of this debt were used for general corporate purposes, including the repayment of some of the Company’s outstanding commercial paper. These Notes will mature on May 1, 2019.
On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate of 6.68% per year). The difference between the stated and effective interest rates primarily reflects the effect of treasury locks. 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 (8.5% Notes due 2019) or 40 basis points (6.35% Notes due 2018).
On March 14, 2008, the Company entered into a 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 December 31, 2009, the Company had $100 million in commercial paper outstanding, at a weighted average interest rate of 0.35% and remaining maturities ranging from 11 to 35 days.
In June 2007, the Company amended and restated its five-year committed revolving credit and letter of credit agreement for $1.75 billion, which permits up to $1.25 billion to be used for letters of credit. This agreement is diversified among 22 banks, with three banks each having 11% of the commitment and the other 21 banks having the remaining 67% of the commitment. The credit agreement includes options, which are subject to consent by the administrative agent and the committing banks, to increase the commitment amount up to $2.0 billion and to extend the term of the agreement. The Company entered into the agreement for general corporate purposes, including support for the issuance of commercial paper and to obtain statutory reserve credit for certain reinsurance arrangements. There was a $27 million letter of credit issued as of December 31, 2009.

 

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Liquidity and Capital Resources Outlook
At December 31, 2009, there was approximately $475 million in cash available at the parent company level. In 2010, the parent company’s debt service consists of scheduled interest payments of $168 million on outstanding long-term debt of $2.4 billion at December 31, 2009 and approximately $100 million of commercial paper that will mature over the next three months. There are no scheduled long-term debt repayments in 2010. The Company expects to either repay the commercial paper or refinance it either by issuing long-term debt or re-issuing commercial paper.
The Company funds its qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Pension Protection Act of 2006. For 2010, the Company expects minimum required contributions to be approximately $70 million. This amount could change based on final valuation amounts. In addition, the Company currently plans to make voluntary contributions of approximately $140 million during 2010. Based on its current funded status, the Company does not believe that the litigation matter discussed in Note 23 to the Consolidated Financial Statements would have an impact on 2010 funding requirements even if resolved in 2010. 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 Company’s subsidiaries, most of which are subject to regulatory restrictions and rating agency capital guidelines, and partially dependent on the availability of liquidity from the issuance of debt or equity securities.
The Company expects, based on current projections for cash activity, to have sufficient liquidity to meet its obligations.
However, the Company’s cash projections may not be realized and the demand for funds could exceed available cash if:
  ongoing businesses experience unexpected shortfalls in earnings;
 
  regulatory restrictions or rating agency capital guidelines reduce the amount of dividends available to be distributed to the parent company from the insurance and HMO subsidiaries (including the impact of equity market deterioration and volatility on subsidiary capital);
 
  significant disruption or volatility in the capital and credit markets reduces the Company’s ability to raise capital or creates unexpected losses related to the GMDB and GMIB businesses;
 
  a substantial increase in funding over current projections is required for the Company’s pension plan; or
 
  a substantial increase in funding is required for the Company’s GMDB equity hedge program.

 

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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 CGLIC without prior state approval. 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 December 31, 2009, the Company had an additional $1.5 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.
Though the Company believes it has adequate sources of liquidity, significant disruption or volatility in the capital and credit markets could affect the Company’s ability to access those markets for additional borrowings or increase costs associated with borrowing funds.
Solvency regulation. Many states have adopted some form of the National Association of Insurance Commissioners (“NAIC”) model solvency-related laws and risk-based capital rules (“RBC rules”) for life and health insurance companies. The RBC rules recommend a minimum level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities incurred. If the ratio of the insurer’s adjusted surplus to its risk-based capital falls below statutory required minimums, the insurer could be subject to regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. During 2009, the Company’s HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with applicable RBC and non-U.S. surplus rules.
Effective December 31, 2009 the Company’s principal life insurance subsidiary, CGLIC, implemented the NAIC’s Actuarial Guideline XLIII (also known as AG 43 or VACARVM), which is applicable to CGLIC’s statutory reserves for GMDB and GMIB contracts totaling $1.6 billion as of December 31, 2009. As provided under this guidance, CGLIC received approval from the State of Connecticut to grade-in the full effect of the guideline over a 3-year period. Accordingly, upon implementation at December 31, 2009, statutory surplus for CGLIC was reduced by $40 million. If the guidance had been fully implemented at December 31, 2009, statutory surplus would have been reduced by $110 million. Management does not anticipate that this implementation will have a material impact on the amount of dividends expected to be paid by CGLIC to the parent company in 2010. This implementation has no impact on measurement of the Company’s results of operations or financial condition as determined under GAAP.
Guarantees and Contractual Obligations
The Company is contingently liable for various contractual obligations entered into in the ordinary course of business. The maturities of the Company’s primary contractual cash obligations, as of December 31, 2009, are estimated to be as follows:
                                         
(In millions, on an           Less than 1     1-3     4-5     After 5  
undiscounted basis)   Total     year     years     years     years  
On-Balance Sheet:
                                       
Insurance liabilities:
                                       
Contractholder deposit funds
  $ 7,613     $ 667     $ 840     $ 769     $ 5,337  
Future policy benefits
    11,040       452       852       860       8,876  
Health Care medical claims payable
    921       914       7              
Unpaid claims and claims expenses
    4,315       1,292       941       606       1,476  
Short-term debt
    103       103                    
Long-term debt
    4,620       168       753       278       3,421  
Non-recourse obligations
    25       2       23              
Other long-term liabilities
    1,355       617       218       134       386  
Off-Balance Sheet:
                                       
Purchase obligations
    1,173       495       483       144       51  
Operating leases
    500       116       190       104       90  
 
                             
Total
  $ 31,665     $ 4,826     $ 4,307     $ 2,895     $ 19,637  
 
                             

 

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On-Balance Sheet:
  Insurance liabilities. Contractual cash obligations for insurance liabilities, excluding unearned premiums and fees, represent estimated net benefit payments for health, life and disability insurance policies and annuity contracts. Recorded contractholder deposit funds reflect current fund balances primarily from universal life customers. Contractual cash obligations for these universal life contracts are estimated by projecting future payments using assumptions for lapse, withdrawal and mortality. These projected future payments include estimated future interest crediting on current fund balances based on current investment yields less the estimated cost of insurance charges and mortality and administrative fees. Actual obligations in any single year will vary based on actual morbidity, mortality, lapse, withdrawal, investment and premium experience. The sum of the obligations presented above exceeds the corresponding insurance and contractholder liabilities of $15.3 billion recorded on the balance sheet because the recorded insurance liabilities reflect discounting for interest and the recorded contractholder liabilities exclude future interest crediting, charges and fees. The Company manages its investment portfolios to generate cash flows needed to satisfy contractual obligations. Any shortfall from expected investment yields could result in increases to recorded reserves and adversely impact results of operations. The amounts associated with the sold retirement benefits and individual life insurance and annuity businesses are excluded from the table above as net cash flows associated with them are not expected to impact the Company. The total amount of these reinsured reserves excluded is approximately $6.2 billion.
  Short-term debt represents commercial paper and current obligations under capital leases.
  Long-term debt includes scheduled interest payments. Capital leases are included in long-term debt and represent obligations for software licenses.
  Nonrecourse obligations represent principal and interest payments due which may be limited to the value of specified assets, such as real estate properties held directly or in joint ventures.
  Other long-term liabilities. These items are presented in accounts payable, accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets. This table includes estimated payments for GMIB contracts, pension and other postretirement and postemployment benefit obligations, supplemental and deferred compensation plans, interest rate and foreign currency swap contracts, and certain tax and reinsurance liabilities.
Estimated payments of $127 million for deferred compensation, non-qualified and International pension plans and other postretirement and postemployment benefit plans are expected to be paid in less than one year. The Company’s best estimate is that contributions to the qualified domestic pension plan during 2010 will be approximately $210 million. The Company expects to make payments subsequent to 2010 for these obligations, however subsequent payments have been excluded from the table as their timing is based on plan assumptions which may materially differ from actual activities (see Note 10 to the Consolidated Financial Statements for further information on pension and other postretirement benefit obligations).
The above table also does not contain $214 million of gross liabilities for uncertain tax positions because the Company cannot reasonably estimate the timing of their resolution with the respective taxing authorities. See Note 19 to the Consolidated Financial Statements for the year ended December 31, 2009 for further information.
Off-Balance Sheet:
  Purchase obligations. As of December 31, 2009, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:
         
(In millions)        
Fixed maturities
  $ 72  
Commercial mortgage loans
    41  
Real estate
    10  
Limited liability entities (other long-term investments)
    591  
 
     
Total investment commitments
    714  
Future service commitments
    459  
 
     
Total purchase obligations
  $ 1,173  
 
     

 

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The Company had commitments to invest in limited liability entities that hold real estate, loans to real estate entities or securities. See Note 12(C) to the Consolidated Financial Statements for additional information.
Future service commitments include an agreement with IBM for various information technology (IT) infrastructure services. The Company’s remaining commitment under this contract is approximately $376 million over the next four years. The Company has the ability to terminate this agreement with 90 days notice, subject to termination fees.
    The Company’s remaining estimated future service commitments primarily represent contracts for certain outsourced business processes and IT maintenance and support. The Company generally has the ability to terminate these agreements, but does not anticipate doing so at this time. Purchase obligations exclude contracts that are cancelable without penalty or those that do not specify minimum levels of goods or services to be purchased.
  Operating leases. For additional information, see Note 21 to the Consolidated Financial Statements.
Guarantees
The Company, through its subsidiaries, is contingently liable for various financial and other guarantees provided in the ordinary course of business. See Note 23 to the Consolidated Financial Statements for additional information on guarantees.
Share Repurchase
The Company maintains a share repurchase program, which was authorized by its Board of Directors. The decision to repurchase shares depends on market conditions and alternative uses of capital. The Company has, and may continue from time to time, to repurchase shares on the open market through a Rule 10b5-1 plan which permits a company to repurchase its shares at times when it otherwise might be precluded from doing so under insider trading laws or because of self-imposed trading blackout periods.
The Company did not repurchase any shares in 2009. In 2008 the Company repurchased 10.0 million shares for $378 million.
The total remaining share repurchase authorization as of February 25, 2010, was $449 million.
INVESTMENT ASSETS
The Company’s investment assets do not include separate account assets. Additional information regarding the Company’s investment assets and related accounting policies is included in Notes 2, 11, 12, 14 and 17 to the Consolidated Financial Statements.
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and privately placed debt securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor and trading securities. Fixed maturities and equity securities include hybrid securities. Fair values are based on quoted market prices when available. When market prices are not available, fair value is generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality. In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair value using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price.
The Company performs ongoing analyses on prices to conclude that they represent reasonable estimates of fair value. This process involves quantitative and qualitative analysis and is overseen by the Company’s investment professionals. This process also includes review of pricing methodologies, pricing statistics and trends and back testing recent trades.
The Company’s 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 December 31, 2009.

 

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(In millions)   2009     2008  
Federal government and agency
  $ 571     $ 762  
State and local government
    2,521       2,486  
Foreign government
    1,070       944  
Corporate
    8,585       6,856  
Federal agency mortgage-backed
    34       37  
Other mortgage-backed
    121       125  
Other asset-backed
    541       571  
 
           
Total
  $ 13,443     $ 11,781  
 
           
Other mortgage-backed assets consist principally of commercial mortgage-backed securities and collateralized mortgage obligations of which $37 million were residential mortgages and home equity lines of credit, all of which were originated using standard underwriting practices and are not considered sub-prime loans.
Quality ratings
As of December 31, 2009, $12.3 billion, or 92%, of the fixed maturities in the Company’s investment portfolio were investment grade (Baa and above, or equivalent), and the remaining $1.1 billion were below investment grade. Most of the bonds that are below investment grade are rated at the higher end of the non-investment grade spectrum.
Private placement investments are generally less marketable than publicly-traded bonds, but yields on these investments tend to be higher than yields on publicly-traded bonds with comparable credit risk. The fair value of private placement investments was $5.1 billion as of December 31, 2009 and $4.4 billion as of December 31, 2008. The Company maintains controls on its participation in private placement investments. In particular, the Company performs a credit analysis of each issuer, diversifies investments by industry and issuer and requires financial and other covenants that allow the Company to monitor issuers for deteriorating financial strength so the Company can take remedial actions, if warranted.
Because of the higher yields and the inherent risk associated with privately placed investments and below investment grade securities, gains or losses from such investments could affect future results of operations. However, since management matches the duration of assets to the duration of liabilities, it expects to hold a significant portion of these assets for the long term and therefore, does not expect such gains or losses to be material to the Company’s liquidity or financial condition.
The value of the Company’s fixed maturity portfolio increased $574 million in 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 $133 million as of December 31, 2009.
As of December 31, 2009, approximately 64% or $1,605 million of the Company’s total investments in state and local government securities of $2,521 million were guaranteed by monoline bond insurers. The quality ratings of these investments with and without this guaranteed support as of December 31, 2009 were as follows:
                     
        As of December 31, 2009  
        Fair Value  
        With     Without  
(In millions)   Quality Rating   Guarantee     Guarantee  
State and local governments
  Aaa   $ 61     $ 59  
 
  Aa1-Aa3     1,143       971  
 
  A1-A3     341       448  
 
  Baa1-Baa3     60       72  
 
  Not available           55  
 
               
Total state and local governments
      $ 1,605     $ 1,605  
 
               

 

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As of December 31, 2009, approximately 79% or $428 million of the Company’s total investments in other asset-backed securities of $541 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 December 31, 2009, the Company had no direct investments in monoline bond insurers. Guarantees provided by various monoline bond insurers for certain of the Company’s investments in state and local governments and other asset-backed securities as of December 31, 2009 were:
                     
(In millions)   Guarantor Quality           As of December 31, 2009  
Guarantor   Rating           Indirect Exposure  
AMBAC
  Caa2           $ 196  
MBIA, Inc.
  Baa1             1,204  
Financial Securities Assurance
  Aa3             594  
Financial Guaranty Insurance Co.
  Not rated             39  
 
                 
Total
              $ 2,033  
 
                 
The Company continues to underwrite investments in these securities focusing on the underlying issuer’s credit quality, without regard for guarantees. As such, this portfolio of state and local government securities, guaranteed by monoline bond insurers is of high quality with approximately 92% rated A3 or better without their guarantees.
Commercial Mortgage Loans
The Company’s commercial mortgage loans are made exclusively to commercial borrowers. These fixed rate loans are diversified by property type, location and borrower to reduce exposure to potential losses. Loans are secured by the related property and are generally made at less than 75% of the property’s value at origination of the loan. In addition to property value, the Company evaluates the quality of each commercial mortgage loan using “debt service coverage”, which is the ratio of the estimated cash flows from the property to the required loan payments (principal and interest).
The Company completed its annual in depth review of its commercial mortgage loan portfolio in the third quarter of 2009. This review included an analysis of each property’s financial statements as of December 31, 2008, rent rolls and operating plans and budgets for 2009, a physical inspection of the property and other pertinent factors. Based on each property’s value determined during this review, the portfolio’s average loan to value ratio increased from 64% as of December 31, 2008 to 77% at December 31, 2009, driven by an average decline in property values of 18% since completion of the previous review during the third quarter of 2008. This 18% decrease is less than reported declines in commercial real estate values of 20% to 30% from peak prices achieved in late 2006 and into early 2007 to real estate values estimated during the second quarter of 2009. This was driven by management’s decision to not fully reflect peak prices in prior valuations, along with declines in value recognized during the Company’s 2008 portfolio review. In 2009, overall debt service coverage for the portfolio of commercial mortgage loans was approximately 1.5, which was unchanged since the 2008 portfolio review.

 

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The following table reflects the commercial mortgage loan portfolio as of December 31, 2009 summarized by loan to value ratio based on the annual loan review completed in July, 2009.
                                 
Loan to Value Distribution  
    Amortized Cost        
Loan to Value Ratios   Senior     Subordinated     Total     % of Mortgage Loans  
Below 50%
  $ 199     $ 164     $ 363       10 %
50% to 59%
    309             309       9 %
60% to 69%
    383       37       420       12 %
70% to 79%
    524       72       596       17 %
80% to 89%
    838       47       885       25 %
90% to 99%
    666       17       683       19 %
100% or above
    251       15       266       8 %
 
                       
Totals
  $ 3,170     $ 352     $ 3,522       100 %
 
                       
As summarized above, $352 million or 10% of the commercial mortgage loan portfolio is comprised of subordinated notes and loans, including $319 million of loans secured by first mortgages, which were fully underwritten and originated by the Company using its standard underwriting procedures. Senior interests in these first mortgage loans were then sold to other institutional investors. This strategy allowed the Company to effectively utilize its origination capabilities to underwrite high quality loans with strong borrower sponsorship, limit individual loan exposures, and achieve attractive risk adjusted yields. In the event of a default, the Company would pursue remedies up to and including foreclosure jointly with the holders of the senior interests, but would receive repayment only after satisfaction of the senior interest.
There are seven loans where the aggregate carrying value of the mortgage loans exceeds the value of the underlying properties by $16 million. Five of these loans have current debt service coverage of 1.0 or greater and two with debt service coverage below 1.0 have other mitigating factors including strong borrower sponsorship.
Although the property value declines increased the portfolio loan to value ratios, all but four of the approximately 180 loans that comprise the Company’s total mortgage loan portfolio continue to perform under their contractual terms, and the actual aggregate default rate is 3.6%. Given the quality and diversity of the underlying real estate, positive debt service coverage, significant borrower cash investment averaging nearly 30%, and only $201 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.
Commercial real estate fundamentals and values continued to decline in 2009 after completion of the portfolio review in the third quarter. While the vast majority of loans in the Company’s portfolio have positive debt service coverage of at least 1.0, the Company expects declines in debt service coverage to reflect further deterioration in fundamentals (higher vacancy rates and lower rental rates) resulting from ongoing weak economic conditions. Management’s current view is that property values have fallen by approximately 10% on average from values estimated as part of the third quarter 2009 portfolio review. However, the value of well located, well leased, institutional quality real estate appears to be stabilizing. See Critical Accounting Estimates beginning on page 55 of this Form 10-K for more information on the effect of declines in property values on commercial mortgage loans.
Other Long-term Investments
The Company’s other long-term investments include $561 million in private equity and real estate funds as well as direct investments in real estate joint ventures. The funds typically invest in mezzanine debt or equity of privately held companies and equity real estate. 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 60 separate partnerships, and approximately 35 general partners who manage one or more of these partnerships. Also, the funds’ underlying investments are diversified by industry sector, property type, and geographic region. No single partnership investment exceeds 8% of the Company’s private equity and real estate partnership portfolio. Given the current economic environment, future impairments are possible; however, management does not expect those losses to have a material effect on the Company’s financial condition.

 

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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. The characteristics management considers include, but are not limited to, the following:
  request from the borrower for restructuring;
  principal or interest payments past due by more than 30 but fewer than 60 days;
  downgrade in credit rating;
  collateral losses on asset-backed securities; and
  for commercial mortgages, deterioration of debt service coverage below 1.0 or value declines resulting in estimated loan-to-value ratios increasing to 100% or more.
The Company recognizes interest income on problem bonds and commercial mortgage loans only when payment is actually received because of the risk profile of the underlying investment. The 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 2009 or 2008.
The following table shows problem and potential problem investments at amortized cost, net of valuation reserves and write-downs:
                                                 
    December 31, 2009     December 31, 2008  
(In millions)   Gross     Reserve     Net     Gross     Reserve     Net  
Problem bonds
  $ 103     $ (49 )   $ 54     $ 94     $ (59 )   $ 35  
Problem commercial mortgage loans
    169       (11 )     158                    
Foreclosed real estate
    59             59                    
 
                                   
Total problem investments
  $ 331     $ (60 )   $ 271     $ 94     $ (59 )   $ 35  
 
                                   
 
                                               
Potential problem bonds
  $ 94     $ (10 )   $ 84     $ 140     $ (14 )   $ 126  
Potential problem commercial mortgage loans
    245       (6 )     239       92             92  
 
                                   
Total potential problem investments
  $ 339     $ (16 )   $ 323     $ 232     $ (14 )   $ 218  
 
                                   
Net problem investments represent 1.5% of total investments excluding policy loans. Net problem investments increased $236 million during 2009 primarily reflecting deterioration on six commercial mortgage loans totaling $217 million, one of which is held as foreclosed real estate.
Net potential problem investments represent 1.8% of total investments excluding policy loans. Net potential problem investments increased $105 million during 2009 primarily reflecting the addition of nine loans totaling $169 million to the potential problem loan list that were exhibiting signs of distress such as an elevated loan to value ratio or a low or negative debt service coverage. These loans were all performing according to their original contractual terms as of December 31, 2009 and although they are showing signs of distress, most of these loans are adequately collateralized. These additional nine loans were added to potential problem investments as a result of management’s in-depth commercial mortgage loan portfolio review completed in the third quarter of 2009.

 

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Commercial mortgage loans are considered impaired when it is probable that the Company will not collect amounts due according to the terms of the original loan agreement. Problem and potential problem commercial mortgage loans totaling $222 million, presented in the above table, are considered impaired. During 2009, the Company recorded a $17 million pre-tax ($11 million after-tax) increase to valuation reserves on impaired commercial mortgage loans. See Note 12 to the Consolidated Financial Statements and the Critical Accounting Estimates section of the MD&A beginning on page 55 of this Form 10-K for additional information regarding impaired commercial mortgage loans.
Summary
The Company recorded after-tax realized investment losses for investment asset write-downs and changes in valuation reserves as follows:
                 
(In millions)   2009     2008  
Credit-related (1)
  $ 61     $ 44  
Other (2)
    8       97  
 
           
Total (3)
  $ 69     $ 141  
 
           
     
(1)   Credit-related losses include other-than-temporary declines in value of fixed maturities and equity securities, and impairments of commercial mortgage loans and real estate entities. The amount related to credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income was not significant.
 
(2)   Prior to adoption of new GAAP guidance for other-than-temporary impairments on April 1, 2009, Other primarily represented the impact of rising market yields on investments where the Company could not demonstrate the intent and ability to hold until recovery.
 
(3)   Includes other-than-temporary impairments on debt securities of $31 million in 2009, $138 million in 2008 and $20 million in 2007. These impairments are included in both the credit related and other categories above.
The financial markets experienced a significant improvement during 2009. Both investment grade and below investment grade corporate credit indices reported significantly lower credit spreads and the S&P 500 posted a return of approximately 25% during this period. While credit spreads tightened in 2009 and asset values increased significantly, substantial uncertainty remains concerning the economic environment. As a result of this economic environment, risks in the Company’s investment portfolio remain elevated.
Continued economic weakness for an extended period could cause default rates to increase and recoveries to decline resulting in additional impairment losses for the Company. Future realized and unrealized investment results will be impacted largely by market conditions that exist when a transaction occurs or at the reporting date. These future conditions are not reasonably predictable. Management believes that the vast majority of the Company’s fixed maturity investments will continue to perform under their contractual terms, and that declines in their fair values below carrying value are temporary. Based on the strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, the Company expects to hold a significant portion of these assets for the long term. Therefore, future credit-related losses are not expected to have a material adverse effect on the Company’s liquidity or financial condition.
While management believes the commercial mortgage loan portfolio is positioned to perform well due to the solid aggregate loan to value ratio, strong debt service coverage and minimal underwater position, the commercial real estate market continues to exhibit significant signs of distress and if these conditions remain for an extended period or worsen substantially, it could result in an increase in problem and potential problem loans. Given the current economic environment, future impairments are possible; however, management does not expect those losses to have a material effect on the Company’s financial condition.

 

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MARKET RISK
Financial Instruments
The Company’s assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. The Company’s primary market risk exposures are:
  Interest-rate risk on fixed-rate, domestic, medium-term instruments. Changes in market interest rates affect the value of instruments that promise a fixed return and impact the value of liabilities for reinsured GMDB and GMIB contracts.
  Foreign currency exchange rate risk of the U.S. dollar primarily to the South Korean won, Taiwan dollar, euro, British pound, New Zealand dollar, and Hong Kong dollar. An unfavorable change in exchange rates reduces the carrying value of net assets denominated in foreign currencies.
  Equity price risk for domestic equity securities and for the value of reinsured GMDB and GMIB contracts resulting from unfavorable changes in variable annuity account values based on underlying mutual fund investments.
For further discussion of reinsured contracts, see Note 7 for GMDB contracts and Note 11 for GMIB contracts in the Consolidated Financial Statements.
The Company’s Management of Market Risks
The Company predominantly relies on three techniques to manage its exposure to market risk:
  Investment/liability matching. The Company generally selects investment assets with characteristics (such as duration, yield, currency and liquidity) that correspond to the underlying characteristics of its related insurance and contractholder liabilities so that the Company can match the investments to its obligations. Shorter-term investments support generally shorter-term life and health liabilities. Medium-term, fixed-rate investments support interest-sensitive and health liabilities. Longer-term investments generally support products with longer pay out periods such as annuities and long-term disability liabilities.
  Use of local currencies for foreign operations . The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies. While this technique does not reduce the Company’s foreign currency exposure of its net assets, it substantially limits exchange rate risk to those net assets.
  Use of derivatives. The Company generally uses derivative financial instruments to minimize certain market risks and, from time to time, to enhance investment returns.
See Notes 2(C) and 13 to the Consolidated Financial Statements for additional information about financial instruments, including derivative financial instruments.
Effect of Market Fluctuations on the Company
The examples that follow illustrate the effect of hypothetical changes in market rates or prices on the fair value of certain financial instruments including:
  hypothetical changes in market interest rates, primarily for fixed maturities and commercial mortgage loans, partially offset by liabilities for long-term debt and GMIB contracts;
  hypothetical changes in market rates for foreign currencies, primarily for the net assets of foreign subsidiaries denominated in a foreign currency; and
  hypothetical changes in market prices for equity exposures, primarily for equity securities and GMIB contracts.
In addition, hypothetical effects of changes in equity indices and foreign exchange rates are presented separately for futures contracts used in the GMDB equity hedge program.

 

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Management believes that actual results could differ materially from these examples because:
  these examples were developed using estimates and assumptions;
  changes in the fair values of all insurance-related assets and liabilities have been excluded because their primary risks are insurance rather than market risk;
  changes in the fair values of investments recorded using the equity method of accounting and liabilities for pension and other postretirement and postemployment benefit plans (and related assets) have been excluded, consistent with the disclosure guidance; and
  changes in the fair values of other significant assets and liabilities such as goodwill, deferred policy acquisition costs, taxes, and various accrued liabilities have been excluded; because they are not financial instruments, their primary risks are other than market risk.
The effects of hypothetical changes in market rates or prices on the fair values of certain of the Company’s financial instruments, subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as of December 31:
                     
Market scenario for          
certain non-insurance   Loss in fair value  
financial instruments (in millions)   2009     2008  
100 basis point increase in interest rates
  $ 700     $ 700  
10% strengthening in U.S. dollar to foreign currencies
  $ 190     $ 160  
10% decrease in market prices for equity exposures
  $ 50     $ 50  
The Company’s foreign operations hold investment assets, such as fixed maturities, that are generally invested in the currency of the related liabilities. Due to the increase in the fair value of these investments in 2009, which are primarily denominated in the South Korean won, the effect of a hypothetical 10% strengthening in U.S. dollar to foreign currencies at December 31, 2009 was greater than that effect at December 31, 2008.
The effect of a hypothetical increase in interest rates was determined by estimating the present value of future cash flows using various models, primarily duration modeling and, for GMIB contracts, stochastic modeling. The effect of a hypothetical strengthening of the U.S. dollar relative to the foreign currencies held by the Company was estimated to be 10% of the U.S. dollar equivalent fair value. The effect of a hypothetical decrease in the market prices of equity exposures was estimated based on a 10% decrease in the equity mutual fund values underlying guaranteed minimum income benefits reinsured by the Company and a 10% decrease in the value of equity securities held by the Company. See Note 11 to the Consolidated Financial Statements for additional information.
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 $100 million in the fair value of the futures contracts outstanding under this program as of December 31, 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.
As noted above, the Company manages its exposures to market risk by matching investment characteristics to its obligations.
Stock Market Performance
The performance of equity markets can have a significant effect on the Company’s businesses, including on:
  risks and exposures associated with GMDB (see Note 7 to the Consolidated Financial Statements) and GMIB contracts (see Note 11 to the Consolidated Financial Statements); and
  pension liabilities since equity securities comprise a significant portion of the assets of the Company’s employee pension plans.

 

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CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CIGNA Corporation and its subsidiaries (the “Company”) and its representatives may from time to time make written and oral forward-looking statements, including statements contained in press releases, in the Company’s filings with the Securities and Exchange Commission, in its reports to shareholders and in meetings with analysts and investors. Forward-looking statements may contain information about financial prospects, economic conditions, trends and other uncertainties. These forward-looking statements are based on management’s beliefs and assumptions and on information available to management at the time the statements are or were made. Forward-looking statements include but are not limited to the information concerning possible or assumed future business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, trends and, in particular, the Company’s productivity initiatives, litigation and other legal matters, operational improvement initiatives in the health care operations, and the outlook for the Company’s results for full year 2010 and beyond. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe”, “expect”, “plan”, “intend”, “anticipate”, “estimate”, “predict”, “potential”, “may”, “should” or similar expressions.
You should not place undue reliance on these forward-looking statements. The Company cautions that actual results could differ materially from those that management expects, depending on the outcome of certain factors. Some factors that could cause actual results to differ materially from the forward-looking statements include:
  1.   increased medical costs that are higher than anticipated in establishing premium rates in the Company’s health care operations, including increased use and costs of medical services;
 
  2.   increased medical, administrative, technology or other costs resulting from new legislative and regulatory requirements imposed on the Company’s employee benefits businesses;
 
  3.   challenges and risks associated with implementing operational improvement initiatives and strategic actions in the ongoing operations of the businesses, including those related to: (i) growth in targeted geographies, product lines, buying segments and distribution channels, (ii) offering products that meet emerging market needs, (iii) strengthening underwriting and pricing effectiveness, (iv) strengthening medical cost and medical membership results, (v) delivering quality member and provider service using effective technology solutions, (vi) lowering administrative costs and (vii) transitioning to an integrated operating company model, including operating efficiencies related to the transition;
 
  4.   risks associated with pending and potential state and federal class action lawsuits, disputes regarding reinsurance arrangements, other litigation and regulatory actions challenging the Company’s businesses, including disputes related to payments to providers, government investigations and proceedings, and tax audits and related litigation;
 
  5.   heightened competition, particularly price competition, which could reduce product margins and constrain growth in the Company’s businesses, primarily the Health Care business;
 
  6.   risks associated with the Company’s mail order pharmacy business which, among other things, includes any potential operational deficiencies or service issues as well as loss or suspension of state pharmacy licenses;
 
  7.   significant changes in interest rates and deterioration in the loan to value ratios of commercial real estate investments for a sustained period of time;
 
  8.   downgrades in the financial strength ratings of the Company’s insurance subsidiaries, which could, among other things, adversely affect new sales and retention of current business as well as the downgrade in the financial strength ratings of reinsurers which could result in increased statutory reserve or capital requirements;
 
  9.   limitations on the ability of the Company’s insurance subsidiaries to dividend capital to the parent company as a result of downgrades in the subsidiaries’ financial strength ratings, changes in statutory reserve or capital requirements or other financial constraints;
 
  10.   the inability of the hedge program adopted by the Company to substantially reduce equity market risks for reinsurance contracts that guarantee minimum death benefits under certain variable annuities (including possible market difficulties in entering into appropriate futures contracts and in matching such contracts to the underlying equity risk);
 
  11.   adjustments to the reserve assumptions (including lapse, partial surrender, mortality, interest rates and volatility) used in estimating the Company’s liabilities for reinsurance contracts covering guaranteed minimum death benefits under certain variable annuities;
 
  12.   adjustments to the assumptions (including annuity election rates and amounts collectible from reinsurers) used in estimating the Company’s assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits under certain variable annuities;
 
  13.   significant stock market declines, which could, among other things, result in increased expenses for guaranteed minimum income benefit contracts, guaranteed minimum death benefit contracts and the Company’s pension plan in future periods as well as the recognition of additional pension obligations;
 
  14.   unfavorable claims experience related to workers’ compensation and personal accident exposures of the run-off reinsurance business, including losses attributable to the inability to recover claims from retrocessionaires;

 

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  15.   significant deterioration in economic conditions and significant market volatility, which could have an adverse effect on the Company’s operations, investments, liquidity and access to capital markets;
 
  16.   significant deterioration in economic conditions and significant market volatility, which could have an adverse effect on the businesses of our customers (including the amount and type of healthcare services provided to their 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 (including health care reform legislation that could include, among other items, a broad based public sector alternative and/or alternative assessments and tax increases specific to the Company’s industry), which could increase cost and affect the market for the Company’s 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 Company’s covered medical and disability expenses, pharmacy costs and mortality experience to rise significantly, and cause operational disruption, depending on the severity of the event and number of individuals affected;
 
  19.   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 Company’s 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 Healthcare’s outsourcing projects and leveraging the Company’s capabilities and those of the businesses acquired from Great-West to further enhance the combined organization’s network access position, underwriting effectiveness, delivery of quality member and provider service, and increased penetration of its membership base with differentiated product offerings.
This list of important factors is not intended to be exhaustive. Other sections of the Form 10-K, including the “Risk Factors” section, 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.

 

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Management’s Annual Report on Internal Control over Financial Reporting
Management of CIGNA Corporation (“the Company”) is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s internal controls were designed to provide reasonable assurance to the Company’s Management and Board of Directors that the Company’s consolidated published financial statements for external purposes were prepared in accordance with generally accepted accounting principles. The Company’s internal controls over financial reporting include those policies and procedures that:
  (i)   pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets and liabilities of the Company;
  (ii)   provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
  (iii)   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2009. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on Management’s assessment and the criteria set forth by COSO, it was determined that the Company’s internal controls over financial reporting are effective as of December 31, 2009.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers, has audited the effectiveness of the Company’s internal control over financial reporting, as stated in their report located on page 168 in this Form 10-K.

 

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Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption “Market Risk” in the MD&A section of this Form 10-K is incorporated by reference.

 

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Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CIGNA Corporation
Consolidated Statements of Income
                         
(In millions, except per share amounts)                  
For the years ended December 31,   2009     2008     2007  
Revenues
                       
Premiums and fees
  $ 16,041     $ 16,253     $ 15,008  
Net investment income
    1,014       1,063       1,114  
Mail order pharmacy revenues
    1,282       1,204       1,118  
Other revenues
    120       751       368  
Realized investment gains (losses)
                       
Other-than-temporary impairments on debt securities, net
    (47 )     (213 )     (31 )
Other realized investment gains
    4       43       47  
 
                 
Total realized investment gains (losses)
    (43 )     (170 )     16  
 
                 
Total revenues
    18,414       19,101       17,624  
 
                 
Benefits and Expenses
                       
Health Care medical claims expense
    6,927       7,252       6,798  
Other benefit expenses
    3,407       4,285       3,401  
Mail order pharmacy cost of goods sold
    1,036       961       904  
Guaranteed minimum income benefits (income) expense
    (304 )     690       147  
Other operating expenses
    5,450       5,531       4,740  
 
                 
Total benefits and expenses
    16,516       18,719       15,990  
 
                 
Income from Continuing Operations before Income Taxes
    1,898       382       1,634  
 
                 
Income taxes (benefits):
                       
Current
    275       313       511  
Deferred
    319       (221 )      
 
                 
Total taxes
    594       92       511  
 
                 
Income from Continuing Operations
    1,304       290       1,123  
Income (Loss) from Discontinued Operations, Net of Taxes
    1       4       (5 )
 
                 
Net Income
    1,305       294       1,118  
Less: Net Income Attributable to Noncontrolling Interest
    3       2       3  
 
                 
Shareholders’ Net Income
  $ 1,302     $ 292     $ 1,115  
 
                 
Basic Earnings Per Share:
                       
Shareholders’ income from continuing operations
  $ 4.75     $ 1.04     $ 3.91  
Shareholders’ income (loss) from discontinued operations
          0.01       (0.02 )
 
                 
Shareholders’ net income
  $ 4.75     $ 1.05     $ 3.89  
 
                 
Diluted Earnings Per Share:
                       
Shareholders’ income from continuing operations
  $ 4.73     $ 1.03     $ 3.86  
Shareholders’ income (loss) from discontinued operations
          0.02       (0.02 )
 
                 
Shareholders’ net income
  $ 4.73     $ 1.05     $ 3.84  
 
                 
 
                       
Dividends Declared Per Share
  $ 0.04     $ 0.04     $ 0.04  
 
                 
 
                       
Amounts Attributable to CIGNA:
                       
Shareholders’ income from continuing operations
  $ 1,301     $ 288     $ 1,120  
Shareholders’ income (loss) from discontinued operations
    1       4       (5 )
 
                 
Shareholders’ Net Income
  $ 1,302     $ 292     $ 1,115  
 
                 
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

 

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CIGNA Corporation
Consolidated Balance Sheets
                                 
(In millions, except per share amounts)            
As of December 31,   2009     2008  
Assets
                               
Investments:
                               
Fixed maturities, at fair value (amortized cost, $12,580; $11,492)
          $ 13,443             $ 11,781  
Equity securities, at fair value (cost, $137; $140)
            113               112  
Commercial mortgage loans
            3,522               3,617  
Policy loans
            1,549               1,556  
Real estate
            124               53  
Other long-term investments
            595               632  
Short-term investments
            493               236  
 
                           
Total investments
            19,839               17,987  
Cash and cash equivalents
            924               1,342  
Accrued investment income
            238               225  
Premiums, accounts and notes receivable, net
            1,361               1,407  
Reinsurance recoverables
            6,597               6,973  
Deferred policy acquisition costs
            943               789  
Property and equipment
            862               804  
Deferred income taxes, net
            1,029               1,617  
Goodwill
            2,876               2,878  
Other assets, including other intangibles
            1,056               1,520  
Separate account assets
            7,288               5,864  
 
                           
Total assets
          $ 43,013             $ 41,406  
 
                           
Liabilities
                               
Contractholder deposit funds
          $ 8,484             $ 8,539  
Future policy benefits
            8,136               8,754  
Unpaid claims and claim expenses
            3,968               4,037  
Health Care medical claims payable
            921               924  
Unearned premiums and fees
            427               414  
 
                           
Total insurance and contractholder liabilities
            21,936               22,668  
Accounts payable, accrued expenses and other liabilities
            5,797               6,869  
Short-term debt
            104               301  
Long-term debt
            2,436               2,090  
Nonrecourse obligations
            23               16  
Separate account liabilities
            7,288               5,864  
 
                           
Total liabilities
            37,584               37,808  
 
                           
Contingencies — Note 23
                               
Shareholders’ Equity
                               
Common stock (par value per share, $0.25; shares issued, 351)
            88               88  
Additional paid-in capital
            2,514               2,502  
Net unrealized appreciation (depreciation), fixed maturities
  $ 378             $ (147 )        
Net unrealized appreciation, equity securities
    4               7          
Net unrealized depreciation, derivatives
    (30 )             (13 )        
Net translation of foreign currencies
    (12 )             (60 )        
Postretirement benefits liability adjustment
    (958 )             (861 )        
 
                           
Accumulated other comprehensive loss
            (618 )             (1,074 )
Retained earnings
            8,625               7,374  
Less treasury stock, at cost
            (5,192 )             (5,298 )
 
                           
Total shareholders’ equity
            5,417               3,592  
Noncontrolling interest
            12               6  
 
                           
Total equity
            5,429               3,598  
 
                           
Total liabilities and equity
          $ 43,013             $ 41,406  
 
                           
Shareholders’ Equity Per Share
          $ 19.75             $ 13.25  
 
                           
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

 

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CIGNA Corporation
Consolidated Statements of Comprehensive Income
and Changes in Total Equity
                                                 
    2009     2008     2007  
    Compre-             Compre-             Compre-        
(In millions, except per share amounts)   hensive     Total     hensive     Total     hensive     Total  
For the years ended December 31,   Income     Equity     Income     Equity     Income     Equity  
Common Stock, beginning of year
          $ 88             $ 88             $ 40  
Effect of issuance of stock for stock split
                                        48  
 
                                   
Common Stock, end of year
            88               88               88  
 
                                   
Additional Paid-In Capital, beginning of year
            2,502               2,474               2,451  
Effect of issuance of stock for stock split
                                        (48 )
Effect of issuance of stock for employee benefit plans
            12               28               71  
 
                                   
Additional Paid-In Capital, end of year
            2,514               2,502               2,474  
 
                                   
Accumulated Other Comprehensive Income (Loss), beginning of year
            (1,074 )             51               (169 )
Implementation effect of updated guidance on other-than-temporary impairments (see Note 2)
            (18 )                            
Implementation effect of updated guidance on certain hybrid financial instruments (See Note 2)
                                        (12 )
Net unrealized appreciation (depreciation), fixed maturities
  $ 543       543     $ (287 )     (287 )   $ (47 )     (47 )
Net unrealized depreciation, equity securities
    (3 )     (3 )                 (3 )     (3 )
 
                                         
Net unrealized appreciation (depreciation) on securities
    540               (287 )             (50 )        
Net unrealized appreciation (depreciation), derivatives
    (17 )     (17 )     6       6       (4 )     (4 )
Net translation of foreign currencies
    48       48       (121 )     (121 )     28       28  
Postretirement benefits liability adjustment
    (97 )     (97 )     (723 )     (723 )     258       258  
 
                                         
Other comprehensive income (loss)
    474               (1,125 )             232          
 
                                   
 
                                               
Accumulated Other Comprehensive Income (Loss), end of year
            (618 )             (1,074 )             51  
 
                                   
Retained Earnings, beginning of year
            7,374               7,113               6,177  
Implementation effect of updated guidance on other-than-temporary impairments (See Note 2)
            18                              
Implementation effect of updated guidance on certain hybrid financial instruments (See Note 2)
                                        12  
Implementation effect of updated guidance on uncertain tax positions (See Note 2)
                                        (29 )
Shareholders’ net income
    1,302       1,302       292       292       1,115       1,115  
Effect of issuance of stock for employee benefit plans
            (58 )             (20 )             (151 )
Common dividends declared (per share: $0.04; $0.04; $0.04)
            (11 )             (11 )             (11 )
 
                                   
Retained Earnings, end of year
            8,625               7,374               7,113  
 
                                   
Treasury Stock, beginning of year
            (5,298 )             (4,978 )             (4,169 )
Repurchase of common stock
                          (378 )             (1,158 )
Other, primarily issuance of treasury stock for employee benefit plans
            106               58               349  
 
                                   
Treasury Stock, end of year
            (5,192 )             (5,298 )             (4,978 )
 
                                   
Shareholders’ Comprehensive Income (Loss) and Shareholders’ Equity
    1,776       5,417       (833 )     3,592       1,347       4,748  
 
                                   
Noncontrolling interest, beginning of year
            6               6               3  
Net income attributable to noncontrolling interest
    3       3       2       2       3       3  
Accumulated other comprehensive income attributable to noncontrolling interest
    3       3       (2 )     (2 )            
 
                                   
Noncontrolling interest, end of year
    6       12             6       3       6  
 
                                   
Total Comprehensive Income and Total Equity
  $ 1,782     $ 5,429     $ (833 )   $ 3,598     $ 1,350     $ 4,754  
 
                                   
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

 

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CIGNA Corporation
Consolidated Statements of Cash Flows
                         
(In millions)                  
For the years ended December 31,   2009     2008     2007  
Cash Flows from Operating Activities
                       
Net income
  $ 1,305     $ 294     $ 1,118  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
(Income) loss from discontinued operations
    (1 )     (4 )     5  
Insurance liabilities
    (357 )     485       (24 )
Reinsurance recoverables
    30       63       159  
Deferred policy acquisition costs
    (109 )     (74 )     (106 )
Premiums, accounts and notes receivable
    49       219       47  
Other assets
    452       (860 )     (134 )
Accounts payable, accrued expenses and other liabilities
    (1,321 )     1,466       150  
Current income taxes
    55       (72 )     10  
Deferred income taxes
    319       (221 )      
Realized investment (gains) losses
    43       170       (16 )
Depreciation and amortization
    268       244       194  
Gains on sales of businesses (excluding discontinued operations)
    (32 )     (38 )     (47 )
Mortgage loans originated and held for sale
                (80 )
Proceeds from sales of mortgage loans held for sale
    1       1       76  
Other, net
    43       (17 )     (10 )
 
                 
Net cash provided by operating activities
    745       1,656       1,342  
 
                 
Cash Flows from Investing Activities
                       
Proceeds from investments sold:
                       
Fixed maturities
    927       1,459       1,012  
Equity securities
    22       6       28  
Commercial mortgage loans
    61       48       1,293  
Other (primarily short-term and other long-term investments)
    910       492       260  
Investment maturities and repayments:
                       
Fixed maturities
    1,100       872       973  
Commercial mortgage loans
    94       98       123  
Investments purchased:
                       
Fixed maturities
    (2,916 )     (2,681 )     (2,150 )
Equity securities
    (14 )     (18 )     (27 )
Commercial mortgage loans
    (175 )     (488 )     (693 )
Other (primarily short-term and other long-term investments)
    (1,187 )     (776 )     (394 )
Property and equipment sales
                82  
Property and equipment purchases
    (307 )     (257 )     (262 )
Acquisition of Great-West Healthcare, net of cash acquired
          (1,319 )      
Cash provided by investing activities of discontinued operations
                70  
Other (primarily other acquisitions/dispositions)
          (8 )     (46 )
 
                 
Net cash provided by (used in) investing activities
    (1,485 )     (2,572 )     269  
 
                 
Cash Flows from Financing Activities
                       
Deposits and interest credited to contractholder deposit funds
    1,312       1,305       1,175  
Withdrawals and benefit payments from contractholder deposit funds
    (1,223 )     (1,214 )     (1,368 )
Change in cash overdraft position
    53       (17 )     (20 )
Net change in short-term debt
    (199 )     298        
Net proceeds on issuance of long-term debt
    346       297       498  
Repayment of long-term debt
    (1 )           (378 )
Repurchase of common stock
          (378 )     (1,185 )
Issuance of common stock
    30       37       248  
Common dividends paid
    (11 )     (14 )     (11 )
 
                 
Net cash provided by (used in) financing activities
    307       314       (1,041 )
 
                 
Effect of foreign currency rate changes on cash and cash equivalents
    15       (26 )     8  
 
                 
Net increase (decrease) in cash and cash equivalents
    (418 )     (628 )     578  
Cash and cash equivalents, beginning of year
    1,342       1,970       1,392  
 
                 
Cash and cash equivalents, end of year
  $ 924     $ 1,342     $ 1,970  
 
                 
Supplemental Disclosure of Cash Information:
                       
Income taxes paid, net of refunds
  $ 220     $ 366     $ 455  
Interest paid
  $ 158     $ 140     $ 122  
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

 

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Notes to the Consolidated Financial Statements
Note 1 — Description of Business
CIGNA Corporation together with its subsidiaries (referred to collectively as “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, including health care products and services such as medical coverages, pharmacy, behavioral health, dental benefits, and disease management; group disability, life and accident insurance; and disability and workers’ compensation case management and related services. In addition, the Company has an international operation that offers life, accident and supplemental health insurance products and 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 operation.
Note 2 — Summary of Significant Accounting Policies
A.  Basis of Presentation
The consolidated financial statements include the accounts of CIGNA Corporation, its significant subsidiaries, and variable interest entities for which the Company has determined it is the primary beneficiary. 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”). Amounts recorded in the consolidated financial statements reflect management’s estimates and assumptions about medical costs, investment valuation, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates.
In preparing these consolidated financial statements, the Company has evaluated events that occurred between the balance sheet date and February 25, 2010.
Certain reclassifications 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.
Discontinued operations. Summarized financial data for discontinued operations in 2009 primarily represents a tax benefit from a past divestiture resolved at the completion of the 2005 and 2006 IRS examinations.
Discontinued operations for 2008 primarily represents an after-tax gain of $3 million from the settlement of certain issues related to a past divestiture.
Discontinued operations for 2007 primarily reflects:
  impairment losses related to the dispositions of several Latin American insurance operations as discussed in Note 3; and
  realized gains on the disposition of certain directly-owned real estate investments as discussed in Note 14.
Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations .
                         
(In millions)   2009     2008     2007  
Income before income (taxes) benefits
  $     $ 3     $ 25  
Income (taxes) benefits
    1       1       (7 )
 
                 
Income from operations
    1       4       18  
Impairment loss, net of tax
                (23 )
 
                 
Income (loss) from discontinued operations, net of taxes
  $ 1     $ 4     $ (5 )
 
                 
Variable interest entities. As of December 31, 2009 and 2008 the Company determined it was not a primary beneficiary in any variable interest entities.

 

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B.  Recent Accounting Pronouncements
Accounting Standards Codification. The Financial Accounting Standards Board (“FASB”) has established the Accounting Standards Codification (“Codification” or “ASC”) as the single source of authoritative accounting guidance effective for financial reporting in 2009. Therefore, the Company has used the Codification section or description when referring to GAAP.
Other-than-temporary impairments. On April 1, 2009, the Company adopted the FASB’s updated guidance for evaluating whether an impairment is other than temporary for fixed maturities with declines in fair value below amortized cost (ASC 320). It requires assessing the Company’s intent to sell or whether it is more likely than not that the Company will be required to sell such fixed maturities before their fair values recover. If so, an impairment loss is recognized in net income for the excess of the amortized cost over fair value. The Company must also determine if it does not expect to recover the amortized cost of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell these fixed maturities). In this case, the credit portion of the impairment loss is recognized in net income and the non-credit portion of an impairment loss is recognized in a separate component of shareholders’ equity. A reclassification adjustment from retained earnings to accumulated other comprehensive income was required for previously impaired fixed maturities that have a non-credit loss as of the date of adoption, net of related tax effects.
The cumulative effect of adoption increased the Company’s retained earnings with an offsetting decrease to accumulated other comprehensive income of $18 million, with no overall change to shareholders’ equity. See Note 12 for information on the Company’s other-than-temporary impairments including additional required disclosures.
Noncontrolling interests in subsidiaries. Effective January 1, 2009, the Company adopted the FASB’s updated guidance on accounting for noncontrolling interests (ASC 810) through retroactive restatement of prior financial statements and reclassified $3 million of noncontrolling interest as of January 1, 2007 from Accounts payable, accrued expenses and other liabilities to Noncontrolling interest in total equity. In addition, net income attributable to the noncontrolling interest of $2 million in 2008 and $3 million in 2007 has been reclassified to be included in net income, with a reduction to net income to determine net income attributable to the Company’s shareholders (“shareholders’ net income”).
Earnings per share. Effective January 1, 2009, the Company adopted the FASB’s updated earnings per share guidance (ASC 260) for determining participating securities that requires unvested restricted stock awards containing rights to nonforfeitable dividends to be included in the denominator of both basic and diluted earnings per share (“EPS”) calculations. Prior period EPS data have been restated to reflect the adoption of this guidance. See Note 4 for the effects of this guidance on previously reported EPS amounts.
Business combinations. Effective January 1, 2009, the Company adopted the FASB’s guidance on accounting for business combinations (ASC 805) that requires fair value measurements for all future acquisitions, including contingent purchase price and certain contingent assets or liabilities of the entity to be acquired, requires acquisition-related and restructuring costs to be expensed as incurred and requires changes in tax items after the acquisition date to be reported in income tax expense. There were no effects to the Company’s Consolidated Financial Statements at adoption.
Derivatives disclosures. Effective January 1, 2009, the Company expanded its disclosures on derivatives and hedging activities to comply with the FASB’s updated guidance (ASC 815) that requires the Company to disclose the purpose for using derivative instruments, their accounting treatment and related effects on financial condition, results of operations and liquidity. See Note 13 for information on the Company’s derivative financial instruments including these additional required disclosures.
Fair value measurements. Effective January 1, 2008, the Company adopted the FASB’s fair value disclosure and measurement guidance (ASC 820) that expands disclosures about fair value measurements and clarifies how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability (exit price). In addition, the FASB amended the fair value guidance in 2008 to provide additional guidance for determining the fair value of a financial asset when the market for that instrument is not active. In 2009, the Company also adopted FASB guidance on measuring the fair value of non-financial assets and liabilities, certain financial liabilities and investments in certain entities using their net asset value or its equivalent. See Note 11 for information on the Company’s fair value measurements. In addition, in 2009 the Company adopted new FASB guidance on expanded fair value disclosures for assets supporting its pension and other postretirement benefit plans. See Note 10 for further information.

 

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The Company carries certain financial instruments at fair value in the financial statements including approximately $14 billion in invested assets at December 31, 2009. The Company also carries derivative instruments at fair value, including assets and liabilities for reinsurance contracts covering guaranteed minimum income benefits (GMIB assets and liabilities) under certain variable annuity contracts issued by other insurance companies and related retrocessional contracts. The Company also reports separate account assets at fair value; however, changes in the fair values of these assets accrue directly to policyholders and are not included in the Company’s revenues and expenses. At the adoption of this fair value guidance, there were no effects to the Company’s measurements of fair values for financial instruments other than for GMIB assets and liabilities discussed below. In addition, there were no effects to the Company’s measurements of financial assets and non-financial assets and liabilities from adopting the FASB’s 2008 and 2009 amendments to their fair value guidance.
At adoption, the Company was required to change certain assumptions used to estimate the fair values of GMIB assets and liabilities. Because there is no market for these contracts, the assumptions used to estimate their fair values at adoption were determined using a hypothetical market participant’s view of exit price, rather than using historical market data and actual experience to establish the Company’s future expectations. Certain of these assumptions (primarily related to annuitant behavior) have limited or no observable market data so determining an exit price requires the Company to exercise significant judgment and make critical accounting estimates. On adoption, the Company recorded a charge of $131 million after-tax, net of reinsurance ($202 million pre-tax), in Run-off Reinsurance.
The Company’s results of operations related to this business are expected to continue to be volatile in future periods because several underlying assumptions (primarily interest rates) will be based on current market-observable inputs which will likely change each period. See Note 11 for additional information.
Transfers of financial assets. In 2009, the FASB issued guidance for accounting for transfers of financial assets (ASC 860) that changes the requirements for recognizing the transfer of financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. The guidance also eliminates the concept of a “qualifying special purpose entity” when assessing transfers of financial instruments. The recognition and measurement provisions of this guidance must be applied to transfers that occur on or after January 1, 2010. On adoption, the Company does not expect a material effect to its results of operations or financial condition.
Variable interest entities. In 2009, the FASB amended guidance (ASC 810) that requires quarterly qualitative analysis to determine whether a variable interest entity must be consolidated by the Company primarily based on the entity’s purpose and design, the Company’s ability to direct the entity’s activities that most significantly impact its economic performance, and the Company’s right or obligation to participate in that performance. A variable interest entity is insufficiently capitalized or is not controlled through voting or similar rights. These amendments must also be applied to qualifying special-purpose entities formerly excluded from such analysis. Any changes in the Company’s consolidated entities resulting from these requirements may be recognized through an adjustment to retained earnings for the cumulative effect of implementing at the January 1, 2010 date of adoption or through retrospective restatement of prior period financial statements. In addition, this guidance requires the Company to disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity. On adoption, the Company does not expect a material effect to its results of operations or financial condition.
Fair value option. Effective January 1, 2008, the Company adopted FASB updated guidance for the fair value option for financial assets and liabilities (ASC 825), which permits entities to choose fair value measurement at the time of acquisition of many financial instruments, including insurance contracts, with subsequent changes in fair value to be reported in net income for the period. The adoption of this guidance did not impact the Company’s consolidated financial statements, as no items were elected for fair value measurement.
Uncertain tax positions. Effective January 1, 2007, the Company implemented updated FASB guidance (ASC 740) on accounting for uncertain tax positions that are “more likely than not” to result in a benefit if challenged by the Internal Revenue Service (“IRS”). The cumulative effect of implementing the guidance for unrecognized tax benefits decreased opening retained earnings by $29 million. See Note 19 for additional information.
Certain financial instruments. Effective January 1, 2007, the Company adopted updated FASB guidance on accounting for certain hybrid financial instruments (ASC 815). At adoption, the Company elected to fair value certain existing investments in preferred stock and debt securities with call or conversion features (hybrid securities) and future changes in the fair value of these investments will be reported in net income. As a result, the Company reclassified $12 million after-tax of unrealized appreciation from the opening balance of accumulated other comprehensive loss to retained earnings with no net change to total shareholders’ equity. See Note 12(A) for a review of instruments that the Company has elected to fair value.

 

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C. Investments
The Company’s accounting policies for investment assets are discussed below:
Fixed maturities and equity securities. Fixed maturities include bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor. Equity securities include common stocks and preferred stocks that are non-redeemable or redeemable only by the issuer. These investments are primarily classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within shareholders’ equity. Beginning April 1, 2009, when the Company determines it does not expect to recover the amortized cost basis of fixed maturities with declines in fair value (even if it does not intend to sell or will not be required to sell these fixed maturities), the credit portion of the impairment loss is recognized in net income and the non-credit portion, if any, is recognized in a separate component of shareholders’ equity. The credit portion is the difference between the amortized cost basis of the fixed maturity and the net present value of its projected future cash flows. Projected future cash flows are based on qualitative and quantitative factors, including probability of default, and the estimated timing and amount of recovery. For mortgage and asset-backed securities, estimated future cash flows are based on assumptions about the collateral attributes including prepayment speeds, default rates and changes in value. Equity securities and, prior to April 1, 2009, fixed maturities were considered impaired, and their cost basis was written down to fair value through earnings, when management did not expect to recover the amortized cost, or if the Company could not demonstrate its intent or ability to hold the investment until full recovery. Fixed maturities and equity securities also include certain trading and hybrid securities carried at fair value with changes in fair value reported in realized investment gains and losses, beginning after the implementation of updated guidance on certain hybrid financial instruments on January 1, 2007. The Company elected fair value accounting for certain hybrid securities to simplify accounting and mitigate volatility in results of operations and financial condition.
Commercial mortgage loans. Mortgage loans held by the Company are made exclusively to commercial borrowers, therefore there is no exposure to either prime or sub-prime residential mortgages. Generally, commercial mortgage loans are carried at unpaid principal balances and are issued at a fixed rate of interest. Commercial mortgage loans held for sale are carried at the lower of unpaid principal balance or fair value with any resulting valuation allowance reported in realized investment gains and losses. Commercial mortgage loans are considered impaired when it is probable that the Company will not collect amounts due according to the terms of the original loan agreement. Impaired loans are carried at the lower of unpaid principal or fair value of the underlying collateral. Valuation reserves reflect any changes in fair value. The Company estimates the fair value of the underlying collateral using internal valuations generally based on discounted cash flow analyses.
Policy loans. Policy loans are carried at unpaid principal balances.
Real estate. Investment real estate can be “held and used” or “held for sale”. The Company accounts for real estate as follows:
  Real estate “held and used” is expected to be held longer than one year and includes real estate acquired through the foreclosure of commercial mortgage loans. The Company carries real estate held and used at depreciated cost less any write-downs to fair value due to impairment and assesses impairment when cash flows indicate that the carrying value may not be recoverable. Depreciation is generally calculated using the straight-line method based on the estimated useful life of the particular real estate asset.
  Real estate is “held for sale” when a buyer’s investigation is completed, a deposit has been received and the sale is expected to be completed within the next year. Real estate held for sale is carried at the lower of carrying value or current fair value, less estimated costs to sell, and is not depreciated. Valuation reserves reflect any changes in fair value.
  The Company uses several methods to determine the fair value of real estate, but relies primarily on discounted cash flow analyses and, in some cases, third-party appraisals.
At the time of foreclosure, properties are reclassified from commercial mortgage loans to real estate. The Company rehabilitates, re-leases and sells foreclosed properties. This process usually takes from two to four years unless management considers a near-term sale preferable.
Other long-term investments. Other long-term investments include investments in unconsolidated entities. These entities include certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company’s ownership percentage of reported income or loss in cases where the Company has significant influence, otherwise the investment is carried at cost. Income from certain entities is reported on a one quarter lag depending on when their financial information is received. Also included in other long-term investments are loans to unconsolidated real estate entities secured by the equity interests of these real estate entities, which are carried at unpaid principal balances (mezzanine loans). These other long-term investments are considered impaired, and written down to their fair value, when cash flows indicate that the carrying value may not be recoverable. Fair value is generally determined based on a discounted cash flow analysis.

 

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Additionally, other long-term investments include interest rate and foreign currency swaps carried at fair value. See Note 13 for information on the Company’s accounting policies for these derivative financial instruments.
Short-term investments. Investments with maturities of less than one year from time of purchase are classified as short-term, available for sale and carried at fair value, which approximates cost.
Derivative financial instruments. Note 13 discusses the Company’s accounting policies for derivative financial instruments.
Net investment income. When interest and principal payments on investments are current, the Company recognizes interest income when it is earned. The Company stops recognizing interest income when interest payments are delinquent or when certain terms (interest rate or maturity date) of the investment have been restructured. Net investment income on these investments is only recognized when interest payments are actually received. Interest and dividends earned on trading and hybrid securities are included in net investment income.
Investment gains and losses. Realized investment gains and losses result from sales, investment asset write-downs, changes in the fair values of trading and hybrid securities and certain derivatives and changes in valuation reserves, based on specifically identified assets. Realized investment gains and losses on the disposition of certain directly owned real estate investments are eliminated from ongoing operations and reported in discontinued operations when the operations and cash flows of the underlying assets are clearly distinguishable and the Company has no significant continuing involvement in their operations.
Unrealized gains and losses on fixed maturities and equity securities carried at fair value (excluding trading and hybrid securities) and certain derivatives are included in accumulated other comprehensive income (loss), net of:
  amounts required to adjust future policy benefits for the run-off settlement annuity business; and
  deferred income taxes.
D.  Cash and Cash Equivalents
Cash equivalents consist of short-term investments with maturities of three months or less from the time of purchase that are classified as held to maturity and carried at amortized cost. The Company reclassifies cash overdraft positions to “accounts payable, accrued expenses and other liabilities” when the legal right of offset does not exist.
E. Premiums, Accounts and Notes Receivable and Reinsurance Recoverables
Premiums, accounts and notes receivable are reported net of an allowance for doubtful accounts of $43 million as of December 31, 2009 and $50 million as of December 31, 2008. Reinsurance recoverables are estimates of amounts that the Company will receive from reinsurers and are recorded net of an allowance for unrecoverable reinsurance of $15 million as of December 31, 2009 and $23 million as of December 31, 2008. The Company estimates these allowances for doubtful accounts for premiums, accounts and notes receivable, as well as for reinsurance recoverables, using management’s best estimate of collectibility, taking into consideration the aging of receivables, historical collection patterns and other economic factors.
F.  Deferred Policy Acquisition Costs
Acquisition costs include sales compensation, commissions, direct response marketing, telemarketing, premium taxes and other costs that the Company incurs in connection with new and renewal business. Depending on the product line they relate to, the Company records acquisition costs in different ways. Acquisition costs for:
  Universal life products are deferred and amortized in proportion to the present value of total estimated gross profits over the expected lives of the contracts.
  Annuity and other individual life insurance (primarily international) and group health indemnity products are deferred and amortized, generally in proportion to the ratio of periodic revenue to the estimated total revenues over the contract periods.
  Other products are expensed as incurred.

 

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For universal life, annuity and other individual products, management estimates the present value of future revenues less expected payments. For group health indemnity products, management estimates the sum of future expected claims and related costs less unearned premiums and anticipated net investment income. If management’s estimates are less than the deferred costs, the Company reduces deferred policy acquisition costs and records an expense. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. The Company recorded in other operating expenses amortization for policy acquisition costs of $299 million in 2009, $314 million in 2008 and $242 million in 2007. There are no deferred policy acquisition costs attributable to the sold individual life insurance and annuity and retirement businesses or the run-off reinsurance operations.
G.  Property and Equipment
Property and equipment is carried at cost less accumulated depreciation. When applicable, cost includes interest, real estate taxes and other costs incurred during construction. Also included in this category is internal-use software that is acquired, developed or modified solely to meet the Company’s internal needs, with no plan to market externally. Costs directly related to acquiring, developing or modifying internal-use software are capitalized.
The Company calculates depreciation and amortization principally using the straight-line method based on the estimated useful life of each asset as follows: buildings and improvements, 1 year to 40 years; and equipment and software, 1 year to 10 years. See Note 9 for additional information.
H. Goodwill
Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. Substantially all goodwill relates to the Health Care segment. The Company evaluates goodwill for impairment annually during the third quarter at the reporting unit level, based on discounted cash flow analyses and writes it down through results of operations if impaired. Consistent with prior years, the Company’s evaluations used the best information available at the time, including reasonable assumptions and projections consistent with those used in its annual planning process. The discounted cash flow analyses used a range of discount rates that correspond with the Company’s weighted average cost of capital, consistent with that used for investment decisions considering the specific and detailed operating plans and strategies within the Health Care segment. The resulting discounted cash flow analyses indicated an estimated fair value for the reporting units of the Health Care segment exceeding their carrying values, including goodwill and other intangibles. Finally, the Company determined that no events or circumstances occurred subsequent to the annual evaluation of goodwill that would more likely than not reduce the fair value of the reporting units of the Health Care segment below their carrying values. See Note 9 for additional information.
I. Other Assets, including Other Intangibles
Other assets consist of various insurance-related assets and the gain position of certain derivatives, primarily GMIB assets. The Company’s other intangible assets include purchased customer and producer relationships, provider networks, and trademarks. The Company amortizes other intangibles on an accelerated or straight-line basis over periods from 1 to 30 years. Management revises amortization periods if it believes there has been a change in the length of time that an intangible asset will continue to have value. Costs incurred to renew or extend the terms of these intangible assets are generally expensed as incurred. See Note 9 for additional information.
J. Separate Account Assets and Liabilities
Separate account assets and liabilities are contractholder funds maintained in accounts with specific investment objectives. The assets of these accounts are legally segregated and are not subject to claims that arise out of any of the Company’s other businesses. These separate account assets are carried at fair value with equal amounts for related separate account liabilities. The investment income, gains and losses of these accounts generally accrue to the contractholders and are not included in the Company’s revenues and expenses. Fees earned for asset management services are reported in premiums and fees.
K. Contractholder Deposit Funds
Liabilities for contractholder deposit funds include deposits received from customers for investment-related and universal life products and investment earnings on their fund balances. These liabilities are adjusted to reflect administrative charges and, for universal life fund balances, mortality charges.

 

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L.  Future Policy Benefits
Future policy benefits are liabilities for the present value of estimated future obligations under long-term life and supplemental health insurance policies and annuity products currently in force. These obligations are estimated using actuarial methods and primarily consist of reserves for annuity contracts, life insurance benefits, guaranteed minimum death benefit (“GMDB”) contracts and certain life, accident and health insurance products in our International operations.
Obligations for annuities represent specified periodic benefits to be paid to an individual or groups of individuals over their remaining lives. Obligations for life insurance policies represent benefits to be paid to policyholders, net of future premiums to be received. Management estimates these obligations based on assumptions as to premiums, interest rates, mortality and surrenders, allowing for adverse deviation. Mortality, morbidity, and surrender assumptions are based on either the Company’s own experience or actuarial tables. Interest rate assumptions are based on management’s judgment considering the Company’s experience and future expectations, and range from 1.5% to 10%. Obligations for the run-off settlement annuity business include adjustments for investment returns consistent with requirements of GAAP when a premium deficiency exists.
Certain reinsurance contracts contain guaranteed minimum death benefits under variable annuities issued by other insurance companies. These obligations represent the guaranteed death benefit in excess of the contractholder’s account values (based on underlying equity and bond mutual fund investments). These obligations are estimated based on assumptions regarding lapse, partial surrenders, mortality, interest rates (mean investment performance and discount rate), market volatility as well as investment returns and premiums, consistent with the requirements of GAAP when a premium deficiency exists. Lapse, partial surrenders, mortality, interest rates and volatility are based on management’s judgment considering the Company’s experience and future expectations. The results of futures contracts used in the GMDB equity hedge program are reflected in the liability calculation as a component of investment returns. See also Note 7 for additional information.
M.  Unpaid Claims and Claims Expenses
Liabilities for unpaid claims and claim expenses are estimates of payments to be made under insurance coverages (primarily long-term disability, workers’ compensation and life and health) for reported claims and for losses incurred but not yet reported.
The Company develops these estimates for losses incurred but not yet reported using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the length of time over which payments are expected to be made. The Company consistently applies these actuarial principles and assumptions each reporting period, with consideration given to the variability of these factors, and 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.
The Company’s estimate of the liability for disability claims reported but not yet paid is primarily calculated as the present value of expected benefit payments to be made over the estimated time period that a policyholder remains disabled. The Company estimates the expected time period that a policyholder may be disabled by analyzing the rate at which an open claim is expected to close (claim resolution rate). Claim resolution rates may vary based upon the length of time a policyholder is disabled, the covered benefit period, cause of disability, benefit design and the policyholder’s age, gender and income level. The Company uses historical resolution rates combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. The reserve for the gross monthly disability benefits due to a policyholder is reduced (offset) by the income that the policyholder receives under other benefit programs, such as Social Security Disability Income, worker’s compensation, statutory disability or other group disability benefit plans. For awards of such offsets that have not been finalized, the Company estimates the probability and amount of the offset based on the Company’s experience over the past three to five years.
The Company discounts certain claim liabilities related to group long-term disability and workers’ compensation because benefit payments may be made over an extended period. Discount rate assumptions are based on projected investment returns for the asset portfolios that support these liabilities and range from 3.5% to 7.3%. When estimates change, the Company records the adjustment in benefits and expenses in the period in which the change in estimate is identified. Discounted liabilities associated with the long-term disability and certain workers’ compensation businesses were $3.1 billion at December 31, 2009 and $3.2 billion at December 31, 2008.

 

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N.  Health Care Medical Claims Payable
Medical claims payable for the Health Care segment include both reported claims and estimates for losses incurred but not yet reported.
The Company develops these estimates using actuarial principles and assumptions based on historical and projected claim payment patterns, medical cost trends, which are impacted by the utilization of medical services and the related costs of the services provided (unit costs), benefit design, seasonality, and other relevant operational factors. The Company consistently applies these actuarial principles and assumptions each reporting period, with consideration given to the variability of these factors, and 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.
The Company’s estimate of the liability for medical claims incurred but not yet reported is primarily calculated using historical claim payment patterns and expected medical cost trends. The Company analyzes the historical claim payment patterns by comparing the dates claims were incurred, generally the dates services were provided, to the dates claims were paid to determine “completion factors”, which are a measure of the time to process claims. A completion factor is calculated for each month of incurred claims. The Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the ultimate liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. The difference between this estimate of the ultimate liability and the current paid claims data is the estimate of the remaining claims to be paid for each incurral month. These monthly estimates are aggregated and included in the Company’s Health Care medical claims payable at the end of each reporting period. Completion factors are used to estimate the Health Care medical claims payable for all months where claims have not been completely resolved and paid, except for the most recent month as described below.
Completion factors are impacted by several key items including changes in the level of claims processed electronically versus manually (auto-adjudication), changes in provider claims submission rates, membership changes and the mix of products. As noted, the Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period. It is possible that the actual completion rates for the current period will develop differently from historical patterns, which could have a material impact on the Company’s medical claims payable and net income.
Claims incurred in the most recent month have limited paid claims data, since a large portion of health care claims are not submitted to the Company for payment in the month services have been provided. This makes the completion factor approach less reliable for claims incurred in the most recent month. As a result, in any reporting period, for the estimates of the ultimate claims incurred in the most recent month, the Company primarily relies on medical cost trend analysis, which reflects expected claim payment patterns and other relevant operational considerations. Medical cost trend is impacted by several key factors including medical service utilization and unit costs and the Company’s ability to manage these factors through benefit design, underwriting, provider contracting and the Company’s medical management initiatives. These factors are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior.
Because historical trend factors are often not representative of current claim trends, the trend experienced for the most recent history along with an analysis of emerging trends, have been taken into consideration in establishing the liability for Health Care medical claims payable at December 31, 2009 and 2008. It is possible that the actual medical trend for the current period will develop differently from that expected, which could have a material impact on the Company’s medical claims payable and net income.
For each reporting period, the Company evaluates key assumptions by comparing the assumptions used in establishing the medical claims payable to actual experience. When actual experience differs from the assumptions used in establishing the liability, medical claims payable are increased or decreased through current period net income. Additionally, the Company evaluates expected future developments and emerging trends which may impact key assumptions. The estimation process involves considerable judgment, reflecting the variability inherent in forecasting future claim payments. The adequacy of these estimates is highly sensitive to changes in the Company’s key assumptions, specifically completion factors, which are impacted by actual or expected changes in the submission and payment of medical claims, and medical cost trends, which are impacted by actual or expected changes in the utilization of medical services and unit costs.

 

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O.  Unearned Premiums and Fees
Premiums for life, accident and health insurance are recognized as revenue on a pro rata basis over the contract period. Fees for mortality and contract administration of universal life products are recognized ratably over the coverage period. The unrecognized portion of these amounts is recorded as unearned premiums and fees.
P.  Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consist principally of pension, other postretirement and postemployment benefits and various insurance-related liabilities, including amounts related to reinsurance contracts and insurance-related assessments that management can reasonably estimate. Accounts payable, accrued expenses and other liabilities also include certain overdraft positions and the loss position of certain derivatives, primarily for GMIB contracts (see Note 13). Legal costs to defend the Company’s litigation and arbitration matters are expensed when incurred in cases for which the Company cannot reasonably estimate the ultimate cost to defend. In cases for which the Company can reasonably estimate the cost to defend, these costs are recognized when the claim is reported.
Q.  Translation of Foreign Currencies
The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies, which are generally their functional currencies. The Company uses exchange rates as of the balance sheet date to translate assets and liabilities into U.S. dollars. Translation gains or losses on functional currencies, net of applicable taxes, are recorded in accumulated other comprehensive income (loss). The Company uses average monthly exchange rates during the year to translate revenues and expenses into U.S. dollars.
R.  Premiums and Fees, Revenues and Related Expenses
Premiums for life, accident and health insurance and managed care coverages are recognized as revenue on a pro rata basis over the contract period. Benefits and expenses are recognized when incurred.
Premiums for individual life insurance and individual and group annuity products, excluding universal life and investment-related products, are recognized as revenue when due. Benefits and expenses are matched with premiums.
Revenue for investment-related products is recognized as follows:
  Net investment income on assets supporting investment-related products is recognized as earned.
  Contract fees, which are based upon related administrative expenses, are recognized in premiums and fees as they are earned ratably over the contract period.
Benefits and expenses for investment-related products consist primarily of income credited to policyholders in accordance with contract provisions.
Revenue for universal life products is recognized as follows:
  Net investment income on assets supporting universal life products is recognized as earned.
  Fees for mortality and surrender charges are recognized as assessed, which is as earned.
  Administration fees are recognized as services are provided.
Benefits and expenses for universal life products consist of benefit claims in excess of policyholder account balances. Expenses are recognized when claims are submitted, and income is credited in accordance with contract provisions.
Contract fees and expenses for administrative services only programs and pharmacy programs and services are recognized as services are provided. Mail order pharmacy revenues and cost of goods sold are recognized as each prescription is shipped.

 

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S.  Stock Compensation
The Company records compensation expense for stock awards and options over their vesting periods based on the estimated fair value of the stock options, which is calculated using an option-pricing model. Compensation expense is recorded for restricted stock grants and units over their vesting periods based on fair value, which is equal to the market price of the Company’s common stock on the date of grant.
T.  Participating Business
The Company’s participating life insurance policies entitle policyholders to earn dividends that represent a portion of the earnings of the Company’s life insurance subsidiaries. Participating insurance accounted for approximately 1% of the Company’s total life insurance in force at the end of 2009 and approximately 2% of the Company’s total life insurance in force at the end of 2008 and 2007.
U.  Income Taxes
The Company and its domestic subsidiaries file a consolidated United States federal income tax return. The Company’s foreign subsidiaries file tax returns in accordance with foreign law. U.S. taxation of these foreign subsidiaries may differ in timing and amount from taxation under foreign laws. Reportable amounts, including credits for foreign tax paid by these subsidiaries, are reflected in the U.S. tax return of the affiliates’ domestic parent.
The Company recognizes deferred income taxes when the financial statement and tax-based carrying values of assets and liabilities are different and recognizes deferred income tax liabilities on the unremitted earnings of foreign subsidiaries that are not permanently invested overseas. For subsidiaries whose earnings are considered permanently invested overseas, income taxes are accrued at the local foreign tax rate. The Company establishes valuation allowances against deferred tax assets if it is more likely than not that the deferred tax asset will not be realized. The need for a valuation allowance is determined based on the evaluation of various factors, including expectations of future earnings and management’s judgment. Note 19 contains detailed information about the Company’s income taxes.
The Company recognizes interim period income taxes by estimating an annual effective tax rate and applying it to year-to-date results. The estimated annual effective tax rate is periodically updated throughout the year based on actual results to date and an updated projection of full year income. Although the effective tax rate approach is generally used for interim periods, taxes on significant, unusual and infrequent items are recognized at the statutory tax rate entirely in the period the amounts are realized.
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.
A. Great-West Healthcare Acquisition
On April 1, 2008, the Company acquired the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West Healthcare” or the “acquired business”) through 100% indemnity reinsurance agreements and the acquisition of certain affiliates and other assets and liabilities of Great-West Healthcare. The purchase price of approximately $1.5 billion consisted of a payment to the seller of approximately $1.4 billion for the net assets acquired and the assumption of net liabilities under the reinsurance agreement of approximately $0.1 billion. Great-West Healthcare primarily sells medical plans on a self-funded basis with stop loss coverage to select and regional employer groups. Great-West Healthcare’s offerings also include the following specialty products: stop loss, life, disability, medical, dental, vision, prescription drug coverage, and accidental death and dismemberment insurance. The acquisition, which was accounted for as a purchase, was financed through a combination of cash and the issuance of both short and long-term debt.
In accordance with the FASB’s guidance on accounting for business combinations, the Company completed its allocation of the total purchase price to the tangible and intangible net assets acquired based on management’s estimates of their fair values. Accordingly, approximately $290 million was allocated to intangible assets, primarily customer relationships and internal-use software. The weighted average amortization period was 9 years for customer relationships and 6 years for internal-use software. The remainder, net of tangible net assets acquired, was goodwill which approximated $1.1 billion and was allocated entirely to the Health Care segment. Substantially all of the goodwill is tax deductible and is being amortized over 15 years for federal income tax purposes.

 

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The condensed balance sheet of Great-West Healthcare at the acquisition date was as follows:
         
(In millions)        
Investments
  $ 147  
Cash and cash equivalents
    55  
Premiums, accounts and notes receivable
    226  
Reinsurance recoverables
    12  
Property and equipment (primarily capitalized software)
    142  
Deferred income taxes
    7  
Goodwill
    1,095  
Other assets, including other intangibles
    151  
 
     
Total assets acquired
    1,835  
 
     
 
       
Future policy benefits
    78  
Unpaid claims and claim expenses
    15  
Health Care medical claims payable
    90  
Accounts payable, accrued expenses and other liabilities (1)
    278  
 
     
Total liabilities acquired
    461  
 
     
 
       
Net assets acquired
  $ 1,374  
 
     
     
(1)   Includes $18 million of liabilities related to integration activities: severance of $14 million and consolidation of facilities of $4 million.
The results of Great-West Healthcare have been included in the Company’s Consolidated Financial Statements from the date of acquisition.
The following table presents selected unaudited pro forma information for the Company assuming the acquisition had occurred as of January 1, 2007. The pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
                 
    (Unaudited)  
    Year Ended December 31,  
(In millions, except per share amounts)   2008     2007  
Total revenues
  $ 19,469     $ 19,173  
Shareholders’ income from continuing operations
  $ 309     $ 1,224  
Shareholders’ net income
  $ 313     $ 1,219  
Earnings per share:
               
Shareholders’ income from continuing operations
               
Basic
  $ 1.11     $ 4.27  
Diluted
  $ 1.11     $ 4.22  
Shareholders’ net income
               
Basic
  $ 1.13     $ 4.26  
Diluted
  $ 1.12     $ 4.20  
B.  Sale of the Chilean Insurance Operations
On August 10, 2007, the Company completed the sale of its Chilean insurance operations, which was classified as a discontinued operation in the second quarter of 2007. The Company recognized an impairment loss in the second quarter of 2007 for this business of $19 million after-tax primarily relating to the write-off of unrecoverable tax assets and foreign currency translation losses.

 

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C.  Sale of Retirement Benefits Business
In 2004, the Company sold its retirement benefits business, excluding the corporate life insurance business, for cash proceeds of $2.1 billion. The sale resulted in an initial after-tax gain of $809 million, of which $267 million after-tax was recognized immediately and the remaining amount was deferred. The Company recognized deferred gains of $4 million after-tax in 2009 and 2008, as well as $5 million after-tax in 2007. As of December 31, 2009, the remaining deferred gain of $29 million after-tax will be recognized in the Company’s results of operations through 2032.
D.  Sale of Individual Life Insurance and Annuity Business
In 1998, the Company sold its individual life insurance and annuity business for cash proceeds of $1.4 billion. The sale generated an after-tax gain of approximately $800 million, the majority of which was deferred and is recognized at the rate that earnings from the sold business would have been expected to emerge (primarily over 15 years on a declining basis). The Company recognized deferred gains of $18 million after-tax in 2009, $21 million after-tax in 2008 and $25 million after-tax in 2007. The remaining deferred gain of $90 million after-tax will be recognized in the Company’s results of operations through 2027.
Note 4 — Earnings Per Share
Basic and diluted earnings per share were computed as follows:
                         
            Effect of        
(In millions, except per share amounts)   Basic     Dilution     Diluted  
2009
                       
Shareholders’ income from continuing operations
  $ 1,301     $     $ 1,301  
 
                 
Shares (in thousands):
                       
Weighted average
    274,058             274,058  
Options
            1,299       1,299  
 
                 
Total shares
    274,058       1,299       275,357  
 
                 
EPS
  $ 4.75     $ (0.02 )   $ 4.73  
 
                 
2008
                       
Shareholders’ income from continuing operations
  $ 288     $     $ 288  
 
                 
Shares (in thousands):
                       
Weighted average
    277,317             277,317  
Options
            1,526       1,526  
 
                 
Total shares
    277,317       1,526       278,843  
 
                 
EPS
  $ 1.04     $ (0.01 )   $ 1.03  
 
                 
2007
                       
Shareholders’ income from continuing operations
  $ 1,120     $     $ 1,120  
 
                 
Shares (in thousands):
                       
Weighted average
    286,357             286,357  
Options
            3,776       3,776  
 
                 
Total shares
    286,357       3,776       290,133  
 
                 
EPS
  $ 3.91     $ (0.05 )   $ 3.86  
 
                 

 

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As described in Note 2, effective in 2009, the Company adopted the FASB’s new guidance for determining participating securities which requires the Company’s unvested restricted stock awards to be included in weighted average shares instead of being considered a common stock equivalent. Prior years’ share information has been restated as follows:
                                 
    2008  
    Basic     Diluted  
    As originally             As originally        
    reported     As adjusted     reported     As adjusted  
Shareholders’ income from continuing operations
  $ 1.05     $ 1.04     $ 1.04     $ 1.03  
                                 
    2007  
    Basic     Diluted  
    As originally             As originally        
    reported     As adjusted     reported     As adjusted  
Shareholders’ income from continuing operations
  $ 3.95     $ 3.91     $ 3.88     $ 3.86  
The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect would have increased diluted earnings per share (antidilutive) as their exercise price was greater than the average share price of the Company’s common stock for the period.
                         
(In millions)   2009     2008     2007  
Antidilutive options
    8.8       6.3       1.2  
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:
                 
(In millions)   2009     2008  
Incurred but not yet reported
  $ 790     $ 782  
Reported claims in process
    114       114  
Other medical expense payable
    17       28  
 
           
Medical claims payable
  $ 921     $ 924  
 
           

 

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Activity in medical claims payable was as follows:
                         
(In millions)   2009     2008     2007  
Balance at January 1,
  $ 924     $ 975     $ 960  
Less: Reinsurance and other amounts recoverable
    211       258       250  
 
                 
Balance at January 1, net
    713       717       710  
Acquired April 1, net
          90        
Incurred claims related to:
                       
Current year
    6,970       7,312       6,878  
Prior years
    (43 )     (60 )     (80 )
 
                 
Total incurred
    6,927       7,252       6,798  
Paid claims related to:
                       
Current year
    6,278       6,716       6,197  
Prior years
    647       630       594  
 
                 
Total paid
    6,925       7,346       6,791  
Balance at December 31, net
    715       713       717  
Add: Reinsurance and other amounts recoverable
    206       211       258  
 
                 
Balance at December 31,
  $ 921     $ 924     $ 975  
 
                 
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 8 for additional information on reinsurance. For the year ended December 31, 2009, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $43 million, or 0.6% of the current year incurred claims as reported for the year ended December 31, 2008. Actual completion factors resulted in a reduction in medical claims payable of $21 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $22 million, or 0.3% of the current year incurred claims as reported for the year ended December 31, 2008 for the insured book of business.
For the year ended December 31, 2008, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $60 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2007. Actual completion factors resulted in a reduction of the medical claims payable of $29 million, or 0.4% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business. Actual medical cost trend resulted in a reduction of the medical claims payable of $31 million, or 0.5% of the current year incurred claims as reported for the year ended December 31, 2007 for the insured book of business.
The favorable impacts in 2009 and 2008 relating to completion factors and medical cost trend variances are primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to prior years. This release was substantially offset by the provision for moderately adverse conditions established for claims incurred related to the current year.
The corresponding impact of prior year development on shareholders’ net income was not material for the years ended December 31, 2009 and December 31, 2008. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:
First, due to the nature of the Company’s retrospectively experience-rated business, only adjustments to medical claims payable on accounts in deficit affect shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue directly to the policyholder with no impact on the Company’s shareholders’ net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.

 

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Second, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice, which require that the liabilities be adequate under moderately adverse conditions. As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase determined appropriate to address moderately adverse conditions for the current year incurred claims, the Company does not consider that offset amount as having any impact on shareholders’ net income.
Note 6 Initiatives to Lower Operating Expenses
As part of its strategy, the Company has undertaken several initiatives to realign its organization and consolidate support functions in an effort to increase efficiency and responsiveness to customers and to reduce costs.
During 2008 and 2009, the Company conducted a comprehensive review to reduce the operating expenses of its ongoing businesses (“cost reduction program”). As a result, the Company recognized severance-related and real estate charges in other operating expenses.
Severance charges in 2008 and 2009 resulted from reductions of approximately 2,350 positions in the Company’s workforce.
Cost reduction activity for 2008 and 2009 was as follows:
                         
Pre-tax (In millions)   Severance     Real Estate     Total  
Fourth Quarter 2008 charge (balance carried to January 1, 2009)
  $ 44     $ 11     $ 55  
 
                 
Second Quarter
    14             14  
Third Quarter
    10             10  
Fourth Quarter
    20             20  
 
                 
Subtotal — 2009 charges
    44             44  
Less: Payments
    55       3       58  
 
                 
Balance, December 31, 2009
  $ 33     $ 8     $ 41  
 
                 
The Health Care segment recorded $37 million pre-tax ($24 million after-tax) of the 2009 charges and $44 million pre-tax ($27 million after-tax) of the 2008 charge. The remainder of the 2009 and 2008 charges were reported as follows: Disability and Life: $5 million pre-tax ($4 million after-tax) in 2009 and $3 million pre-tax ($2 million after-tax) in 2008; and International: $2 million pre-tax ($1 million after-tax) in 2009 and $8 million pre-tax ($6 million after-tax) in 2008. Substantially all severance is expected to be paid by the end of 2010.
Note 7 — Guaranteed Minimum Death Benefit Contracts
The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured a guaranteed minimum death benefit (“GMDB”), also known as variable annuity death benefits (“VADBe”), under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds combined with a death benefit. The Company has equity and other market exposures as a result of this product. In periods of declining equity markets and in periods of flat equity markets following a decline, the Company’s liabilities for these guaranteed minimum death benefits increase. Conversely, in periods of rising equity markets, the Company’s liabilities for these guaranteed minimum death benefits decrease.

 

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In order to substantially reduce the equity market exposures relating to guaranteed minimum death benefit contracts, the Company operates a dynamic hedge program (“GMDB equity hedge program”), using exchange-traded futures contracts. The hedge program is designed to offset both positive and negative impacts of changes in equity markets on the GMDB liability. The hedge program involves detailed, daily monitoring of equity market movements and rebalancing the futures contracts within established parameters. While the hedge program is actively managed, it may not exactly offset changes in the GMDB liability due to, among other things, divergence between the performance of the underlying mutual funds and the hedge instruments, high levels of volatility in the equity markets, and differences between actual contractholder behavior and what is assumed. The performance of the underlying mutual funds compared to the hedge instruments is further impacted by a time lag, since the data is not reported and incorporated into the required hedge position on a real time basis. Although this hedge program does not qualify for GAAP hedge accounting, it is an economic hedge because it is designed to reduce and is effective in reducing equity market exposures resulting from this product. The results of the futures contracts are included in other revenue and amounts reflecting corresponding changes in liabilities for these GMDB contracts are included in benefits and expenses.
In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. As a result, the Company increased its reserves. Since that time, the Company has tested for premium deficiency by performing a reserve review on a quarterly basis using current market conditions and assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. Consistent with GAAP, the Company does not recognize gains on premium deficient long duration products.
The Company had future policy benefit reserves for GMDB contracts of $1.3 billion as of December 31, 2009, and $1.6 billion as of December 31, 2008. The determination of liabilities for GMDB requires the Company to make critical accounting estimates. The Company estimates its liabilities for GMDB exposures using a complex internal model run using many scenarios and based on assumptions regarding lapse, future partial surrenders, mortality, interest rates (mean investment performance and discount rate) and volatility. Lapse refers to the full surrender of an annuity prior to a contractholder’s death. Future partial surrender refers to the fact that most contractholders have the ability to withdraw substantially all of their mutual fund investments while retaining the death benefit coverage in effect at the time of the withdrawal. Mean investment performance for underlying equity mutual funds refers to market rates expected to be earned on the hedging instruments over the life of the GMDB equity hedge program, and for underlying fixed income mutual funds refers to the expected market return over the life of the contracts. Market volatility refers to market fluctuation. These assumptions are based on the Company’s experience and future expectations over the long-term period, consistent with the long-term nature of this product. The Company regularly evaluates these assumptions and changes its estimates if actual experience or other evidence suggests that assumptions should be revised. If actual experience differs from the assumptions (including lapse, future partial surrenders, mortality, interest rates and volatility) used in estimating these liabilities, the result could have a material adverse effect on the Company’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Company’s financial condition.

 

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The following provides information about the Company’s reserving methodology and assumptions for GMDB as of December 31, 2009:
  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 0-22% depending on the net amount at risk for each policy and whether surrender charges apply.
  The assumed mean investment performance for the underlying equity mutual funds considers the Company’s GMDB equity hedge program using futures contracts, and is based on the Company’s view that short-term interest rates will average 5% over future periods, but considers that current short-term rates are less than 5%. The mean investment performance assumption for the underlying fixed income mutual funds (bonds and money market) is 5% based on a review of historical returns. The investment performance for underlying equity and fixed income mutual funds is reduced by fund fees ranging from 1-3% across all funds. The results of futures contracts are reflected in the liability calculation as a component of investment returns.
  The volatility assumption is based on a review of historical monthly returns for each key index (e.g. S&P 500) over a period of at least ten years. Volatility represents the dispersion of historical returns compared to the average historical return (standard deviation) for each index. The assumption is 16-30%, 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.
Although first quarter 2009 results included reserve strengthening of $73 million pre-tax ($47 million after-tax), no additional reserve strengthening was required since then, primarily due to the stabilization and recovery of equity markets. The components of the first quarter reserve strengthening 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 Company’s long-term assumption for mean investment performance.

 

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During 2008, the Company recorded additional benefits expenses of $412 million pre-tax ($267 million after-tax) primarily to strengthen GMDB reserves following an analysis of experience and reserve assumptions. The amounts were primarily due to:
  adverse impacts of overall market declines of $210 million pre-tax ($136 million after-tax). This is comprised of (a) $185 million ($120 million after-tax) related to the provision for partial surrenders, including $40 million ($26 million after-tax) for an increase in the assumed election rates for future partial surrenders and (b) $25 million ($16 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 due to turbulent equity market conditions. Volatility risk is not covered by the GMDB equity hedge program. Also, the equity market volatility, particularly during the second half of the year impacted the effectiveness of the hedge program. In aggregate, these volatility-related impacts totaled $182 million of the pre-tax charge ($118 million after-tax). The GMDB equity hedge program is designed so that changes in the value of a portfolio of actively managed futures contracts will offset changes in the liability resulting from equity market movements. In periods of equity market declines, the liability will increase; the hedge program is designed to produce gains on the futures contracts to offset the increase in the liability. However, the hedge program will not perfectly offset the change in the liability, in part because the market does not offer futures contracts that exactly match the diverse mix of equity fund investments held by contractholders, and because there is a time lag between changes in underlying contractholder mutual funds, and corresponding changes in the hedge position. In 2008, the impact of this mismatch was higher than most prior periods due to the relatively large changes in market indices from day to day. In addition, the number of futures contracts used in the hedge program is adjusted only when certain tolerances are exceeded and in periods of highly volatile equity markets when actual volatility exceeds the expected volatility assumed in the liability calculation, losses will result. These conditions have had an adverse impact on earnings, and during 2008, the increase in the liability due to equity market movements was only partially offset by the results of the futures contracts; and
  adverse interest rate impacts. Interest rate risk is not covered by the GMDB equity hedge program, and the interest rate returns on the futures contracts were less than the Company’s long-term assumption for mean investment performance generating $14 million of the pre-tax charge ($9 million after-tax).
Activity in future policy benefit reserves for these GMDB contracts was as follows:
                         
(In millions)   2009     2008     2007  
Balance at January 1,
  $ 1,609     $ 848     $ 862  
Add: Unpaid Claims
    34       21       22  
Less: Reinsurance and other amounts recoverable
    83       19       22  
 
                 
Balance at January 1, net
    1,560       850       862  
Add: Incurred benefits
    (122 )     822       62  
Less: Paid benefits
    170       112       74  
 
                 
Ending balance, net
    1,268       1,560       850  
Less: Unpaid Claims
    36       34       21  
Add: Reinsurance and other amounts recoverable
    53       83       19  
 
                 
Balance at December 31,
  $ 1,285     $ 1,609     $ 848  
 
                 
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.

 

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The majority of the Company’s exposure arises under annuities that guarantee that the benefit received at death will be no less than the highest historical account value of the related mutual fund investments on a contractholder’s anniversary date. Under this type of death benefit, the Company is liable to the extent the highest historical anniversary account value exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death. Other annuity designs that the Company reinsured guarantee that the benefit received at death will be:
  the contractholder’s account value as of the last anniversary date (anniversary reset); or
  no less than net deposits paid into the contract accumulated at a specified rate or net deposits paid into the contract.
The table below presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees in the event of death, by type of benefit as of December 31. The net amount at risk is the death benefit coverage in force or the amount that the Company would have to pay if all contractholders died as of the specified date, and represents the excess of the guaranteed benefit amount over the fair value of the underlying mutual fund investments.
                 
(Dollars in millions)   2009     2008  
Highest anniversary annuity value
               
Account value
  $ 13,890     $ 13,154  
Net amount at risk
  $ 5,953     $ 9,489  
Average attained age of contractholders (weighted by exposure)
    69       68  
Anniversary value reset
               
Account value
  $ 1,403     $ 1,322  
Net amount at risk
  $ 113     $ 336  
Average attained age of contractholders (weighted by exposure)
    61       59  
Other
               
Account value
  $ 1,918     $ 1,846  
Net amount at risk
  $ 914     $ 1,280  
Average attained age of contractholders (weighted by exposure)
    68       67  
Total
               
Account value
  $ 17,211     $ 16,322  
Net amount at risk
  $ 6,980     $ 11,105  
Average attained age of contractholders (weighted by exposure)
    69       68  
Number of contractholders (approx.)
    590,000       650,000  
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 December 31, 2009 was $1.0 billion. The Company recorded in other revenues pre-tax losses of $282 million in 2009, compared with pre-tax gains of $333 million in 2008 and pre-tax losses of $32 million in 2007 from these futures contracts.
The Company has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. All reinsured GMIB policies also have a GMDB benefit reinsured by the Company. See Note 11 for further information.
Note 8 — Reinsurance
The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and disposition transactions where the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

 

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Retirement benefits business . The Company had a reinsurance recoverable of $1.7 billion as of December 31, 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 Company’s 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 held in a trust established for the benefit of the Company. As of December 31, 2009, the fair value of trust assets exceeded the reinsurance recoverable and S&P had assigned this reinsurer a rating of AA-.
Individual life and annuity reinsurance. The Company had reinsurance recoverables totaling $4.4 billion as of December 31, 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 Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. A substantial portion of the reinsurance recoverables are secured by investments held in a trust established for the benefit of the Company. At December 31, 2009, the trust assets secured approximately 90% of the reinsurance recoverables. The remaining balance is currently unsecured. If Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York do not maintain a specified minimum credit or claims paying rating, these reinsurers are required to fully secure the outstanding balance. S&P has assigned each of these companies a rating of AA-.
Other Ceded and Assumed Reinsurance
Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Health Care, Disability and Life, and International segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $294 million as of December 31, 2009 are expected to be collected from more than 90 reinsurers which have been assigned the following financial strength ratings by S&P:
                         
                    Percent of  
                    Reinsurance  
                    Recoverable  
    Reinsurance     Percent     Protected  
Ongoing operations (In millions)   Recoverable     of Total     by Collateral  
AA- (Single reinsurer)
  $ 47       16 %     0 %
AA- or higher (Other reinsurers)
    33       11 %     0 %
A (Single reinsurer)
    29       10 %     0 %
A+ to A- (Other reinsurers)
    111       38 %     4 %
Unrated (Single reinsurer)
    35       12 %     99 %
Below A- or unrated (Other reinsurers)
    39       13 %     37 %
 
                 
Total
  $ 294       100 %     18 %
 
                 
The collateral protecting the recoverables includes assets held in trust and letters of credit. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of December 31, 2009, the Company’s recoverables related to these segments were net of a reserve of $9 million.
Assumed and Ceded reinsurance: Run-off Reinsurance segment. The Company’s Run-off Reinsurance operations assumed risks related to GMDB contracts, GMIB contracts, workers’ compensation, and personal accident business. The Company’s Run-off Reinsurance operations also purchased retrocessional coverage to reduce the risk of loss on these contracts.
Liabilities related to GMDB, workers’ compensation and personal accident are included in future policy benefits and unpaid claims. Because the GMIB contracts are treated as derivatives under GAAP, the asset related to GMIB is recorded in the 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 Company’s Consolidated Balance Sheets (see Notes 11 and 23 for additional discussion of the GMIB assets and liabilities).

 

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The reinsurance recoverables for GMDB, workers’ compensation, and personal accident of $121 million as of December 31, 2009 are expected to be collected from approximately 80 retrocessionaires which have been assigned the following financial strength ratings from S&P:
                         
                    Percent of  
                    Reinsurance  
                    Recoverable  
    Reinsurance     Percent     Protected  
Run-off Reinsurance segment (In millions)   Recoverable     of Total     by Collateral  
AA- or higher
  $ 32       26 %     11 %
A (Single reinsurer)
    36       30 %     100 %
A- (Single reinsurer)
    17       14 %     50 %
A+ to A- (Other reinsurers)
    16       13 %     5 %
Below A- or unrated
    20       17 %     31 %
 
                 
 
  $ 121       100 %     45 %
 
                 
The collateral protecting the recoverables includes letters of credit and assets held in trust. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of December 31, 2009, the Company’s recoverables related to this segment were net of a reserve of $6 million.
The Company’s payment obligations for underlying reinsurance exposures assumed by the Company under these contracts are based on the ceding companies’ claim payments. For GMDB, claim payments vary because of changes in equity markets and interest rates, as well as mortality and contractholder behavior. For workers’ compensation and personal accident, the payments relate to accidents and injuries. Any of these claim payments can extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of the Company’s ultimate payment obligations and corresponding ultimate collection from retrocessionaires, may not be known with certainty for some time.
Summary. The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers/retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of December 31, 2009, based on current information. However, it is possible that future developments could have a material adverse effect on the Company’s consolidated results of operations and, in certain situations, such as if actual experience differs from the assumptions used in estimating reserves for GMDB, could have a material adverse effect on the Company’s financial condition. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.

 

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In the Company’s Consolidated Income Statements, Premiums and fees were presented net of ceded premiums, and Total benefits and expenses were presented net of reinsurance recoveries, in the following amounts:
                         
(In millions)   2009     2008     2007  
Premiums and Fees
                       
Short-duration contracts:
                       
Direct
  $ 13,886     $ 13,969     $ 13,585  
Assumed
    1,076       1,221       329  
Ceded
    (192 )     (242 )     (178 )
 
                 
 
    14,770       14,948       13,736  
 
                 
Long-duration contracts:
                       
Direct
    1,499       1,521       1,485  
Assumed
    33       53       70  
Ceded:
                       
Individual life insurance and annuity business sold
    (209 )     (220 )     (230 )
Other
    (52 )     (49 )     (53 )
 
                 
 
    1,271       1,305       1,272  
 
                 
Total
  $ 16,041     $ 16,253     $ 15,008  
 
                 
Reinsurance recoveries
                       
Individual life insurance and annuity business sold
  $ 322     $ 368     $ 323  
Other
    178       282       106  
 
                 
Total
  $ 500     $ 650     $ 429  
 
                 
The increase in assumed premiums in 2008 primarily reflects the effect of the reinsurance assumed in connection with the acquisition of Great-West Healthcare in 2008. The effects of reinsurance on written premiums and fees for short-duration contracts were not materially different from the recognized premium and fee amounts shown in the above table.

 

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Note 9 — Goodwill, Other Intangibles, and Property and Equipment
Substantially all goodwill relates to the Health Care segment and increased by approximately $1.1 billion during 2008 as a result of the acquisition of Great-West Healthcare.
Other intangible assets were comprised of the following at December 31:
                                 
                            Weighted Average  
            Accumulated     Net Carrying     Amortization  
(Dollars in millions)   Cost     Amortization     Value     Period (Years)  
2009
                               
Customer relationships
  $ 386     $ 254     $ 132       9  
Other
    46       12       34       10  
 
                         
Total reported in other assets, including other intangibles
    432       266       166          
Internal-use software reported in property and equipment
    1,168       692       476       4  
 
                         
Total other intangible assets
  $ 1,600     $ 958     $ 642          
 
                         
 
                               
2008
                               
Customer relationships
  $ 381     $ 230     $ 151       9  
Other
    43       6       37       10  
 
                         
Total reported in other assets, including other intangibles
    424       236       188          
Internal-use software reported in property and equipment
    998       545       453       4  
 
                         
Total other intangible assets
  $ 1,422     $ 781     $ 641          
 
                         
Property and equipment was comprised of the following as of December 31:
                         
            Accumulated     Net Carrying  
(Dollars in millions)   Cost     Amortization     Value  
2009
                       
Internal-use software
  $ 1,168     $ 692     $ 476  
Other property and equipment
    1,194       808       386  
 
                 
Total property and equipment
  $ 2,362     $ 1,500     $ 862  
 
                 
 
                       
2008
                       
Internal-use software
  $ 998     $ 545     $ 453  
Other property and equipment
    1,252       901       351  
 
                 
Total property and equipment
  $ 2,250     $ 1,446     $ 804  
 
                 
Depreciation and amortization was comprised of the following for the years ended December 31:
                         
(Dollars in millions)   2009     2008     2007  
Internal-use software
  $ 147     $ 143     $ 111  
Other property and equipment
    91       76       74  
 
                 
Depreciation and amortization of property and equipment
    238       219       185  
Other intangibles
    30       25       9  
 
                 
Total depreciation and amortization
  $ 268     $ 244     $ 194  
 
                 
The Company estimates annual pre-tax amortization for intangible assets, including internal-use software, over the next five calendar years to be as follows: $145 million in 2010, $125 million in 2011, $100 million in 2012, $66 million in 2013, and $49 million in 2014.

 

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Note 10 — Pension and Other Postretirement Benefit Plans
A.  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 primary domestic defined benefit pension plans effective July 1, 2009. A curtailment of benefits occurred as a result of this action since it eliminated the accrual of benefits effective July 1, 2009 for active employees enrolled in these domestic pension plans. Accordingly, the Company recognized a pre-tax curtailment gain of $46 million ($30 million after-tax) during the second quarter of 2009, which was the remaining unamortized negative prior service cost at May 31, 2009.
The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. The following table summarizes the projected benefit obligations and assets related to the Company’s domestic and international pension and other postretirement benefit plans as of, and for the year ended, December 31:
                                 
    Pension     Other Postretirement  
    Benefits     Benefits  
(In millions)   2009     2008     2009     2008  
Change in benefit obligation
                               
Benefit obligation, January 1
  $ 4,101     $ 4,045     $ 376     $ 426  
Service cost
    43       74       1       1  
Interest cost
    250       242       24       24  
(Gain) loss from past experience
    255       13       59       (20 )
Benefits paid from plan assets
    (247 )     (246 )     (4 )     (3 )
Benefits paid — other
    (30 )     (24 )     (37 )     (36 )
Translation of foreign currencies
    1       (3 )            
Amendments
    5                   (16 )
Curtailment
    (15 )                  
 
                       
Benefit obligation, December 31
    4,363       4,101       419       376  
 
                       
Change in plan assets
                               
Fair value of plan assets, January 1
    2,248       3,417       24       28  
Actual return on plan assets
    436       (921 )     2       (1 )
Benefits paid
    (247 )     (246 )     (2 )     (3 )
Translation of foreign currencies
    1       (4 )            
Contributions
    412       2              
 
                       
Fair value of plan assets, December 31
    2,850       2,248       24       24  
 
                       
Funded Status
  $ (1,513 )   $ (1,853 )   $ (395 )   $ (352 )
 
                       
The postretirement benefits liability adjustment included in accumulated other comprehensive loss consisted of the following as of December 31:
                                 
    Pension     Other Postretirement  
    Benefits     Benefits  
(In millions)   2009     2008     2009     2008  
Unrecognized net gain (loss)
  $ (1,558 )   $ (1,548 )   $ 22     $ 84  
Unrecognized prior service cost
    (5 )     50       69       88  
 
                       
Postretirement benefits liability adjustment
  $ (1,563 )   $ (1,498 )   $ 91     $ 172  
 
                       

 

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During 2009, the Company’s postretirement benefits liability adjustment increased by $146 million pre-tax ($97 million after-tax) resulting in a decrease to shareholders’ equity. The increase in the liability was primarily due to:
  decreases in discount rates for both the pension and other postretirement benefit plans;
  actuarial losses primarily relating to census changes and updated medical trend assumptions resulting from the 2009 plan valuations; and
  the effect of the 2009 curtailment.
Those impacts were partially offset by actual returns on pension plan assets being more favorable than expected in 2009, as both equity and fixed income markets improved considerably in 2009.
Pension benefits. The Company’s pension plans were underfunded by $1.5 billion in 2009 and $1.9 billion in 2008 and had related accumulated benefit obligations of $4.3 billion as of December 31, 2009 and $4.1 billion as of December 31, 2008.
The Company funds its qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Pension Protection Act of 2006. For 2010, the Company expects minimum required contributions to be approximately $70 million. This amount could change based on final valuation amounts. In addition, the Company currently plans to make voluntary contributions of approximately $140 million during 2010. Based on its current funded status, the Company does not believe that the litigation matter discussed in Note 23 to the Consolidated Financial Statements would have an impact on 2010 funding requirements even if resolved in 2010. 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.
Components of net pension cost for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Service cost
  $ 43     $ 74     $ 73  
Interest cost
    250       242       231  
Expected long-term return on plan assets
    (239 )     (234 )     (209 )
Amortization of:
                       
Net loss from past experience
    34       57       119  
Prior service cost
    (4 )     (11 )     (1 )
Curtailment
    (46 )            
 
                 
Net pension cost
  $ 38     $ 128     $ 213  
 
                 

 

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The Company expects to recognize pre-tax losses of $24 million in 2010 from amortization of past experience. This estimate is based on a weighted average amortization period for the frozen and inactive plans of approximately 30 years, as this period is now based on the average expected remaining life of plan participants. As a result of the plan freeze, the workforce is considered inactive for pension accounting purposes because employees will no longer earn pension benefits.
Other postretirement benefits. Unfunded retiree health benefit plans had accumulated benefit obligations of $268 million at December 31, 2009, and $235 million at December 31, 2008. Retiree life insurance plans had accumulated benefit obligations of $150 million as of December 31, 2009 and $141 million as of December 31, 2008.
Components of net other postretirement benefit cost for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Service cost
  $ 1     $ 1     $ 2  
Interest cost
    24       24       24  
Expected long-term return on plan assets
    (1 )     (1 )     (1 )
Amortization of:
                       
Net gain from past experience
    (5 )     (8 )     (6 )
Prior service cost
    (18 )     (17 )     (17 )
 
                 
Net other postretirement benefit cost
  $ 1     $ (1 )   $ 2  
 
                 
The Company expects to recognize in 2010 pre-tax gains of $19 million related to amortization of prior service cost and pre-tax gains of $1 million from amortization of past experience. The original amortization period is based on an average remaining service period of active employees associated with the other postretirement benefit plans of approximately 9 years. The remaining amortization period for prior service cost is approximately 4 years.
The estimated rate of future increases in the per capita cost of health care benefits is 9% in 2010, decreasing by 0.5% per year to 5% in 2017 and beyond. This estimate reflects the Company’s current claim experience and management’s estimate that rates of growth will decline in the future. A 1% increase or decrease in the estimated rate would change 2009 reported amounts as follows:
                 
(In millions)   Increase     Decrease  
Effect on total service and interest cost
  $ 1     $ 1  
Effect on postretirement benefit obligation
  $ 12     $ 11  

 

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Plan assets. The target investment allocation percentages (58% equity securities, 20% fixed income, 7% real estate and 15% other) are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. The pension plan asset portfolio has been most heavily weighted towards equity securities, consisting of domestic and international investments, in an effort to synchronize the expected higher rate of return on equities over the long-term with the overall long-term nature of the pension benefit obligations. The diversification of the pension plan assets into other investments is intended to mitigate the volatility in returns, while also providing adequate liquidity to fund benefit distributions.
As of December 31, 2009, pension plan assets included $2.6 billion invested in the separate accounts of Connecticut General Life Insurance Company (“CGLIC”) and Life Insurance Company of North America, which are subsidiaries of the Company, as well as an additional $0.3 billion invested directly in funds offered by the buyer of the retirement benefits business.
The fair values of plan assets by category and by hierarchy as defined by GAAP are as follows. See Note 11 for a definition of the levels within the fair value hierarchy.
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
December 31, 2009   Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Plan assets at fair value:
                               
Fixed maturities:
                               
Federal government and agency
  $     $ 6     $     $ 6  
Foreign government
          26             26  
Corporate
          88       26       114  
Mortgage and other asset-backed
          22             22  
Fund investments and pooled separate accounts (1)
          300       118       418  
 
                       
Total fixed maturities
          442       144       586  
 
                       
Equity securities:
                               
Domestic
    1,341       1       23       1,365  
International, including funds and pooled separate accounts (1)
    171       195             366  
 
                       
Total equity securities
    1,512       196       23       1,731  
 
                       
Real estate, including pooled separate accounts (1)
                160       160  
Securities partnerships
                257       257  
Guaranteed deposit account contract
                29       29  
Cash equivalents
          87             87  
 
                       
Total plan assets at fair value
  $ 1,512     $ 725     $ 613     $ 2,850  
 
                       
     
(1)   A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

 

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Plan assets in Level 1 include exchange-listed equity securities. Level 2 assets primarily include:
  fixed income and international equity funds priced using their daily net asset value which is the exit price; and
  fixed maturities valued using recent trades of similar securities or pricing models as described below.
Because many fixed maturities 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.
Plan assets classified in Level 3 include securities partnerships and equity real estate generally valued based on the pension plan’s ownership share of the equity of the investee including changes in the fair values of its underlying investments. In addition, investments in pooled separate accounts principally invested in equity real estate and fixed income funds that are priced using the net asset value are classified in Level 3 due to restrictions on withdrawal.
The following table summarizes the changes in pension plan assets classified in Level 3 for the year ended December 31, 2009. Actual return on plan assets in this table may include changes in fair value that are attributable to both observable and unobservable inputs.
                                                 
                                    Guaranteed        
    Fixed     Equity             Securities     Deposit Account        
(In millions)   Maturities     Securities     Real Estate     Partnerships     Contract     Total  
 
                                               
Balance at January 1, 2009
  $ 31     $ 14     $ 208     $ 264     $ 32     $ 549  
 
                                   
Actual return on plan assets:
                                               
Assets still held at reporting date
    8             (104 )     (31 )     8       (119 )
Assets sold during the period
    5                               5  
 
                                   
Total actual return on plan assets
    13             (104 )     (31 )     8       (114 )
 
                                   
Purchases, sales, settlements
    (75 )     9       56       24       (11 )     3  
Transfers into Level 3
    175                               175  
 
                                   
Balance at December 31, 2009
  $ 144     $ 23     $ 160     $ 257     $ 29     $ 613  
 
                                   
The assets related to other postretirement benefit plans are invested in deposit funds with interest credited based on fixed income investments in the general account of CGLIC. As there are significant unobservable inputs in determining the fair value of these assets, they are classified as Level 3. During 2009, these assets earned a return of $2 million, which was offset by a net withdrawal from the fund of $2 million.

 

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Assumptions for pension and other postretirement benefit plans. Management determined the present value of the projected benefit obligation and the accumulated other postretirement benefit obligation and related benefit costs based on the following weighted average assumptions as of and for the years ended December 31:
                 
    2009     2008  
Discount rate:
               
Pension benefit obligation
    5.50 %     6.25 %
Other postretirement benefit obligation
    5.25 %     6.25 %
Pension benefit cost
    6.25 %     6.25 %
Other postretirement benefit cost
    6.25 %     6.25 %
Expected long-term return on plan assets:
               
Pension benefit cost
    8.00 %     8.00 %
Other postretirement benefit cost
    5.00 %     5.00 %
Expected rate of compensation increase:
               
Projected pension benefit obligation
    3.50 %     3.50 %
Pension benefit cost
    3.50 %     3.50 %
Other postretirement benefit obligation
    3.00 %     3.00 %
Other postretirement benefit cost
    3.00 %     3.00 %
Discount rates are set by applying actual annualized yields at various durations from the Citigroup Pension Liability curve, without adjustment, to the expected cash flows of the postretirement benefits liabilities. The Company believes that the Citigroup Pension Liability curve is the most representative curve to use because it is derived from a broad array of bonds in various industries throughout the domestic market for high quality bonds. Further, Citigroup monitors the bond portfolio to ensure that only high quality issues are included. Accordingly, the Company does not believe that any adjustment is required to the Citigroup curve. Expected long-term rates of return on plan assets were developed considering actual long-term historical returns, expected long-term market conditions, plan asset mix and management’s investment strategy. Actual and target investment allocations are very similar at December 31, 2009.
To measure pension costs, the Company uses a market-related asset valuation for domestic pension plan assets invested in non-fixed income investments. The market-related value of pension assets recognizes the difference between actual and expected long-term returns in the portfolio over 5 years, a method that reduces the short-term impact of market fluctuations. At December 31, 2009, the market-related asset value was approximately $3.3 billion compared with a market value of approximately $2.9 billion.
Benefit payments. The following benefit payments, including expected future services, are expected to be paid in:
                         
            Other Postretirement  
            Benefits  
    Pension             Net of Medicare  
(In millions)   Benefits     Gross     Part D Subsidy  
2010
  $ 502     $ 44     $ 40  
2011
  $ 343     $ 42     $ 40  
2012
  $ 332     $ 42     $ 40  
2013
  $ 319     $ 41     $ 39  
2014
  $ 321     $ 40     $ 38  
2015-2019
  $ 1,526     $ 176     $ 169  

 

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B. 401(k) Plans
The Company sponsors a 401(k) plan in which the Company matches a portion of employees’ pre-tax contributions. Another 401(k) plan with an employer match was frozen in 1999. Participants in the active plan may invest in a fund that invests in the Company’s common stock, several diversified stock funds, a bond fund and a fixed-income fund.
The Company may elect to increase its matching contributions if the Company’s annual performance meets certain targets. A substantial amount of the Company’s matching contributions are invested in the Company common stock. The Company’s expense for these plans was $36 million for 2009, $34 million for 2008 and $35 million for 2007.
Note 11 — Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, such as when impaired or, for commercial mortgage loans, when classified as “held for sale.”
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
Fair values are based on quoted market prices when available. When market prices are not available, fair value is generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms 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 Company’s financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement 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 Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.

 

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Financial Assets and Financial Liabilities Carried at Fair Value
The following tables provide information as of December 31, 2009 and December 31, 2008 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders. In addition, Note 10 contains similar tables for the Company’s pension plan assets.
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
December 31, 2009   Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Financial assets at fair value:
                               
Fixed maturities:
                               
Federal government and agency
  $ 43     $ 527     $ 1     $ 571  
State and local government
          2,521             2,521  
Foreign government
          1,056       14       1,070  
Corporate
          8,241       344       8,585  
Federal agency mortgage-backed
          34             34  
Other mortgage-backed
          114       7       121  
Other asset-backed
          92       449       541  
 
                       
Total fixed maturities (1)
    43       12,585       815       13,443  
Equity securities
    2       81       30       113  
 
                       
Subtotal
    45       12,666       845       13,556  
Short-term investments
          493             493  
GMIB assets (2)
                482       482  
Other derivative assets (3)
          16             16  
 
                       
Total financial assets at fair value, excluding separate accounts
  $ 45     $ 13,175     $ 1,327     $ 14,547  
 
                       
Financial liabilities at fair value:
                               
GMIB liabilities
  $     $     $ 903     $ 903  
Other derivative liabilities
          30             30  
 
                       
Total financial liabilities at fair value
  $     $ 30     $ 903     $ 933  
 
                       
     
(1)   Fixed maturities includes $274 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $38 million of appreciation for securities classified in Level 3.
 
(2)   The 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 $15 million for the future cost of reinsurance.
 
(3)   Other derivative assets includes $12 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.

 

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    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
December 31, 2008   Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Financial assets at fair value:
                               
Fixed maturities:
                               
Federal government and agency
  $ 38     $ 724     $     $ 762  
State and local government
          2,486             2,486  
Foreign government
          923       21       944  
Corporate
          6,526       330       6,856  
Federal agency mortgage-backed
          37             37  
Other mortgage-backed
          121       4       125  
Other asset-backed
          57       514       571  
 
                       
Total fixed maturities (1)
    38       10,874       869       11,781  
Equity securities
    8       84       20       112  
 
                       
Subtotal
    46       10,958       889       11,893  
Short-term investments
          236             236  
GMIB assets (2)
                953       953  
Other derivative assets (3)
          45             45  
 
                       
Total financial assets at fair value, excluding separate accounts
  $ 46     $ 11,239     $ 1,842     $ 13,127  
 
                       
Financial liabilities at fair value:
                               
GMIB liabilities
  $     $     $ 1,757     $ 1,757  
Other derivative liabilities
          36             36  
 
                       
Total financial liabilities at fair value
  $     $ 36     $ 1,757     $ 1,793  
 
                       
     
(1)   Fixed maturities includes $514 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $111 million of appreciation for securities classified in Level 3.
 
(2)   The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. The assets are net of a liability of $17 million for the future cost of reinsurance.
 
(3)   Other derivative assets include $40 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $5 million of interest rate swaps not designated as accounting hedges.
Level 1 Financial Assets
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. Given the narrow definition of Level 1 and the Company’s investment asset strategy to maximize investment returns, a relatively small portion of the Company’s investment assets are classified in this category.
Level 2 Financial Assets and Financial Liabilities
Fixed maturities and equity securities. Approximately 93% as of December 31, 2009 and 92% as of December 31, 2008 of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage and asset-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 and asset-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.

 

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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 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 December 31, 2009. The nature and use of these other derivatives are described further in Note 13.
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 6% as of December 31, 2009 and 7% as of December 31, 2008 of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category, including:
                 
    December 31,     December 31,  
(In millions)   2009     2008  
Mortgage and asset-backed securities
  $ 456     $ 518  
Primarily private corporate bonds
    288       270  
Subordinated loans and private equity investments
    101       101  
 
           
Total
  $ 845     $ 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, spreads and liquidity of assets with similar characteristics. For mortgage and asset-backed securities, inputs and assumptions to pricing may also include collateral attributes and prepayment speeds. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research as well as the issuer’s financial statements in its evaluation. Subordinated loans and private equity investments are valued at transaction price in the absence of market data indicating a change in the estimated fair values.
Guaranteed minimum income benefit contracts. Because cash flows of the GMIB liabilities and assets are affected by equity markets and interest rates, 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 behavior (including mortality, lapse, and annuity election rates), and non-performance risk, as well as risk and profit charges. At adoption of the FASB’s new guidance for fair value measurements in 2008, the Company updated assumptions to reflect those that the Company believes a hypothetical market participant would use to determine a current exit price for these contracts and recorded an increase in the net GMIB liability as described in Note 2(B). As assumptions related to annuitant behavior used to estimate fair values for these contracts are largely unobservable, the Company classifies GMIB assets and liabilities in Level 3. The Company considered the following in determining the view of a hypothetical market participant:
  that the most likely transfer of these assets and liabilities would be through a reinsurance transaction with an independent insurer having a market capitalization and credit rating similar to that of the Company; and
  that because this block of contracts is in run-off mode, an insurer looking to acquire these contracts would have similar existing contracts with related administrative and risk management capabilities.

 

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These GMIB assets and liabilities are estimated with a complex internal model using many scenarios to determine the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received adjusted for risk and profit charges that the Company estimates a hypothetical market participant would require to assume this business. Net amounts expected to be paid include the excess of the expected value of the income benefits over the values of the annuitants’ accounts at the time of annuitization. Generally, market return, interest rate and volatility assumptions are based on market observable information. Assumptions related to annuitant behavior reflect the Company’s belief that a hypothetical market participant would consider the actual and expected experience of the Company as well as other relevant and available industry resources in setting policyholder behavior assumptions. The Company is also required to adjust for nonperformance risk to reflect the market’s perception of the risk that either the Company will not fulfill its GMIB liability (own credit) or the Company will not collect on its GMIB retrocessional coverage (reinsurer credit risk). The significant assumptions used to value the GMIB assets and liabilities as of December 31, 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 3.39% at December 31, 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 56% of underlying mutual fund investments modeled based on other indices (with insufficient market-observable data), volatility is based on the average historical level for each index over the past 10 years. Using this approach, volatility ranges from 17% to 33% for equity funds, 4% to 12% for bond funds and 1% to 2% for money market funds.
 
  The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.
 
  The annual lapse rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts, ranges from 2% to 17% and depends on the time since contract issue and the relative value of the guarantee.
 
  The annual annuity election rate assumption reflects experience that differs by the company issuing the underlying variable annuity contracts and depends on the annuitant’s age, the relative value of the guarantee and whether a contractholder has had a previous opportunity to elect the benefit. Immediately after the expiration of the waiting period, the assumed probability that an individual will annuitize their variable annuity contract is up to 80%. For the second and subsequent annual opportunities to elect the benefit, the assumed probability of election is up to 30%. Actual data is still emerging for the Company as well as the industry and the estimates are based on this limited data.
 
  The nonperformance risk adjustment is incorporated by adding an additional spread to the discount rate in the calculation of both (1) the GMIB liability to reflect a hypothetical market participant’s view of the risk of the Company not fulfilling its GMIB obligations, and (2) the GMIB asset to reflect a hypothetical market participant’s view of the reinsurers’ credit risk, after considering collateral. The estimated market-implied spread is company-specific for each party involved to the extent that company-specific market data is available and based on industry averages for similarly rated companies when company-specific data is not available. The spread is impacted by the credit default swap (“CDS”) spreads of the specific parent companies, adjusted to reflect subsidiaries’ credit ratings relative to their parent company. The additional spread over LIBOR incorporated into the discount rate was 10 to 110 basis points for the GMIB liability and 0 to 140 basis points for the GMIB reinsurance asset for that portion of the interest rate curve most relevant to these policies.
 
  The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be required by a hypothetical market participant.
The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting current observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that impact the net liability. If the emergence of future experience or future assumptions differs from the assumptions used in estimating these assets and liabilities, the resulting impact could be material to the Company’s consolidated results of operations, and in certain situations, could be material to the Company’s financial condition.

 

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GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles. As of December 31, 2009, S&P has given a financial strength rating of AA to one reinsurer. The receivable from the second reinsurer is fully collateralized by assets held in a trust.
Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the years ended December 31, 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 this table may include changes in fair value that are attributable to both observable and unobservable inputs.
                                 
    Fixed Maturities &     GMIB     GMIB     GMIB  
(In millions)   Equity Securities     Assets     Liabilities     Net  
Balance at 1/1/09
  $ 889     $ 953     $ (1,757 )   $ (804 )
 
                       
Gains (losses) included in income:
                               
Results of GMIB
          (365 )     669       304  
Other
    (18 )                  
 
                       
Total gains (losses) included in net income
    (18 )     (365 )     669       304  
 
                       
Gains included in other comprehensive income
    59                    
Losses required to adjust future policy benefits for settlement annuities (1)
    (72 )                  
Purchases, issuances, settlements
    (29 )     (106 )     185       79  
Transfers into Level 3
    16                    
 
                       
Balance at 12/31/09
  $ 845     $ 482     $ (903 )   $ (421 )
 
                       
Total gains (losses) included in net income attributable to instruments held at the reporting date
  $ (20 )   $ (365 )   $ 669     $ 304  
 
                       
     
(1)   Amounts do not accrue to shareholders.
                                 
    Fixed Maturities &     GMIB     GMIB     GMIB  
(In millions)   Equity Securities     Assets     Liabilities     Net  
Balance at 1/1/08
  $ 732     $ 173     $ (313 )   $ (140 )
 
                       
Gains (losses) included in income:
                               
Effect of adoption of new fair value measurement guidance
          244       (446 )     (202 )
Results of GMIB, excluding adoption effect
          604       (1,092 )     (488 )
Other
    (21 )                  
 
                       
Total gains (losses) included in net income
    (21 )     848       (1,538 )     (690 )
 
                       
Losses included in other comprehensive income
    (17 )                  
Gains required to adjust future policy benefits for settlement annuities (1)
    91                    
Purchases, issuances, settlements
    1       (68 )     94       26  
Transfers into Level 3
    103                    
 
                       
Balance at 12/31/08
  $ 889     $ 953     $ (1,757 )   $ (804 )
 
                       
Total gains (losses) included in net income attributable to instruments held at the reporting date
  $ (18 )   $ 848     $ (1,538 )   $ (690 )
 
                       
     
(1)   Amounts do not accrue to shareholders.

 

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As noted in the table above, total gains and losses included in net income are reflected in the following captions in the Consolidated Statements of Income:
  Realized investment gains (losses) and net investment income for amounts related to fixed maturities and equity securities; and
  Guaranteed minimum income benefits 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.
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 table 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 FASB’s guidance for fair value measurements, the Company’s GMIB assets and liabilities are expected to be volatile in future periods because the underlying capital markets assumptions will be based largely on market-observable inputs at the close of each reporting period including interest rates and market-implied volatilities.
For 2009, the net pre-tax gain for GMIB was $304 million, and was primarily due to the following factors:
  increases in interest rates ($248 million);
  increases in underlying account values in the period, driven by favorable equity market and bond fund returns, resulting in reduced exposures ($98 million);
  specific adjustments to nonperformance risk for the Company net of nonperformance risk of its reinsurers ($16 million); and
  updates to the risk and profit charge estimates ($30 million).
These favorable effects were partially offset by:
  higher than expected claim experience ($26 million);
  increases to the annuitization assumption, reflecting higher utilization experience ($21 million);
  updates to the lapse assumption ($14 million);
  updates to fund correlation assumptions ($4 million); and
  other amounts, including experience varying from assumptions, model and in-force updates ($23 million).
Excluding the net increase for the effect of adoption of FASB’s guidance for fair value measurement, the increase in the net GMIB liability for 2008 was primarily driven by the impact of declines in underlying account values in the period, driven by declines in equity markets and bond fund returns, resulting in increased exposures and decreases in interest rates since December 31, 2007.

 

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Separate account assets
Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are excluded from the Company’s revenues and expenses. As of December 31, 2009 and December 31, 2008 separate account assets were as follows:
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
December 31, 2009   Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Guaranteed separate accounts (See Note 22)
  $ 275     $ 1,480     $     $ 1,755  
Non-guaranteed separate accounts (1)
    1,883       3,100       550       5,533  
 
                       
Total separate account assets
  $ 2,158     $ 4,580     $ 550     $ 7,288  
 
                       
     
(1)   Non-guaranteed separate accounts include $2.6 billion in assets supporting the Company’s pension plan, including $517 million classified in Level 3.
                                 
    Quoted Prices in             Significant        
    Active Markets for     Significant Other     Unobservable        
December 31, 2008   Identical Assets     Observable Inputs     Inputs        
(In millions)   (Level 1)     (Level 2)     (Level 3)     Total  
Guaranteed separate accounts (See Note 22)
  $ 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 Company’s pension plan, including $435 million classified in Level 3.
Separate account assets in Level 1 include exchange-listed equity securities. Level 2 assets primarily include:
  equity securities and corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and
  actively-traded institutional and retail mutual fund investments and separate accounts priced using the daily net asset value which is the exit price.
Separate account assets classified in Level 3 include investments primarily in securities partnerships and real estate generally valued based on the separate account’s ownership share of the equity of the investee including changes in the fair values of its underlying investments.

 

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The following tables summarize the change in separate account assets reported in Level 3 for the years ended December 31, 2009 and 2008.
         
(In millions)        
Balance at 1/1/09
  $ 475  
Policyholder losses (1)
    (86 )
Purchases, issuances, settlements
    4  
Transfers into Level 3
    157  
 
     
Balance at 12/31/09
  $ 550  
 
     
     
(1)   Included in this amount are losses of $92 million attributable to instruments still held at the reporting date.
         
(In millions)        
Balance at 1/1/08
  $ 403  
Policyholder gains (1)
    11  
Purchases, issuances, settlements
    78  
Transfers out of Level 3
    (17 )
 
     
Balance at 12/31/08
  $ 475  
 
     
     
(1)   Included in this amount are losses of $4 million attributable to instruments still held at the reporting date.
Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions, such as commercial mortgage loans and investments in real estate entities when they become impaired. During 2009, impaired commercial mortgage loans with carrying values of $143 million were written down to their fair values of $126 million, resulting in pre-tax realized investment losses of $17 million. Also during 2009, impaired real estate entities with carrying values of $48 million were written down to their fair values of $12 million, resulting in pre-tax realized investment losses of $36 million. These fair value measurements were based on discounted cash flow analyses using significant unobservable inputs, and were classified in Level 3. For 2008, the amounts required to adjust these assets and liabilities to their fair values were not significant.

 

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Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
Most financial instruments that are subject to fair value disclosure requirements are carried in the Company’s consolidated financial statements at amounts that approximate fair value. The following table provides the fair values and carrying values of the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at December 31, 2009 and December 31, 2008.
                                 
    December 31, 2009     December 31, 2008  
            Carrying             Carrying  
(In millions)   Fair Value     Value     Fair Value     Value  
Commercial mortgage loans
  $ 3,323     $ 3,522     $ 3,401     $ 3,617  
Contractholder deposit funds, excluding universal life products
  $ 940     $ 941     $ 889     $ 915  
Long-term debt, excluding capital leases
  $ 2,418     $ 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 Company’s assessment of the credit quality of the loans. Market interest rates are derived by calculating the appropriate spread over comparable U.S. Treasury rates, based on the property type, quality rating and average life of the loan. The quality ratings reflect the relative risk of the loan, considering debt service coverage, the loan to value ratio and other factors. Fair values of impaired mortgage loans are based on the estimated fair value of the underlying collateral generally determined using an internal discounted cash flow model.
Contractholder deposit funds, excluding universal life products . Generally, these funds do not have stated maturities. Approximately 45% of these balances can be withdrawn by the customer at any time without prior notice or penalty. The fair value for these contracts is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. Most of the remaining contractholder deposit funds are reinsured by the buyers of the individual life and annuity and retirement benefits businesses. The fair value for these contracts is determined using the fair value of these buyers’ assets supporting these reinsured contracts. The Company had a reinsurance recoverable equal to the carrying value of these reinsured contracts.
Long-term debt, excluding capital leases . The fair value of long-term debt is based on quoted market prices for recent trades. When quoted market prices are not available, fair value is estimated using a discounted cash flow analysis and the Company’s estimated current borrowing rate for debt of similar terms and remaining maturities.
Fair values of off-balance sheet financial instruments were not material.
Note 12 — Investments
A.  Fixed Maturities and Equity Securities
Securities in the following table are included in fixed maturities and equity securities on the Company’s Consolidated Balance Sheets. These securities are carried at fair value with changes in fair value reported in other realized investment gains (losses).
                 
(In millions)   2009     2008  
Included in fixed maturities:
               
Trading securities (amortized cost: $8; $13)
  $ 8     $ 13  
Hybrid securities (amortized cost: $37; $10)
    43       10  
 
           
Total
  $ 51     $ 23  
 
           
Included in equity securities:
               
Hybrid securities (amortized cost: $109; $123)
  $ 81     $ 84  
 
           

 

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Fixed maturities and equity securities included $197 million at December 31, 2009 and $211 million at December 31, 2008, which were pledged as collateral to brokers as required under certain futures contracts. These fixed maturities and equities 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 December 31, 2009:
                 
    Amortized     Fair  
(In millions)   Cost     Value  
Due in one year or less
  $ 624     $ 640  
Due after one year through five years
    3,923       4,155  
Due after five years through ten years
    4,765       5,048  
Due after ten years
    2,570       2,853  
Mortgage and other asset-backed securities
    653       696  
 
           
Total
  $ 12,535     $ 13,392  
 
           
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 $37 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.
Gross unrealized appreciation (depreciation) on fixed maturities (excluding trading securities and hybrid securities) by type of issuer is shown below.
                                 
    December 31, 2009  
            Unrealized     Unrealized        
    Amortized     Appre-     Depre-     Fair  
(In millions)   Cost     ciation     ciation     Value  
Federal government and agency
  $ 398     $ 174     $ (1 )   $ 571  
State and local government
    2,341       188       (8 )     2,521  
Foreign government
    1,040       38       (8 )     1,070  
Corporate
    8,104       529       (98 )     8,535  
Federal agency mortgage-backed
    33       1             34  
Other mortgage-backed
    125       5       (10 )     120  
Other asset-backed
    494       55       (8 )     541  
 
                       
Total
  $ 12,535     $ 990     $ (133 )   $ 13,392  
 
                       
                                 
(In millions)   December 31, 2008  
Federal government and agency
  $ 359     $ 403     $     $ 762  
State and local government
    2,391       117       (22 )     2,486  
Foreign government
    882       70       (8 )     944  
Corporate
    7,197       167       (529 )     6,835  
Federal agency mortgage-backed (1)
    36       1             37  
Other mortgage-backed
    149             (25 )     124  
Other asset-backed
    455       128       (13 )     570  
 
                       
Total
  $ 11,469     $ 886     $ (597 )   $ 11,758  
 
                       
     
(1)   Federal agency mortgage-backed securities were first purchased in 2008 as part of the acquired business.

 

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The above table includes investments with a fair value of $2.3 billion supporting the Company’s run-off settlement annuity business, with gross unrealized appreciation of $326 million and gross unrealized depreciation of $52 million at December 31, 2009. Such unrealized amounts are required to support future policy benefit liabilities of this business and, accordingly, are not included in accumulated other comprehensive income. At December 31, 2008, investments supporting this business had a fair value of $2.5 billion, gross unrealized appreciation of $624 million and gross unrealized depreciation of $110 million.
As of December 31, 2009, the Company had commitments to purchase $72 million of fixed maturities bearing interest at a fixed market rate.
Review of declines in fair value. Management reviews fixed maturities for impairment based on criteria that include:
  length of time and severity of decline;
 
  financial health and specific near term prospects of the issuer;
 
  changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and
 
  the Company’s intent to sell or the likelihood of a required sale prior to recovery.
Fixed maturities (excluding trading and hybrid securities) which were primarily investment grade corporate bonds with a decline in fair value from cost were as follows, including the length of time of such decline:
                                 
    December 31, 2009  
    Fair     Amortized     Unrealized     Number  
(Dollars in millions)   Value     Cost     Depreciation     of Issues  
Fixed maturities:
                               
One year or less:
                               
Investment grade
  $ 1,637     $ 1,671     $ (34 )     333  
Below investment grade
  $ 79     $ 85     $ (6 )     55  
More than one year:
                               
Investment grade
  $ 754     $ 838     $ (84 )     120  
Below investment grade
  $ 57     $ 66     $ (9 )     14  
                                 
(Dollars in millions)   December 31, 2008  
Fixed maturities:
                               
One year or less:
                               
Investment grade
  $ 2,930     $ 3,255     $ (325 )     622  
Below investment grade
  $ 372     $ 425     $ (53 )     113  
More than one year:
                               
Investment grade
  $ 920     $ 1,130     $ (210 )     214  
Below investment grade
  $ 49     $ 58     $ (9 )     13  
As of December 31, 2009, the unrealized depreciation of investment grade fixed maturities is primarily due to increases in market yields since purchase. Approximately $40 million of the unrealized depreciation is due to securities with a decline in value of greater than 20%. The remaining $93 million of the unrealized depreciation is due to securities with declines in value of less than 20%. There were no equity securities with a material decline in fair value from cost as of December 31, 2009. See Note 14(B) for discussion of impairments included in realized investment gains and losses.
B.  Commercial Mortgage Loans and Real Estate
Mortgage loans held by the Company are made exclusively to commercial borrowers; therefore there is no exposure to either prime or sub-prime residential mortgages. The Company’s commercial mortgage loans and real estate investments are diversified by property type, location and, for commercial mortgage loans, borrower. Generally, commercial mortgage loans are carried at unpaid principal balances and are issued at a fixed rate of interest.
In connection with the Company’s investment strategy to enhance investment yields by selling senior participations, commercial mortgage loans include loans that were originated with the intent to sell of $75 million as of December 31, 2008. There were no loans held for sale as of December 31, 2009.

 

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At December 31, commercial mortgage loans and real estate investments were distributed among the following property types and geographic regions:
                 
(In millions)   2009     2008  
Property type
               
Office buildings
  $ 1,161     $ 1,118  
Apartment buildings
    901       988  
Industrial
    595       546  
Hotels
    499       512  
Retail facilities
    426       441  
Other
    64       65  
 
           
Total
  $ 3,646     $ 3,670  
 
           
Geographic region
               
Pacific
  $ 1,069     $ 1,102  
South Atlantic
    735       779  
New England
    582       546  
Central
    517       512  
Middle Atlantic
    408       394  
Mountain
    335       337  
 
           
Total
  $ 3,646     $ 3,670  
 
           
At December 31, 2009, scheduled commercial mortgage loan maturities were as follows (in millions): $278 in 2010, $394 in 2011, $644 in 2012, $613 in 2013 and $1,593 thereafter.
Actual maturities could differ from contractual maturities for several reasons: borrowers may have the right to prepay obligations, with or without prepayment penalties; the maturity date may be extended; and loans may be refinanced.
Real estate investments with a carrying value of $55 million at December 31, 2009 and $13 million at December 31, 2008 were non-income producing during the preceding twelve months.
As of December 31, the Company had impaired commercial mortgage loans and related valuation reserves (excluding loans held for sale) as follows:
                                                 
    2009     2008  
(In millions)   Gross     Reserves     Net     Gross     Reserves     Net  
Impaired commercial mortgage loans with valuation reserves
  $ 143     $ (17 )   $ 126     $     $     $  
Impaired commercial mortgage loans with no valuation reserves
    96             96       59             59  
 
                                   
Total
  $ 239     $ (17 )   $ 222     $ 59     $     $ 59  
 
                                   
During 2009, the Company recorded a $17 million pre-tax ($11 million after-tax) increase to valuation reserves on impaired commercial mortgage loans. Commercial mortgage loans without valuation reserves are also considered impaired (probable that the Company will not collect all amounts due according to the terms of the original loan agreements); however, the Company expects to recover their remaining carrying value primarily because it is less than the fair value of the underlying collateral of these loans. The average recorded investment in impaired mortgage loans was $116 million during December 31, 2009 and $12 million during December 31, 2008. Pre-tax interest income recognized on impaired commercial mortgage loans was $3 million in 2009 and $1 million in 2008.
As of December 31, 2009, the Company had commitments to extend credit under commercial mortgage loan agreements of $41 million, all of which were at a fixed rate of interest. These loan commitments are diversified by property type and geographic region. As of December 31, 2009, the Company had commitments to contribute additional equity of $10 million to real estate investments. The Company expects to disburse most of the committed amounts in 2010.

 

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C.  Other Long-term Investments
As of December 31, other long-term investments consisted of the following:
                 
(In millions)   2009     2008  
Real estate entities
  $ 289     $ 321  
Securities partnerships
    272       242  
Interest rate and foreign currency swaps
    16       45  
Mezzanine loans
    13       21  
Other
    5       3  
 
           
Total
  $ 595     $ 632  
 
           
Investments in real estate entities and securities partnerships with a carrying value of $121 million at December 31, 2009 and $96 million at December 31, 2008 were non-income producing during the preceding twelve months.
As of December 31, 2009, the Company had commitments to contribute:
  $253 million to limited liability entities that hold either real estate or loans to real estate entities that are diversified by property type and geographic region; and
  $338 million to entities that hold securities diversified by issuer and maturity date.
The Company expects to disburse approximately 40% of the committed amounts in 2010 and the remaining amounts by 2015.
D. Short-Term Investments and Cash Equivalents
Short-term investments and cash equivalents included corporate securities of $624 million, federal government securities of $402 million and money market funds of $104 million at December 31, 2009. The Company’s short-term investments and cash equivalents at December 31, 2008 included corporate securities of $1.1 billion, federal government securities of $126 million and money market funds of $147 million.
E.  Concentration of Risk
As of December 31, 2009 and 2008, the Company did not have a concentration of investments in a single issuer or borrower exceeding 10% of shareholders’ equity.

 

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Note 13 — Derivative Financial Instruments
The Company’s investment strategy is to manage the characteristics 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. 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, from time to time, to enhance investment returns.
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 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 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 net income (generally as part of realized investment gains and losses).
Certain subsidiaries of the Company are parties to over-the-counter derivative instruments that contain provisions requiring both parties to such instruments to post collateral depending on net liability thresholds and the party’s financial strength or credit rating. The collateral posting requirements vary by counterparty. The aggregate fair value of derivative instruments with such credit-risk-related contingent features where subsidiaries of the Company were in a net liability position as of December 31, 2009 was $29 million for which the Company was not required to post collateral with its counterparties. If the various contingent features underlying the agreements were triggered as of December 31, 2009, the Company would be required to post collateral equal to the total net liability. Such subsidiaries are parties to certain other derivative instruments that contain termination provisions for which the counterparties could demand immediate payment of the total net liability position if the financial strength rating of the subsidiary were to decline below specified levels. As of December 31, 2009, there was no net liability position under such derivative instruments.
See Note 7 for a discussion of derivatives associated with GMDB contracts and Note 11 for a discussion of derivatives arising from GMIB contracts.
The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments including the Company’s purpose for entering into specific derivative transactions, and their locations and effect on the financial statements as of and for the period ended December 31, 2009. Derivatives in the Company’s separate accounts are not included because associated gains and losses generally accrue directly to policyholders.

 

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Instrument / Volume                      
of Activity   Primary Risk   Purpose   Cash Flows   Accounting Policy  
   
Derivatives Designated as Accounting Hedges — Cash Flow Hedges
   
Interest rate swaps — $160 million of par value of related investments

Foreign currency swaps — $179 million of U.S. dollar equivalent par value of related investments

Combination swaps (interest rate and foreign currency) — $54 million of U.S. dollar equivalent par value of related investments
  Interest rate and foreign currency   To hedge the interest and/or foreign currency cash flows of fixed maturities and commercial mortgage loans to match associated liabilities. Currency swaps are primarily euros, Australian dollars, Canadian dollars and British pounds for periods of up to 12 years.   The Company periodically exchanges cash flows between variable and fixed interest rates and/or between two currencies for both principal and interest. Net interest cash flows are reported in net investment income and included in operating activities.   Using cash flow hedge accounting, fair values are reported in other long-term investments or other liabilities and accumulated other comprehensive income and amortized into net investment income or reported in other realized investment gains and losses as interest or principal payments are received.
 
                           
   
    Fair Value Effect on the Financial Statements (in millions)
   
 
                           
 
      As of December 31, 2009   Gain (Loss) Recognized in Other
Comprehensive Income
 
              Accounts Payable, Accrued        
 
  Instrument   Other Long-Term Investments   Expenses and Other Liabilities   For the year ended December 31, 2009
 
  Interest rate swaps   $   8   $     $ (5 )
 
  Foreign currency swaps       4       24     (24 )
 
  Interest rate and foreign currency swaps             6     (12 )
 
                 
 
  Total   $   12   $   30   $ (41 )
 
                 
 
                           
Purchased options — $312 million of cash surrender value of related life insurance policies
  Interest rate   To hedge the possibility of early policyholder cash surrender when the amortized cost of underlying invested assets is greater than their fair values.   The Company pays a fee and may receive or pay cash, based on the difference between the amortized cost and fair values of underlying invested assets at the time of policyholder surrender. These cash flows will be reported in financing activities.   Using cash flow hedge accounting, fair values are reported in other assets or other liabilities, with changes in fair value reported in accumulated other comprehensive income and amortized to other benefit expenses over the life of the underlying invested assets.
 
                           
   
    Fair Value Effect on the Financial Statements
   
 
                           
    Fair 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 contracts at their expiration and reported the cash outflow in operating activities.   Using cash flow hedge accounting, fair values were reported in short-term investments or other liabilities, with changes in fair value reported in accumulated other comprehensive income. The net cumulative gain or loss from the contracts are 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. These losses are amortized to interest expense over the life of the debt beginning in the second quarter of 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.

 

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Instrument / Volume of                      
Activity   Primary Risk   Purpose   Cash Flows   Accounting Policy
   
Derivatives Not Designated as Accounting Hedges
   
Futures — $1,058 million of U.S. dollar equivalent market price of outstanding contracts
  Equity and foreign currency   To reduce domestic and international equity market exposures for certain reinsurance contracts that guarantee minimum death benefits (GMDB) resulting from changes in variable annuity account values based on underlying mutual funds. Currency futures are primarily euros, Japanese yen and British pounds.   The Company receives (pays) cash daily in the amount of the change in fair value of the futures contracts. Cash flows are included in operating activities.   Fair value changes are reported in other revenues. Amounts not yet settled from the previous day’s fair value change (daily variation margin) are reported in premiums, accounts and notes receivable, net or accounts payable, accrued expenses and other liabilities.
 
                           
   
    Fair Value Effect on the Financial Statements (in millions)
   
 
                           
 
                    Other Revenues
 
 
                    For the year ended December 31, 2009  
 
  Futures                   $ (283 )
 
                           
   
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 (losses).
 
                           
   
    Fair Value Effect on the Financial Statements (in millions)
   
 
                           
 
      As of December 31, 2009           Other Realized Investment Gains (Losses)
 
      Other Long-Term Investments           For the year ended December 31, 2009
 
  Interest rate swaps   $   4           $ (1 )
 
                           
   
Written options (GMIB liability) — $1,183 million of maximum potential undiscounted future payments as defined in Note 23 Purchased options (GMIB asset) — $651 million of maximum potential undiscounted future receipts as defined in Note 23
  Equity and interest rate   The Company has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees of minimum income benefits, resulting from the level of variable annuity account values compared with a contractually guaranteed amount. Payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments. The Company purchased reinsurance contracts to reduce a portion of the market risk assumed. These contracts are accounted for as written and purchased options.   The Company periodically receives (pays) fees based on either contractholders’ account values or deposits increased at a contractual rate. The Company will also pay (receive) cash depending on changes in account values and interest rates when contractholders first elect to receive minimum income payments. These cash flows are reported in operating activities.   Fair values are reported in other liabilities (GMIB liability) and other assets (GMIB asset). Changes in fair value are reported in guaranteed minimum income benefits (income) expense.
 
                           
   
    Fair Value Effect on the Financial Statements (in millions)
   
 
                           
 
      As of December 31, 2009   Guaranteed Minimum Income Benefits
(Income) Expense
 
              Accounts Payable, Accrued        
 
  Instrument   Other Assets   Expenses and Other Liabilities   For the year ended December 31, 2009
 
  Written options (GMIB liability)   $     $   903   $ (669 )
 
  Purchased options (GMIB asset)       482           365  
 
  Total   $   482   $   903   $ (304 )

 

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Note 14 — Investment Income and Gains and Losses
A. Net Investment Income
The components of pre-tax net investment income for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Fixed maturities
  $ 748     $ 729     $ 722  
Equity securities
    7       8       8  
Commercial mortgage loans
    223       219       240  
Policy loans
    92       86       81  
Real estate
    (1 )     1       5  
Other long-term investments
    (30 )     6       24  
Short-term investments and cash
    10       43       78  
 
                 
 
    1,049       1,092       1,158  
Less investment expenses
    35       29       44  
 
                 
Net investment income
  $ 1,014     $ 1,063     $ 1,114  
 
                 
Net investment income for separate accounts (which is not reflected in the Company’s revenues) was $22 million for 2009, $148 million for 2008, and $215 million for 2007.
B. Realized Investment Gains and Losses
The following realized gains and losses on investments for the years ended December 31 exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.
                         
(In millions)   2009     2008     2007  
Fixed maturities
  $ 2     $ (237 )   $ (26 )
Equity securities
    12       (31 )     13  
Commercial mortgage loans
    (20 )     (2 )     8  
Other investments, including derivatives
    (37 )     100       21  
 
                 
Realized investment gains (losses) from continuing operations, before income taxes
    (43 )     (170 )     16  
Less income taxes (benefits)
    (17 )     (60 )     5  
Less realized gains attributable to noncontrolling interests
                1  
 
                 
Realized investment gains (losses) from continuing operations
    (26 )     (110 )     10  
 
                 
Realized investment gains from discontinued operations, before income taxes
                25  
Less income taxes
                9  
 
                 
Realized investment gains from discontinued operations
                16  
 
                 
Net realized investment gains (losses)
  $ (26 )   $ (110 )   $ 26  
 
                 

 

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Included in pre-tax realized investment gains (losses) above were asset write-downs and changes in valuation reserves as follows:
                         
(in millions)   2009     2008     2007  
Credit related (1)
  $ 93     $ 67     $ 18  
Other (2)
    13       150       22  
 
                 
Total (3)
  $ 106     $ 217     $ 40  
 
                 
     
(1)   Credit-related losses include other-than-temporary declines in fair value of fixed maturities and equity securities, and impairments of commercial mortgage loans and real estate entities. The amount related to credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income was not significant.
 
(2)   Prior to adoption of new GAAP guidance for other-than-temporary impairments on April 1, 2009, other primarily represented the impact of rising market yields on investments where the Company could not demonstrate the intent and ability to hold until recovery.
 
(3)   Includes other-than-temporary impairments on debt securities of $47 million in 2009, $213 million in 2008 and $31 million in 2007. These impairments are included in both the credit related and other categories above.
The Company recognized pre-tax gains of $13 million in 2009 and pre-tax losses of $31 million in 2008 on hybrid securities. Losses in 2008 include $14 million on hybrid securities (classified as equity securities) of certain quasi-federal government agencies where the Company believes that the decline in fair value is other than temporary.
Realized investment losses in 2009 in other investments, including derivatives primarily represent impairments of real estate entities. In 2008, gains primarily represented gains on the sales of real estate properties held in joint ventures.
Realized investment gains and (losses) that are not reflected in the Company’s revenues for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Separate accounts
  $ (25 )   $ (146 )   $ 652  
Investment gains required to adjust future policy benefits for the run-off settlement annuity business
  $ 51     $ 8     $ 18  
Sales information for available-for-sale fixed maturities and equity securities, for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Proceeds from sales
  $ 949     $ 1,465     $ 1,040  
Gross gains on sales
  $ 51     $ 13     $ 26  
Gross losses on sales
  $ (9 )   $ (53 )   $ (12 )

 

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Note 15 — Debt
                 
(In millions)   2009     2008  
Short-term:
               
Commercial paper
  $ 100     $ 299  
Current maturities of long-term debt
    4       2  
 
           
Total short-term debt
  $ 104     $ 301  
 
           
Long-term:
               
Uncollateralized debt:
               
7% Notes due 2011
  $ 222     $ 222  
6.375% Notes due 2011
    226       226  
5.375% Notes due 2017
    250       250  
6.35% Notes due 2018
    300       300  
8.5% Notes due 2019
    349        
6.37% Notes due 2021
    78       78  
7.65% Notes due 2023
    100       100  
8.3% Notes due 2023
    17       17  
7.875% Debentures due 2027
    300       300  
8.3% Step Down Notes due 2033
    83       83  
6.15% Notes due 2036
    500       500  
Other
    11       14  
 
           
Total long-term debt
  $ 2,436     $ 2,090  
 
           
Under a universal shelf registration statement filed with the Securities and Exchange Commission, 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 treasury locks. See Note 13 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). The difference between the stated and effective interest rates primarily reflects the effect of treasury locks. 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 40 basis points.
Maturities of debt and capital leases are as follows (in millions): $4 in 2010, $452 in 2011, $3 in 2012, $3 in 2013, none in 2013 and the remainder in years after 2013. Interest expense on long-term debt, short-term debt and capital leases was $166 million in 2009, $146 million in 2008, and $122 million in 2007.
On March 14, 2008, the Company entered into a 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 facility for funding. In October 2008, the Company added an additional dealer to its Program. As of December 31, 2009, the Company had $100 million in commercial paper outstanding, at a weighted average interest rate of 0.35%, used for corporate purposes.

 

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In June 2007, the Company amended and restated its five-year revolving credit and letter of credit agreement for $1.75 billion, which permits up to $1.25 billion to be used for letters of credit. The agreement includes options, which are subject to consent by the administrative agent and the committing bank, to increase the commitment amount up to $2.0 billion and to extend the term of the agreement. The Company entered into the agreement for general corporate purposes, including the support for the issuance of commercial paper and to obtain statutory reserve credit for certain reinsurance arrangements. There was a $27 million letter of credit issued as of December 31, 2009. As of December 31, 2009, the Company had an additional $1.5 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.
Note 16 — Common and Preferred Stock
As of December 31, the Company had issued the following shares:
                 
(Shares in thousands)   2009     2008  
Common: Par value $0.25 600,000 shares authorized
               
Outstanding — January 1
    271,036       279,588  
Issued for stock option and other benefit plans
    3,221       1,458  
Repurchase of common stock
          (10,010 )
 
           
Outstanding — December 31
    274,257       271,036  
Treasury stock
    76,689       79,910  
 
           
Issued — December 31
    350,946       350,946  
 
           
The Company maintains a share repurchase program, which was authorized by its Board of Directors. The decision to repurchase shares depends on market conditions and alternative uses of capital. The Company has, and may continue from time to time, to repurchase shares on the open market through a Rule 10b5-1 plan that permits a company to repurchase its shares at times when it otherwise might be precluded from doing so under insider trading laws or because of self-imposed trading blackout periods.
The Company has authorized a total of 25 million shares of $1 par value preferred stock. No shares of preferred stock were outstanding at December 31, 2009 or 2008.

 

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Note 17 — Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) excludes amounts required to adjust future policy benefits for the run-off settlement annuity business.
Changes in accumulated other comprehensive income (loss) were as follows:
                         
            Tax        
            (Expense)     After-  
(In millions)   Pre-Tax     Benefit     Tax  
2009
                       
Net unrealized appreciation, securities:
                       
Implementation effect of updated guidance on other-than-temporary impairments
  $ (27 )   $ 9     $ (18 )
Net unrealized appreciation on securities arising during the year
    843       (292 )     551  
Reclassification adjustment for (gains) included in shareholders’ net income
    (14 )     3       (11 )
 
                 
Net unrealized appreciation, securities
  $ 802     $ (280 )   $ 522  
 
                 
Net unrealized depreciation, derivatives
  $ (30 )   $ 13     $ (17 )
 
                 
Net translation of foreign currencies
  $ 76     $ (28 )   $ 48  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 7     $ (3 )   $ 4  
Curtailment gain
    (46 )     16       (30 )
 
                 
Reclassification adjustment included in shareholders’ net income
    (39 )     13       (26 )
Net change arising from assumption and plan changes and experience
    (107 )     36       (71 )
 
                 
Net postretirement benefits liability adjustment
  $ (146 )   $ 49     $ (97 )
 
                 
                         
            Tax        
            (Expense)     After-  
(In millions)   Pre-Tax     Benefit     Tax  
2008
                       
Net unrealized depreciation, securities:
                       
Net unrealized depreciation on securities arising during the year
  $ (706 )   $ 245     $ (461 )
Reclassification adjustment for losses included in net income
    268       (94 )     174  
 
                 
Net unrealized depreciation, securities
  $ (438 )   $ 151     $ (287 )
 
                 
Net unrealized appreciation, derivatives
  $ 9     $ (3 )   $ 6  
 
                 
Net translation of foreign currencies:
  $ (183 )   $ 62     $ (121 )
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 21     $ (7 )   $ 14  
Net change arising from assumption and plan changes and experience
    (1,134 )     397       (737 )
 
                 
Net postretirement benefits liability adjustment
  $ (1,113 )   $ 390     $ (723 )
 
                 

 

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            Tax        
            (Expense)     After-  
(In millions)   Pre-Tax     Benefit     Tax  
2007
                       
Net unrealized depreciation, securities:
                       
Implementation effect of updated guidance on accounting for hybrid financial instruments
  $ (18 )   $ 6     $ (12 )
Net unrealized depreciation on securities arising during the year
    (68 )     24       (44 )
Reclassification due to sale of discontinued operations
    (23 )     8       (15 )
Reclassification adjustment for losses included in shareholders’ net income
    13       (4 )     9  
 
                 
Net unrealized depreciation, securities
  $ (96 )   $ 34     $ (62 )
 
                 
Net unrealized depreciation, derivatives
  $ (6 )   $ 2     $ (4 )
 
                 
Net translation of foreign currencies:
                       
Net translation of foreign currencies arising during the year
  $ 33     $ (10 )   $ 23  
Reclassification due to sale of discontinued operations
    8       (3 )     5  
 
                 
Net translation of foreign currencies
  $ 41     $ (13 )   $ 28  
 
                 
Postretirement benefits liability adjustment:
                       
Reclassification adjustment for amortization of net losses from past experience and prior service costs
  $ 95     $ (33 )   $ 62  
Net change arising from assumption and plan changes and experience
    301       (105 )     196  
 
                 
Net postretirement benefits liability adjustment
  $ 396     $ (138 )   $ 258  
 
                 
Note 18 — Shareholders’ Equity and Dividend Restrictions
State insurance departments and foreign jurisdictions that regulate certain of the Company’s subsidiaries prescribe accounting practices (which differ in some respects from GAAP) to determine statutory net income and surplus. The Company’s life insurance and HMO company subsidiaries are regulated by such statutory requirements. The statutory net income for the years ended, and statutory surplus as of, December 31 of the Company’s life insurance and HMO subsidiaries were as follows:
                         
(In millions)   2009     2008     2007  
Net income
  $ 1,088     $ 420     $ 1,130  
Surplus
  $ 4,728     $ 3,638     $ 3,346  
As of December 31, 2009, statutory surplus for each of the Company’s life insurance and HMO subsidiaries is sufficient to meet the minimum required by regulators. As of December 31, 2009, the Company’s life insurance and HMO subsidiaries had investments on deposit with state departments of insurance with statutory carrying values of $349 million. The Company’s life insurance and HMO subsidiaries are also subject to regulatory restrictions that limit the amount of annual dividends or other distributions (such as loans or cash advances) insurance companies may extend to the parent company without prior approval of regulatory authorities. The maximum dividend distribution that the Company’s life insurance and HMO subsidiaries may make during 2010 without prior approval is approximately $1.0 billion. Restricted net assets of the Company as of December 31, 2009, were approximately $4.0 billion. One of the Company’s life insurance subsidiaries is permitted to loan up to $400 million to the parent company without prior approval.

 

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Note 19 — Income Taxes
A. Income Tax Expense
The components of income taxes for the years ended December 31 were as follows:
                         
(In millions)   2009     2008     2007  
Current taxes
                       
U.S. income
  $ 211     $ 255     $ 462  
Foreign income
    48       57       36  
State income
    16       1       13  
 
                 
 
    275       313       511  
 
                 
Deferred taxes (benefits)
                       
U.S. income
    279       (224 )     1  
Foreign income
    39       2       (2 )
State income
    1       1       1  
 
                 
 
    319       (221 )      
 
                 
Total income taxes
  $ 594     $ 92     $ 511  
 
                 
Total income taxes for the years ended December 31 were different from the amount computed using the nominal federal income tax rate of 35% for the following reasons:
                         
(In millions)   2009     2008     2007  
Tax expense at nominal rate
  $ 664     $ 135     $ 571  
Tax-exempt interest income
    (31 )     (32 )     (32 )
Effect of permanently invested foreign earnings
    (23 )            
Dividends received deduction
    (3 )     (3 )     (3 )
Resolution of federal tax matters
    (27 )     (1 )     (26 )
State income tax (net of federal income tax benefit)
    12       1       10  
Change in valuation allowance
    (2 )     (15 )     (24 )
Other
    4       7       15  
 
                 
Total income taxes
  $ 594     $ 92     $ 511  
 
                 
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 2009 by $23 million essentially representing unrecognized deferred tax liabilities attributable to the South Korean investment which is considered to be permanent in nature.

 

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B. Deferred Income Taxes
Deferred income tax assets and liabilities as of December 31 are shown below.
                 
(In millions)   2009     2008  
Deferred tax assets
               
Employee and retiree benefit plans
  $ 774     $ 921  
Investments, net
    111       130  
Other insurance and contractholder liabilities
    430       454  
Deferred gain on sale of business
    67       78  
Policy acquisition expenses
    144       147  
Loss carryforwards
    104       111  
Other accrued liabilities
    111       110  
Bad debt expense
    16       22  
Other
    34       39  
 
           
Deferred tax assets before valuation allowance
    1,791       2,012  
Valuation allowance for deferred tax assets
    (116 )     (126 )
 
           
Deferred tax assets, net of valuation allowance
    1,675       1,886  
 
           
Deferred tax liabilities
               
Depreciation and amortization
    291       238  
Unrepatriated foreign income, net
    151       135  
Unrealized appreciation (depreciation) on investments and foreign currency translation
    204       (104 )
 
           
Total deferred tax liabilities
    646       269  
 
           
Net deferred income tax assets
  $ 1,029     $ 1,617  
 
           
Management believes consolidated taxable income to be generated in the future will be sufficient in amount and character to support realization of the Company’s net deferred tax assets of $1.0 billion as of December 31, 2009 and $1.6 billion as of December 31, 2008. This determination is based upon the Company’s consistent overall earnings history and future earnings expectations. Other than deferred tax benefits attributable to operating loss and foreign tax credit carryforwards, there are no constraints on the period of time within which the Company’s deferred tax assets must be realized. Federal operating loss carryforwards of $283 million were available to offset future taxable income of the generating companies, and begin to expire in 2022. Foreign tax credit carryforwards of $11 million were generated in 2009 and may be carried forward 10 years.
The Company’s deferred tax asset is net of a federal and state valuation allowance (see table above). The valuation allowance reflects management’s assessment that certain deferred tax assets may not be realizable. As was the case at December 31, 2008, the valuation allowance at December 31, 2009 relates primarily to operating losses, and other deferred tax benefits, of the run-off reinsurance operations. It is reasonably possible there could be a significant decline in the level of valuation allowance recorded against deferred tax benefits of the reinsurance operations within the next 12 months.
C. Uncertain Tax Positions
A reconciliation of unrecognized tax benefits for the years ended December 31 is as follows:
                         
(In millions)   2009     2008     2007  
Balance at January 1,
  $ 164     $ 260     $ 245  
Increase (decrease) due to prior year positions
    5       (119 )     (31 )
Increase due to current year positions
    76       34       51  
Reduction related to settlements with taxing authorities
    (28 )     (5 )      
Reduction related to lapse of applicable statute of limitations
    (3 )     (6 )     (5 )
 
                 
Balance at December 31,
  $ 214     $ 164     $ 260  
 
                 

 

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The December 31, 2009 balance included $119 million that would impact net income if recognized. 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. The Company, however, is currently unable to reasonably estimate the potential impact of such changes.
The Company classifies net interest expense on uncertain tax positions and any applicable penalties as a component of income tax expense, but excludes these amounts from the liability for uncertain tax positions. The Company’s liability for net interest and penalties was $13 million at December 31, 2009, $19 million at December 31, 2008 and $17 million at December 31, 2007. The 2009 decline included $13 million associated with the completion of an IRS examination.
During 2009, the IRS completed its examination of the Company’s 2005 and 2006 tax years, resulting in a decline in the liability for uncertain tax positions of $36 million, of which $8 million impacted shareholders’ net income. In addition, the Company recorded a reduction of interest and penalties of $13 million resulting in a total impact to shareholders’ net income of $21 million of which:
  $20 million is reflected in continuing operations; and
  $1 million is reflected in discontinued operations.
During 2007, the IRS completed its examination of the Company’s 2003 and 2004 tax years. As a result, the Company recorded shareholders’ net income of $25 million, primarily attributable to the recognition of previously unrecognized tax benefits, of which:
  $23 million is reflected in continuing operations; and
  $2 million is associated with the disposition of Lovelace Health Systems, Inc. in 2003, and is reflected in discontinued operations.
D. Federal Income Tax Examinations, Litigation and Other Matters
During the first quarter of 2009, final resolution was reached in one of the two disputed issues associated with the IRS examination of the Company’s 2003 and 2004 consolidated federal income tax returns. The second of these disputed matters remains unresolved and on June 4, 2009 the Company initiated litigation of this matter by filing a petition in the United States Tax Court. Due to the nature of the litigation process, 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, two issues remain unresolved from the IRS examination of the Company’s 2005 and 2006 consolidated federal income tax returns. One of these unresolved issues is the same matter which remains in dispute from the prior IRS examination. The Company will attempt to resolve the other matter through the administrative appeals process, and filed a formal protest of the proposed adjustments on March 31, 2009.
The IRS has commenced examination of the Company’s 2007 and 2008 consolidated federal income tax returns, completion of which is not expected during 2010. The Company conducts business in numerous states and foreign jurisdictions, and may be engaged in multiple audit proceedings at any given time. Generally, no further state or foreign audit activity for years prior to 2002 is expected.
Congress could initiate tax reform legislation in 2010 that potentially includes changes to the U.S. taxation of foreign operations, similar to provisions previously considered for 2010. If ultimately enacted, these changes could increase the Company’s effective tax rate.
Note 20 — Employee Incentive Plans
The People Resources Committee of the Board of Directors awards stock options, restricted stock and deferred stock to certain employees. To a very limited extent, the Committee has issued common stock instead of cash compensation and dividend equivalent rights as part of restricted and deferred stock units. The Company issues shares from Treasury stock for option exercises, awards of restricted stock and payment of deferred and restricted stock units.
Compensation cost and related tax benefits for these awards were as follows:
                         
(In millions)   2009     2008     2007  
Compensation cost
  $ 42     $ 41     $ 37  
Tax benefits
  $ 15     $ 14     $ 13  

 

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The Company had the following number of shares of common stock available for award at December 31: 23.3 million in 2009, 28.5 million in 2008 and 31.1 million in 2007.
Stock options. The Company awards options to purchase the Company’s common stock at the market price of the stock on the grant date. Options vest over periods ranging from one to five years and expire no later than 10 years after the grant date.
The table below shows the status of, and changes in, common stock options during the last three years:
                                                 
    2009     2008     2007  
            Weighted             Weighted             Weighted  
            Average             Average             Average  
(Options in thousands)   Options     Exercise Price     Options     Exercise Price     Options     Exercise Price  
Outstanding — January 1
    12,258     $ 35.48       11,430     $ 32.69       17,955     $ 29.24  
Granted
    4,709     $ 14.15       2,311     $ 46.53       1,662     $ 46.97  
Exercised
    (1,167 )   $ 25.32       (1,058 )   $ 27.40       (7,757 )   $ 27.67  
Expired or canceled
    (2,049 )   $ 33.42       (425 )   $ 40.67       (430 )   $ 34.73  
 
                                         
 
                                               
Outstanding — December 31
    13,751     $ 29.34       12,258     $ 35.48       11,430     $ 32.69  
 
                                   
Options exercisable at year-end
    8,578     $ 33.53       8,687     $ 31.19       8,383     $ 29.37  
 
                                   
Compensation expense of $19 million related to unvested stock options at December 31, 2009 will be recognized over the next two years (weighted average period).
The table below summarizes information for stock options exercised during the last three years:
                         
(In millions)   2009     2008     2007  
Intrinsic value of options exercised
  $ 7     $ 23     $ 169  
Cash received for options exercised
  $ 30     $ 26     $ 203  
Excess tax benefits realized from options exercised
  $     $ 6     $ 39  
The following table summarizes information for outstanding common stock options at December 31, 2009:
                 
(In millions, except options in   Options     Options  
thousands)   Outstanding     Exercisable  
Number
    13,751       8,578  
Total intrinsic value
  $ 123     $ 41  
Weighted average exercise price
  $ 29.34     $ 33.53  
Weighted average remaining contractual life
  6.0 years     4.3 years  
The weighted average fair value of options granted under employee incentive plans was $4.60 for 2009, $14.33 for 2008 and $16.05 for 2007, using the Black-Scholes option-pricing model and the following assumptions:
                         
    2009     2008     2007  
Dividend yield
    0.3 %     0.1 %     0.1 %
Expected volatility
    40.0 %     35.0 %     35.0 %
Risk-free interest rate
    1.6 %     2.2 %     4.7 %
Expected option life
  4 years     4 years     4 years
The expected volatility reflects the Company’s past daily stock price volatility. The Company 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. The risk-free interest rate is derived using the four-year U.S. Treasury bond yield rate as of the award date for the primary grant. Expected option life reflects the Company’s historical experience excluding activity related to options granted under a replacement option feature. This feature was cancelled in 2004.

 

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Restricted stock. The Company awards restricted stock to its employees or directors with vesting periods ranging from one to five years. These awards are generally in one of two forms: restricted stock grants or restricted stock units. Restricted stock grants are the most widely used form of restricted stock awards and are used for substantially all U.S.-based employees receiving restricted stock awards. Recipients of restricted stock grants are entitled to receive dividends and to vote during the vesting period, but forfeit their awards if their employment terminates before the vesting date. Awards of restricted stock units are generally limited to international employees. A restricted stock unit represents a right to receive a common share of stock when the unit vests. Recipients of restricted stock units are entitled to receive hypothetical dividends, but cannot vote during the vesting period. They forfeit their units if their employment terminates before the vesting date.
The table below shows the status of, and changes in, restricted stock grants and units during the last three years:
                                                 
    2009     2008     2007  
            Weighted             Weighted             Weighted  
            Average Fair Value             Average Fair Value             Average Fair Value  
(Awards in thousands)   Grants/Units     at Award Date     Grants/Units     at Award Date     Grants/Units     at Award Date  
Outstanding — January 1
    2,347     $ 40.53       2,482     $ 34.28       2,802     $ 26.72  
Awarded
    2,678     $ 18.14       820     $ 43.90       698     $ 47.20  
Vested
    (557 )   $ 32.00       (760 )   $ 23.81       (750 )   $ 19.06  
Forfeited
    (355 )   $ 33.79       (195 )   $ 40.47       (268 )   $ 31.45  
 
                                         
 
Outstanding — December 31
    4,113     $ 27.65       2,347     $ 40.53       2,482     $ 34.28  
 
                                   
The fair value of vested restricted stock was: $10 million in 2009, $35 million in 2008 and $36 million in 2007.
At the end of 2009, approximately 2,880 employees held 4.1 million restricted stock grants and units with $63 million of related compensation expense to be recognized over the next three years (weighted average period).
Note 21 — Leases, Rentals and Outsourced Service Arrangements
Rental expenses for operating leases, principally for office space, amounted to $138 million in 2009, $131 million in 2008 and $114 million in 2007. As of December 31, 2009, future net minimum rental payments under non-cancelable operating leases were approximately $500 million, payable as follows (in millions): $116 in 2010, $107 in 2011, $83 in 2012, $60 in 2013, $44 in 2014 and $90 thereafter.
The Company also has several outsourced service arrangements with third parties, primarily for human resource and information technology support services. The initial service periods under these arrangements range from two to seven years and their related costs are reported consistent with operating leases over the service period based on the pattern of use. The Company recorded in other operating expense $115 million in 2009, $113 million in 2008 and $87 million in 2007 for these arrangements.

 

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Note 22 — Segment Information
The Company’s operating segments generally reflect groups of related products, except for the International segment which is generally based on geography. In accordance with GAAP, operating segments that do not require separate disclosure may be combined. The Company measures the financial results of its segments using “segment earnings (loss),” which is defined as income (loss) from continuing operations excluding after-tax realized investment gains and losses.
Consolidated pre-tax income from continuing operations is primarily attributable to domestic operations. Consolidated pre-tax income from continuing operations generated by the Company’s foreign operations was approximately 9% in 2009, 36% in 2008 and 11% in 2007.
The Company determines segment earnings (loss) consistent with the accounting policies for the consolidated financial statements, except that amounts included in Corporate are not allocated to segments. The Company allocates certain other operating expenses, such as systems and other key corporate overhead expenses, on systematic bases. Income taxes are generally computed as if each segment were filing a separate income tax return. The Company does not report total assets by segment since this is not a metric used to allocate resources or evaluate segment performance.
The Company presents segment information as follows:
Health Care includes medical, dental, behavioral health, prescription drug and other products and services that may be integrated to support consumer-focused health care programs. This segment also includes group disability and life insurance products that were historically sold in connection with certain experience-rated medical products.
Disability and Life includes group:
  disability insurance;
  disability and workers’ compensation case management;
  life insurance;
  accident; and
  specialty insurance.
International includes:
  life, accident and supplemental health insurance products; and
  international health care products and services including those offered to expatriate employees of multinational corporations.
Run-off Reinsurance includes accident, workers’ compensation, international life and health, GMDB and GMIB reinsurance businesses. The Company stopped underwriting new reinsurance business in 2000.
The Company also reports results in two other categories.
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.
Corporate reflects amounts not allocated to segments, such as interest expense on corporate debt and on uncertain tax positions, net investment income on investments not supporting segment operations, intersegment eliminations, compensation cost for stock options and certain corporate overhead expenses.

 

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Summarized segment financial information for the years ended December 31 was as follows:
                         
(In millions)   2009     2008     2007  
Health Care
                       
Premiums and fees:
                       
Medical:
                       
Guaranteed cost excluding voluntary / limited benefits (1),(2)
  $ 3,148     $ 3,504     $ 3,877  
Voluntary/limited benefits
    232       200       160  
Experience-rated (2),(3)
    1,699       1,953       1,877  
Stop loss
    1,274       1,197       589  
Dental
    731       785       773  
Medicare
    595       400       349  
Medicare Part D
    342       327       326  
Other (4)
    515       518       473  
 
                 
Total medical
    8,536       8,884       8,424  
Life and other non-medical
    179       184       235  
 
                 
Total premiums
    8,715       9,068       8,659  
Fees (2),(5)
    2,669       2,597       2,007  
 
                 
Total premiums and fees
    11,384       11,665       10,666  
Mail order pharmacy revenues
    1,282       1,204       1,118  
Other revenues
    262       267       250  
Net investment income
    181       200       202  
 
                 
Segment revenues
  $ 13,109     $ 13,336     $ 12,236  
Income taxes
  $ 399     $ 352     $ 358  
Segment earnings
  $ 731     $ 664     $ 679  
 
                 
     
(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 $41 million in 2009, $69 million in 2008 and $61 million in 2007.

 

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(In millions)   2009     2008     2007  
Disability and Life
                       
Premiums and fees:
                       
Life
  $ 1,301     $ 1,261     $ 1,148  
Disability
    1,057       1,004       942  
Other
    276       297       284  
 
                 
Total
    2,634       2,562       2,374  
Other revenues
    113       117       131  
Net investment income
    244       256       276  
 
                 
Segment revenues
  $ 2,991     $ 2,935     $ 2,781  
Income taxes
  $ 109     $ 109     $ 92  
Segment earnings
  $ 284     $ 273     $ 254  
 
                 
International
                       
Premiums and fees:
                       
Health Care
  $ 884     $ 856     $ 845  
Life, Accident and Health
    998       1,014       955  
 
                 
Total
    1,882       1,870       1,800  
Other revenues
    22       18       7  
Net investment income
    69       79       77  
 
                 
Segment revenues
  $ 1,973     $ 1,967     $ 1,884  
Income taxes
  $ 70     $ 104     $ 96  
Equity in income of investees
  $ 11     $ 8     $ 3  
Segment earnings
  $ 183     $ 182     $ 176  
 
                 
Run-off Reinsurance
                       
Premiums and fees and other revenues
  $ (254 )   $ 374     $ 13  
Net investment income
    113       104       93  
 
                 
Segment revenues
  $ (141 )   $ 478     $ 106  
Income taxes (benefits)
  $ 93     $ (375 )   $ (43 )
Segment earnings (loss)
  $ 185     $ (646 )   $ (11 )
 
                 
Other Operations
                       
Premiums and fees and other revenues
  $ 176     $ 184     $ 190  
Net investment income
    407       414       437  
 
                 
Segment revenues
  $ 583     $ 598     $ 627  
Income taxes
  $ 31     $ 43     $ 45  
Segment earnings
  $ 86     $ 87     $ 109  
 
                 
Corporate
                       
Other revenues and eliminations
  $ (58 )   $ (53 )   $ (55 )
Net investment income
          10       29  
 
                 
Segment revenues
  $ (58 )   $ (43 )   $ (26 )
Income tax benefits
  $ (91 )   $ (81 )   $ (42 )
Segment loss
  $ (142 )   $ (162 )   $ (97 )
 
                 
Realized investment gains (losses) from continuing operations
                       
Realized investment gains (losses) from continuing operations
  $ (43 )   $ (170 )   $ 16  
Income taxes (benefits)
    (17 )     (60 )     5  
Less: Realized investment gain attributable to noncontrolling interest
                1  
 
                 
Realized investment gains (losses) from continuing operations, net of taxes and noncontrolling interest
  $ (26 )   $ (110 )   $ 10  
 
                 
Total
                       
Premiums and fees and other revenues
  $ 16,161     $ 17,004     $ 15,376  
Mail order pharmacy revenues
    1,282       1,204       1,118  
Net investment income
    1,014       1,063       1,114  
Realized investment gains (losses) from continuing operations
    (43 )     (170 )     16  
 
                 
Total revenues
  $ 18,414     $ 19,101     $ 17,624  
Income taxes
  $ 594     $ 92     $ 511  
Segment earnings
  $ 1,327     $ 398     $ 1,110  
Realized investment gains (losses) from continuing operations, net of taxes and noncontrolling interest
  $ (26 )   $ (110 )   $ 10  
 
                 
Shareholders’ income from continuing operations
  $ 1,301     $ 288     $ 1,120  
 
                 

 

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Premiums and fees, mail order pharmacy revenues and other revenues by product type were as follows for the years ended December 31:
                         
(In millions)   2009     2008     2007  
Medical
  $ 12,089     $ 12,337     $ 11,276  
Disability
    1,063       994       945  
Life, Accident and Health
    2,748       2,766       2,619  
Mail order pharmacy
    1,282       1,204       1,118  
Other
    261       907       536  
 
                 
Total
  $ 17,443     $ 18,208     $ 16,494  
 
                 
Note 23 — Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various guarantees provided in the ordinary course of business.
A. Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business
Separate account assets are contractholder funds maintained in accounts with specific investment objectives. The Company records separate account liabilities equal to separate account assets. In certain cases, primarily associated with the sold retirement benefits business (which was sold in April 2004), the Company guarantees a minimum level of benefits for retirement and insurance contracts, written in separate accounts. The Company establishes an additional liability if management believes that the Company will be required to make a payment under these guarantees.
The Company guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. This percentage varies depending on the asset class within a sponsoring employer’s portfolio (for example, a bond fund would require a lower percentage than a riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers do not maintain the required levels of separate account assets, the Company or an affiliate of the buyer has the right to redirect the management of the related assets to provide for benefit payments. As of December 31, 2009, employers maintained assets that exceeded the benefit obligations. Benefit obligations under these arrangements were $1.7 billion as of December 31, 2009. As of December 31, 2009, approximately 75% of these guarantees are reinsured by an affiliate of the buyer of the retirement benefits business. The remaining guarantees are provided by the Company with minimal reinsurance from third parties. There were no additional liabilities required for these guarantees as of December 31, 2009. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy. See Note 11 for further information on the fair value hierarchy.
The Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.
B. Guaranteed Minimum Income Benefit Contracts
The Company’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income benefits under certain variable annuity contracts issued by other insurance companies. A contractholder can elect the guaranteed minimum income benefit (“GMIB”) within 30 days of any eligible policy anniversary after a specified contractual waiting period. The Company’s exposure arises when the guaranteed annuitization benefit exceeds the annuitization benefit based on the policy’s current account value. At the time of annuitization, the Company pays the excess (if any) of the minimum benefit guaranteed under the contract over the benefit based on the current account value in a lump sum to the direct writing insurance company.
In periods of declining equity markets or declining interest rates, the Company’s GMIB liabilities increase. Conversely, in periods of rising equity markets and rising interest rates, the Company’s liabilities for these benefits decrease.
The Company estimates the fair value of the GMIB assets and liabilities using assumptions for market returns and interest rates, volatility of the underlying equity and bond mutual fund investments, mortality, lapse, annuity election rates, non-performance risk, and risk and profit charges. See Note 11 for additional information on how fair values for these liabilities and related receivables for retrocessional coverage are determined.

 

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The Company is required to disclose the maximum potential undiscounted future payments for GMIB contracts. Under these guarantees, the future payment amounts are dependent on equity and bond fund market and interest rate levels prior to and at the date of annuitization election, which must occur within 30 days of a policy anniversary, after the appropriate waiting period. Therefore, the future payments are not fixed and determinable under the terms of the contract. Accordingly, the Company has estimated the maximum potential undiscounted future payments using hypothetical adverse assumptions, defined as follows:
  no annuitants surrendered their accounts;
  all annuitants lived to elect their benefit;
  all annuitants elected to receive their benefit on the next available date (2010 through 2014); and
  all underlying mutual fund investment values remained at the December 31, 2009 value of $1.3 billion with no future returns.
The maximum potential undiscounted payments that the Company would make under those assumptions would aggregate $1.2 billion before reinsurance recoveries. The Company expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount. The Company has retrocessional coverage in place from two external reinsurers which covers 55% of the exposures on these contracts. The Company bears the risk of loss if its retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.
C. Certain Other Guarantees
The Company had indemnification obligations to lenders of up to $235 million as of December 31, 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 2010 through 2017. The Company’s indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, the Company does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, the Company also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of December 31, 2009.
As part of the reinsurance and administrative service arrangements, the Company pays claims for the group medical and long-term disability business of Great-West Healthcare and collects related amounts due from their third-party reinsurers. Any uncollected amounts will represent additional assumed liabilities of the Company and decrease shareholders’ net income if and when these amounts are determined uncollectible. At December 31, 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 $22 million.
As of December 31, 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 each lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. The Company had additional liabilities for these guarantees of $8 million as of December 31, 2009.
The Company had indemnification obligations as of December 31, 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 December 31, 2009.
The Company contracts on an administrative services only (“ASO”) basis with customers who fund their own claims. The Company charges these customers administrative fees based on the expected cost of administering their self-funded programs. In some cases, the Company provides performance guarantees associated with meeting certain service related and other performance standards. If these standards are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company establishes liabilities for estimated payouts associated with these guarantees. Approximately 10% of reported ASO fees were at risk for the periods reported, with actual reimbursements of generally less than 1% of reported ASO fees in 2009, 2008 and 2007.

 

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The Company does not expect that these certain other guarantees will have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.
D. 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 Company’s business practices and will continue to do so in the future. In addition, the Company’s subsidiaries are routinely involved with various claims, lawsuits and regulatory and IRS audits and investigations that could result in financial liability, changes in business practices, or both. Health care regulation in its various forms could have an adverse effect on the Company’s health care operations if it inhibits the Company’s ability to respond to market demands or results in increased medical or administrative costs without improving the quality of care or services.
Other possible regulatory and legislative changes or judicial decisions that could have an adverse effect on the Company’s employee benefits businesses include:
  additional mandated benefits or services that increase costs;
  legislation that would grant plan participants broader rights to sue their health plans;
  changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for the Company’s health care products and services; and pension legislation, which could increase pension cost;
  changes in Employee Retirement Income Security Act of 1974 (“ERISA”) regulations resulting in increased administrative burdens and costs;
  additional restrictions on the use of prescription drug formularies and rulings from pending purported class action litigation, which could result in adjustments to or the elimination of the average wholesale price or “AWP” of pharmaceutical products as a benchmark in establishing certain rates, charges, discounts, guarantees and fees for various prescription drugs;
  additional privacy legislation and regulations that interfere with the proper use of medical information for research, coordination of medical care and disease and disability management;
  additional variations among state laws mandating the time periods and administrative processes for payment of health care provider claims;
  legislation that would exempt independent physicians from antitrust laws; and
  changes in federal tax laws, such as amendments that could affect the taxation of employer provided benefits.
The employee benefits industry remains under scrutiny by various state and federal government agencies and could be subject to government efforts to bring criminal actions in circumstances that could previously have given rise only to civil or administrative proceedings.
Concentration of risk. For the Company’s International segment, South Korea is the single largest geographic market. South Korea generated 29% of the segment’s revenues and 49% of the segment’s earnings for year ended December 31, 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 segment’s results and the Company’s consolidated financial results.
E. Litigation and Other Legal Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory and IRS audits, investigations and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs including payments to providers and benefit level disputes. Litigation of income tax matters is accounted for under FASB’s accounting guidance for uncertainty in income taxes. Further information can be found in Note 19. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously and has recorded accruals in accordance with GAAP. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to the Company’s consolidated results of operations, liquidity or financial condition.

 

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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 Ass’n v. CIGNA Corp. et al.
In 2004, the court approved a settlement agreement between the physician class and CIGNA. However, a dispute over disallowed claims under the settlement submitted by a representative of certain class member physicians is in arbitration. Separately, in 2005, the court approved a settlement between CIGNA and a class of non-physician health care providers. Only the American Dental Association case remains unresolved. On March 2, 2009, the Court dismissed with prejudice five of the six counts of the complaint. 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. The appeal is fully briefed and pending and oral argument is scheduled for February 26, 2010 before the United States Court of Appeals for the Eleventh Circuit. CIGNA denies the allegations and will continue to vigorously defend itself.
CIGNA has received insurance recoveries related to the In re Managed Care Litigation . In 2008, the Court of Common Pleas of Philadelphia County ruled that the Company is not entitled to insurance recoveries from one of the two insurers from which the Company is pursuing further recoveries. CIGNA appealed that decision and on June 3, 2009, the Superior Court of Pennsylvania reversed the trial court’s decision, remanding the case to the trial court for further proceedings.
Broker compensation. Beginning in 2004, the Company, other insurance companies and certain insurance brokers received subpoenas and inquiries from various regulators, including the New York and Connecticut Attorneys General, the Florida Office of Insurance Regulation, the U.S. Attorney’s Office for the Southern District of California and the U.S. Department of Labor relating to their investigations of insurance broker compensation. CIGNA cooperated with the inquiries and investigations.
On August 1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company and Life Insurance Company of North America, were named as defendants in a multi-district litigation proceeding, In re Insurance Brokerage Antitrust Litigation , consolidated in the United States District Court for the District of New Jersey. The complaint alleges that brokers and insurers conspired to hide commissions, thus increasing the cost of employee benefit plans, and seeks treble damages and injunctive relief. Numerous insurance brokers and other insurance companies are named as defendants. In 2008, the court ordered the clerk to enter judgment against plaintiffs and in favor of the defendants. Plaintiffs appealed. CIGNA denies the allegations and will continue to vigorously defend itself.
Amara cash balance pension plan litigation. On December 18, 2001, Janice Amara filed a class action lawsuit, 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 Plan’s cash balance formula discriminates against older employees; the conversion resulted in a wear away period (during which the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are not adequately disclosed in the Plan.
In 2008, the court issued a decision finding in favor of CIGNA Corporation and the CIGNA Pension Plan on the age discrimination and wear away claims. However, the court found in favor of the plaintiffs on many aspects of the disclosure claims and ordered an enhanced level of benefits from the existing cash balance formula for the majority of the class, requiring class members to receive their frozen benefits under the pre-conversion CIGNA Pension Plan and their accrued benefits under the post-conversion CIGNA Pension Plan. The court also ordered, among other things, pre-judgment and post-judgment interest. Both parties appealed the court’s decisions to the United States Court of Appeals for the Second Circuit which issued a decision on October 6, 2009 affirming the District Court’s judgment and order on all issues. On January 4, 2010, the Company and the plaintiffs filed separate petitions for a writ of certiorari to the United States Supreme Court. The implementation of the judgment is currently stayed. The Company will continue to vigorously defend itself in this case. In the second quarter of 2008, the Company recorded a charge of $80 million pre-tax ($52 million after-tax), which principally reflects the Company’s best estimate of the liabilities related to the court order.

 

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Ingenix. On February 13, 2008, State of New York Attorney General Andrew M. Cuomo announced an industry-wide investigation into the use of data provided by Ingenix, Inc., a subsidiary of UnitedHealthcare, used to calculate payments for services provided by out-of-network providers. The Company received four subpoenas from the New York Attorney General’s office in connection with this investigation and responded appropriately. On February 17, 2009, the Company entered into an Assurance of Discontinuance resolving the investigation. In connection with the industry-wide resolution, the Company contributed $10 million to the establishment of a new non-profit company that will compile and provide the data currently provided by Ingenix. In addition, on March 28, 2008, the Company received a voluntary request for production of documents from the Connecticut Attorney General’s office seeking certain out-of-network claim payment information. The Company has responded appropriately. Since January 2009, the Company has received and responded to inquiries regarding the use of Ingenix data from the Illinois and Texas Attorneys General and the Departments of Insurance in Illinois, Florida, Vermont, Georgia, Pennsylvania, Connecticut, and Alaska.
The Company was named as a defendant in seven putative nationwide class actions asserting that due to the use of data from Ingenix, Inc., the Company improperly underpaid claims, an industry-wide issue. Two actions were brought on behalf of members, ( Franco v. CIGNA Corp. et al., and Chazen v. CIGNA Corp. et al. ), and five actions were brought on behalf of providers, ( American Medical Association et al. v. CIGNA Corp. et al., Shiring et al. v. CIGNA Corp. et al .; Higashi et al. v. CGLIC et al.; Pain Management and Surgery Center of Southeast Indiana v. CGLIC et al.; and North Peninsula Surgical Center v. Connecticut General Life Insurance Co. et al. ). Six of the seven matters have been consolidated into the Franco case pending in the United States District Court for the District of New Jersey. The consolidated amended complaint, filed on August 7, 2009, asserts claims under ERISA, the RICO statute, the Sherman Antitrust Act and New Jersey state law. CIGNA filed a motion to dismiss the consolidated amended complaint on September 9, 2009, which is now fully briefed and pending. Discovery is ongoing and class certification is scheduled to be briefed in March and April of 2010. The one remaining class action that has not yet been consolidated in the Franco case is North Peninsula Surgical Center , filed on July 6, 2009, 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. The North Peninsula case was voluntarily dismissed on September 29, 2009 and re-filed in the United States District Court for the District of New Jersey on November 12, 2009. The new complaint includes ERISA and state law unfair competition claims only. The case is expected to be consolidated into the Franco case in the near future.
On June 9, 2009, CIGNA filed motions in the United States District Court for the Southern District of Florida to enforce the In re Managed Care Litigation settlement described above by enjoining the RICO and antitrust causes of action asserted by the provider and medical association plaintiffs in the Ingenix litigation on the ground that they arose prior to and were released in the April 2004 settlement. On November 30, 2009, the Court granted the motions and ordered the provider and association plaintiffs to withdraw their RICO and antitrust claims from the Ingenix litigation by December 21, 2009. The plaintiffs filed notices of appeal with the United States Court of Appeals for the Eleventh Circuit on December 10 and 11, 2009, along with motions to stay the order pending appeal. On January 12, 2010, the United States Court of Appeals for the Eleventh Circuit stayed the order pending resolution of the appeal.
One of the provider plaintiffs, Pain Management and Surgery Center of Southern Indiana, filed a voluntary dismissal of its claims on November 11, 2009.
It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to use of data provided by Ingenix, Inc. The Company denies the allegations asserted in the investigations and litigation and will vigorously defend itself in these matters.
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 industry’s role in providing assistance to individuals with their applications for SSDI. The Company has received one Congressional inquiry and has responded to the information request. Also, legislation prohibiting the offset of SSDI payments against private disability insurance payments for prospectively issued policies was introduced but not enacted in the Connecticut state legislature. The Company is also involved in related pending litigation. If the industry is forced to change its offset SSDI procedures, the practices and products for the Company’s Disability and Life segment could be significantly impacted.

 

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(PRICEWATERHOUSECOOPERS LOGO)
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Shareholders of CIGNA Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income and changes in total equity and cash flows present fairly, in all material respects, the financial position of CIGNA Corporation and its subsidiaries (“the Company”) at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2(B) to the Consolidated Financial Statements, the Company adopted ASC 820 “Fair Value Measurements and Disclosures” effective January 1, 2008.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     
/s/ Pricewaterhouse Coopers LLP
   
 
   
Philadelphia, Pennsylvania
   
February 25, 2010
   

 

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Quarterly Financial Data (unaudited)
The following unaudited quarterly financial data is presented on a consolidated basis for each of the years ended December 31, 2009 and 2008. Quarterly financial results necessarily rely heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business, suggest the need to exercise caution in drawing specific conclusions from quarterly consolidated results.
                                 
    Three Months Ended  
(In millions, except per share amounts)   March 31     June 30     Sept. 30     Dec. 31  
Consolidated Results
                               
2009
                               
Total revenues
  $ 4,773     $ 4,488     $ 4,517     $ 4,636  
Income from continuing operations before income taxes
    273       630       487       508  
Shareholders’ net income
    208 (1)     435 (2)     329 (3)     330 (4)
Shareholders’ net income per share:
                               
Basic
    0.76       1.59       1.20       1.20  
Diluted
    0.76       1.58       1.19       1.19  
2008
                               
Total revenues
  $ 4,569     $ 4,863     $ 4,852     $ 4,817  
Income from continuing operations before income taxes
    74       413       233       (338 )
Shareholders’ net income (loss)
    58 (5)     272 (6)     171 (7)     (209) (8)
Shareholders’ net income (loss) per share:
                               
Basic
    0.21       0.97       0.62       (0.77 )
Diluted
    0.20       0.96       0.62       (0.77 )
Stock and Dividend Data
                               
2009
                               
Price range of common stock — high
  $ 23.06     $ 25.60     $ 33.00     $ 38.12  
— low
  $ 12.68     $ 16.84     $ 23.10     $ 26.83  
Dividends declared per common share
  $ 0.040     $     $     $  
2008
                               
Price range of common stock — high
  $ 56.98     $ 44.43     $ 44.13     $ 34.47  
— low
  $ 36.75     $ 35.07     $ 31.76     $ 8.00  
Dividends declared per common share
  $ 0.040     $     $     $  
     
(1)   The first quarter of 2009 includes an after-tax gain of $23 million for the GMIB business, an after-tax benefit of $20 million associated with the completion of the 2005 and 2006 IRS examinations and an after-tax charge of $47 million to strengthen GMDB reserves.
 
(2)   The second quarter of 2009 includes an after-tax gain of $110 million for the GMIB business, an after-tax benefit of $30 million associated with a pension curtailment gain, and an after-tax charge of $9 million for the cost reduction program.
 
(3)   The third quarter of 2009 includes an after-tax gain of $16 million for the GMIB business and an after-tax charge of $7 million for the cost reduction program.
 
(4)   The fourth quarter of 2009 includes an after-tax gain of $60 million for the GMIB business and an after-tax charge of $13 million for the cost reduction program.
 
(5)   The first quarter of 2008 includes an after-tax loss of $195 million for the GMIB business and an after-tax charge of $24 million associated with litigation matters.
 
(6)   The second quarter of 2008 includes an after-tax benefit of $34 million for the GMIB business and an after-tax charge of $52 million associated with litigation matters.
 
(7)   The third quarter of 2008 includes an after-tax loss of $61 million for the GMIB business.
 
(8)   The fourth quarter of 2008 includes an after-tax loss of $215 million for the GMIB business, an after-tax loss of $192 million for the GMDB business and an after-tax charge of $35 million for the cost reduction program partially offset by an after-tax benefit of $47 million for a reduction in management incentive compensation accruals.

 

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Five-Year Cumulative Total Shareholder Return*
December 31, 2004 — December 31, 2009
(PERFORMANCE GRAPH)
                                                 
    12/31/04     12/30/05     12/29/06     12/31/07     12/31/08     12/31/09  
CIGNA
  $ 100     $ 137     $ 162     $ 198     $ 62     $ 130  
S&P 500 Index
  $ 100     $ 105     $ 121     $ 128     $ 81     $ 102  
S&P Mgd. Health Care, Life & Health Ins. Indexes**
  $ 100     $ 138     $ 136     $ 155     $ 72     $ 90  
     
*   Assumes that the value of the investment in CIGNA common stock and each index was $100 on December 31, 2004 and that all dividends were reinvested.
 
**   Weighted average of S&P Managed Health Care (75%) and Life & Health Insurance (25%) Indexes.

 

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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.   CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
Based on an evaluation of the effectiveness of CIGNA’s disclosure controls and procedures conducted under the supervision and with the participation of CIGNA’s management, CIGNA’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, CIGNA’s disclosure controls and procedures are effective to ensure that information required to be disclosed by CIGNA in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
B. Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management report on internal control over financial reporting under the caption “Management’s Annual Report on Internal Control over Financial Reporting” on page 97 in this Form 10-K.
Attestation Report of the Registered Public Accounting Firm
The attestation report of CIGNA’s independent registered public accounting firm, on the effectiveness of CIGNA’s internal control over financial reporting appears under the caption “Report of Independent Registered Public Accounting Firm” on page 168 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in CIGNA’s internal control over financial reporting identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, CIGNA’s internal control over financial reporting.
Item 9B.   OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A . Directors of the Registrant
The information under the captions “The Board of Directors’ Nominees for Terms to Expire in April 2013,” “Directors Who Will Continue in Office,” “Board of Directors and Committee Meetings, Membership, Attendance and Independence” (as it relates to Audit Committee disclosure), and “Section 16(a) Beneficial Ownership Reporting Compliance” in CIGNA’s proxy statement to be dated on or about March 19, 2010 is incorporated by reference.
B. Executive Officers of the Registrant
See PART I — “Executive Officers of the Registrant on page 45 in this Form 10-K.”

 

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C. Code of Ethics and Other Corporate Governance Disclosures
CIGNA’s Code of Ethics is the Company’s code of business conduct and ethics, and applies to CIGNA’s directors, officers (including the chief executive officer, chief financial officer and chief accounting officer) and employees. The Code of Ethics is posted on the Corporate Governance section found on the “About Us” page of the Company’s website, www.cigna.com. In the event the Company substantively amends its Code of Ethics or waives a provision of the Code, CIGNA intends to disclose the amendment or waiver on the Corporate Governance section of the Company’s website.
In addition, the Company’s corporate governance guidelines (Board Practices) and the charters of its board committees (audit, corporate governance, executive, finance and people resources) are available on the Corporate Governance section of the Company’s website. These corporate governance documents, as well as the Code of Ethics, are available in print to any shareholder who requests them.
Item 11.   EXECUTIVE COMPENSATION
The information under the captions “Director Compensation,” “Report of the People Resources Committee,” “Compensation Discussion and Analysis” and “Executive Compensation” in CIGNA’s proxy statement to be dated on or about March 19, 2010 is incorporated by reference.

 

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Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents information regarding CIGNA’s equity compensation plans as of December 31, 2009:
                         
    (a)     (b)     (c)  
                    Securities Remaining  
                    Available For Future  
    Securities To Be Issued     Weighted Average     Issuance Under Equity  
    Upon Exercise Of     Exercise Price Per Share Of     Compensation Plans  
    Outstanding Options,     Outstanding Options,     (Excluding Securities  
Plan Category   Warrants And Rights     Warrants And Rights     Reflected In Column (a))  
Equity Compensation Plans Approved by Security Holders
    13,751,414     $ 29.34       23,278,830  
Equity Compensation Plans Not Approved by Security Holders
                 
 
                 
Total
    13,751,414     $ 29.34       23,278,830  
The information under the captions “Stock held by Directors, Nominees and Executive Officers” and “Largest Security Holders” in CIGNA’s proxy statement to be dated on or about March 19, 2010 is incorporated by reference.
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption “Certain Transactions” in CIGNA’s proxy statement to be dated on or about March 19, 2010 is incorporated by reference.
Item 14 .   PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the captions “Policy for the Pre-Approval of Audit and Non-Audit Services” and “Fees to Independent Registered Public Accounting Firm” in CIGNA’s proxy statement to be dated on or about March 19, 2010 is incorporated by reference.
PART IV
Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following Financial Statements appear on pages 99 through 168:
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007.
Consolidated Balance Sheets as of December 31, 2009 and 2008.
Consolidated Statements of Comprehensive Income and Changes in Total Equity for the years ended December 31, 2009, 2008 and 2007.
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.
Notes to the Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
(2) The financial statement schedules are listed in the Index to Financial Statement Schedules on page FS-1.
(3) The exhibits are listed in the Index to Exhibits beginning on page E-1.

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 25, 2010
         
  CIGNA CORPORATION
 
 
  By:   /s/ Annmarie T. Hagan  
    Annmarie T. Hagan   
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 25, 2010.
     
Signature   Title
 
   
/s/ David M. Cordani
  Chief Executive Officer and Director
David M. Cordani
  (Principal Executive Officer)
 
   
/s/ Annmarie T. Hagan
  Executive Vice President and Chief Financial Officer
Annmarie T. Hagan
  (Principal Financial Officer)
 
   
/s/ Mary T. Hoeltzel
  Vice President and Chief Accounting Officer
Mary T. Hoeltzel
  (Principal Accounting Officer)
 
   
/s/ Isaiah Harris, Jr.
  Chairman of the Board
Isaiah Harris, Jr.
   
 
   
/s/ Jane E. Henney, M.D.
  Director
Jane E. Henney, M.D.
   
 
   
/s/ Peter N. Larson
  Director
Peter N. Larson
   
 
   
/s/ Roman Martinez IV
  Director
Roman Martinez IV
   
 
   
/s/ John M. Partridge
  Director
John M. Partridge
   
 
   

 

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Signature   Title
 
   
/s/ James E. Rogers
  Director
James E. Rogers
   
 
   
/s/ Carol Cox Wait
  Director
Carol Cox Wait
   
 
   
/s/ Eric C. Wiseman
  Director
Eric C. Wiseman
   
 
   
/s/ Donna F. Zarcone
  Director
Donna F. Zarcone
   
 
   
/s/ William D. Zollars
  Director
William D. Zollars
   

 

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CIGNA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
         
    PAGE  
  FS-2  
 
       
Schedules
       
 
       
  FS-3  
 
       
  FS-4  
 
       
  FS-10  
 
       
  FS-12  
 
       
  FS-13  
Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.

 

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Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Board of Directors
and Shareholders of CIGNA Corporation
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 25, 2010 (which report and consolidated financial statements are included under Item 8 in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
     
/s/ Pricewaterhouse Coopers LLP
 
   
Philadelphia, Pennsylvania
   
February 25, 2010
   

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2009
(in millions)
                         
                    Amount at  
                    which shown in  
            Fair     the Consolidated  
Type of Investment   Cost     Value     Balance Sheet  
 
Fixed maturities:
                       
Bonds:
                       
United States government and government agencies and authorities
  $ 398     $ 571     $ 571  
States, municipalities and political subdivisions
    2,341       2,521       2,521  
Foreign governments
    1,040       1,070       1,070  
Public utilities
    50       52       52  
All other corporate bonds
    8,074       8,510       8,510  
Asset backed securities:
                       
United States government agencies mortgage-backed
    33       34       34  
Other mortgage-backed
    126       121       121  
Other asset-backed
    494       541       541  
Redeemable preferred stocks
    24       23       23  
 
                 
Total fixed maturities
    12,580       13,443       13,443  
 
                 
 
                       
Equity securities:
                       
Common stocks:
                       
Industrial, miscellaneous and all other
    19       23       23  
Non redeemable preferred stocks
    118       90       90  
 
                 
Total equity securities
    137       113       113  
 
                 
 
                       
Commercial mortgage loans on real estate
    3,522               3,522  
Policy loans
    1,549               1,549  
Real estate investments
    124               124  
Other long-term investments
    545               595  
Short-term investments
    493               493  
 
                   
 
                       
Total investments
  $ 18,950             $ 19,839  
 
                   

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS OF INCOME
(in millions)
                         
    For the year ended  
    December 31,  
    2009     2008     2007  
 
                       
Other revenues
  $     $     $ 1  
 
                 
Total revenues
                1  
 
                 
 
                       
Operating expenses:
                       
Interest
    160       140       116  
Intercompany interest
    80       220       325  
Other
    68       108       49  
 
                 
Total operating expenses
    308       468       490  
 
                 
Loss before income taxes
    (308 )     (468 )     (489 )
Income tax benefit
    (118 )     (161 )     (164 )
 
                 
Loss of parent company
    (190 )     (307 )     (325 )
Equity in income of subsidiaries from continuing operations
    1,491       595       1,445  
 
                 
Shareholders’ income from continuing operations
    1,301       288       1,120  
Income (loss) from discontinued operations, net of taxes
    1       4       (5 )
 
                 
Shareholders’ net income
  $ 1,302     $ 292     $ 1,115  
 
                 
See Notes to Financial Statements on pages FS-7 through FS-9.

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
BALANCE SHEETS
(in millions)
                                 
    As of December 31,  
    2009     2008  
 
                               
Assets:
                               
Cash and cash equivalents
          $             $ 1  
Investments in subsidiaries
            13,674               12,275  
Other assets
            586               723  
 
                           
Total assets
          $ 14,260             $ 12,999  
 
                           
 
Liabilities:
                               
Intercompany
            4,517               5,088  
Short-term debt
            100               299  
Long-term debt
            2,347               1,998  
Other liabilities
            1,879               2,022  
 
                           
Total liabilities
          $ 8,843             $ 9,407  
 
                           
 
                               
Shareholders’ Equity:
                               
Common stock (shares issued, 351)
            88               88  
Additional paid in capital
            2,514               2,502  
Net unrealized appreciation (depreciation) — fixed maturities
  $ 378             $ (147 )        
Net unrealized appreciation — equity securities
    4               7          
Net unrealized depreciation — derivatives
    (30 )             (13 )        
Net translation of foreign currencies
    (12 )             (60 )        
Postretirement benefits liability adjustment
    (958 )             (861 )        
 
                           
Accumulated other comprehensive loss
            (618 )             (1,074 )
Retained earnings
            8,625               7,374  
Less treasury stock, at cost
            (5,192 )             (5,298 )
 
                           
Total shareholders’ equity
            5,417               3,592  
 
                           
Total liabilities and shareholders’ equity
          $ 14,260             $ 12,999  
 
                           
See Notes to Financial Statements on pages FS-7 through FS-9.

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS OF CASH FLOWS
(in millions)
                         
    For the year ended  
    December 31,  
    2009     2008     2007  
 
                       
Cash Flows from Operating Activities:
                       
Shareholders’ Net Income
  $ 1,302     $ 292     $ 1,115  
Adjustments to reconcile shareholders’ net income to net cash provided by operating activities:
                       
Equity in income of subsidiaries
    (1,494 )     (595 )     (1,445 )
(Income) loss from discontinued operations
    (1 )     (4 )     5  
Dividends received from subsidiaries
    650       535       1,026  
Other liabilities
    (401 )     74       87  
Other, net
    356       (116 )     275  
 
                 
Net cash provided by operating activities
    412       186       1,063  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Other, net
                21  
 
                 
Net cash provided by investing activities
                21  
 
                 
 
                       
Cash Flows from Financing Activities:
                       
Net change in intercompany debt
    (579 )     (426 )     (271 )
Net change in short-term debt
    (199 )     299        
Net proceeds on issuance of long-term debt
    346       297       498  
Repayment of long-term debt
                (376 )
Issuance of common stock
    30       37       248  
Common dividends paid
    (11 )     (14 )     (11 )
Repurchase of common stock
          (378 )     (1,185 )
 
                 
Net cash used in financing activities
    (413 )     (185 )     (1,097 )
Net increase (decrease) in cash and cash equivalents
    (1 )     1       (13 )
Cash and cash equivalents, beginning of year
    1             13  
 
                 
Cash and cash equivalents, end of year
  $     $ 1     $  
 
                 
See Notes to Financial Statements on pages FS-7 through FS-9.

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto in the Annual Report.
     
Note 1 —
  For purposes of these condensed financial statements, CIGNA Corporation’s (the Company) wholly owned and majority owned subsidiaries are recorded using the equity basis of accounting. Certain reclassifications have been made to prior years’ amounts to conform to the 2009 presentation.
 
   
Note 2 —
  On April 25, 2007, the Company’s Board of Directors approved a three-for-one stock split (in the form of a stock dividend) of the Company’s common shares. The stock split was effective on June 4, 2007 for shareholders of record as of the close of business on May 21, 2007.
 
   
Note 3 —
  Short-term and long-term debt consisted of the following at December 31:
                 
(In millions)   2009     2008  
Short-term:
               
Commercial Paper
  $ 100     $ 299  
 
           
Total short-term debt
  $ 100     $ 299  
 
           
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        
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  
 
           
Total long-term debt
  $ 2,347     $ 1,998  
 
           
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 7, 2009 (with an effective interest rate of 9.9% per year). The difference between the stated and effective interest rates primarily reflects the effect of treasury locks. Interest is payable on May 1 and November 1 of each year beginning November 1, 2009. These Notes will mature on May 1, 2019.

 

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On March 4, 2008, the Company issued $300 million of 6.35% Notes (with an effective interest rate of 6.68% per year). The difference between the stated and effective interest rates primarily reflects the effect of treasury locks. 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.
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 December 31, 2009, the Company had $100 million in commercial paper outstanding, at a weighted average interest rate of 0.35%, used for general corporate purposes.
In June 2007, the Company amended and restated its five year revolving credit and letter of credit agreement for $1.75 billion, which permits up to $1.25 billion to be used for letters of credit. The credit agreement includes options, which are subject to consent by the administrative agent and the committing bank, to increase the commitment amount up to $2.0 billion and to extend the term of the agreement. The Company entered into the agreement for general corporate purposes, including support for the issuance of commercial paper and to obtain statutory reserve credit for certain reinsurance arrangements. There was a $27 million of letter of credit issued as of December 31, 2009.
Maturities of long-term debt are as follows (in millions): none in 2010, $448 in 2011, none in 2012 and 2013 and the remainder in years after 2014.
Interest paid on short- and long-term debt amounted to $153 million, $135 million and $116 million for 2009, 2008 and 2007, respectively.
Note 4 — Intercompany liabilities consist primarily of loans payable to CIGNA Holdings, Inc. of $4.6 billion as of December 31, 2009 and $5.1 billion as of December 31, 2008. Interest was accrued at an average monthly rate of 1.56% and 4.23% for 2009 and 2008, respectively.

 

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Note 5 —
  As of December 31, 2009, the Company had guarantees and similar agreements in place to secure payment obligations or solvency requirements of certain wholly owned subsidiaries as follows:
    The Company has arranged for bank letters of credit in the amount of $41 million in support of its indirect wholly owned subsidiaries. As of December 31, 2009, approximately $33 million of the letters of credit were issued to support CIGNA Global Reinsurance Company, an indirect wholly owned subsidiary domiciled in Bermuda. These letters of credit primarily secure the payment of insureds’ claims from run-off reinsurance operations. As of December 31, 2009, approximately $8 million of the letters of credit were issued to provide collateral support for various other indirectly wholly owned subsidiaries of the Company.
    The Company has provided a capital commitment deed in an amount up to $185 million in favor of CIGNA Global Reinsurance Company. This deed is equal to the letters of credit securing the payment of insureds’ claims from run-off reinsurance operations. This deed is required by Bermuda regulators to have these letters of credit for the London run-off reinsurance operations included as admitted assets.
    Various indirect, wholly owned subsidiaries have obtained surety bonds in the normal course of business. If there is a claim on a surety bond and the subsidiary is unable to pay, the Company guarantees payment to the company issuing the surety bond. The aggregate amount of such surety bonds as of December 31, 2009 was $60 million.
    The Company is obligated under a $27 million letter of credit required by the insurer of its high-deductible self-insurance programs to indemnify the insurer for claim liabilities that fall within deductible amounts for policy years dating back to 1994.
    The Company also provides solvency guarantees aggregating $34 million under state and federal regulations in support of its indirect wholly owned medical HMOs in several states.
    The Company has arranged an $80 million letter of credit in support of CIGNA Europe Insurance Company, an indirect wholly owned subsidiary. The Company has agreed to indemnify the banks providing the letters of credit in the event of any draw. CIGNA Europe Insurance Company is the holder of the letters of credit.
    In addition, the Company has agreed to indemnify payment of losses included in CIGNA Europe Insurance Company’s reserves on the assumed reinsurance business transferred from ACE. As of December 31, 2009, the reserve was $105 million.
In 2009, no payments have been made on these guarantees and none are pending. The Company provided other guarantees to subsidiaries that, in the aggregate, do not represent a material risk to the Company’s results of operations, liquidity or financial condition.

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
                                 
    Deferred     Future policy     Medical claims        
    policy     benefits and     payable and     Unearned  
    acquisition     contractholder     unpaid     premiums  
Segment   costs     deposit funds     claims     and fees  
 
                               
Year Ended December 31, 2009:
                               
Health Care
  $ 60     $ 507     $ 1,098     $ 76  
Disability and Life
    6       1,023       3,122       32  
International
    808       1,003       228       282  
Run-off Reinsurance
          1,287       288        
Other Operations
    69       12,800       161       37  
Corporate
                (8 )      
 
                       
Total
  $ 943     $ 16,620     $ 4,889     $ 427  
 
                       
 
                               
Year Ended December 31, 2008:
                               
Health Care
  $ 60     $ 551     $ 1,138     $ 70  
Disability and Life
    7       956       3,104       36  
International
    650       843       205       265  
Run-off Reinsurance
          1,611       356        
Other Operations
    72       13,332       158       43  
Corporate
                       
 
                       
Total
  $ 789     $ 17,293     $ 4,961     $ 414  
 
                       
 
                               
Year Ended December 31, 2007:
                               
Health Care
  $ 51     $ 533     $ 1,198     $ 75  
Disability and Life
    9       879       3,080       39  
International
    682       912       230       331  
Run-off Reinsurance
          875       452       1  
Other Operations
    74       13,542       142       50  
Corporate
                       
 
                       
Total
  $ 816     $ 16,741     $ 5,102     $ 496  
 
                       

 

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                        Amortization        
                        of deferred        
        Net             policy     Other  
Premiums     investment     Benefit     acquisition     operating  
and fees (1)     income (2)     expenses (1)(3)     expenses     expenses (4)  
                                     
$ 11,384     $ 181     $ 7,096     $ 141     $ 4,742  
  2,634       244       1,922       6       670  
  1,882       69       1,080       146       491  
  29       113       (146 )           (273 )
  112       407       398       6       62  
              (16 )           191  
                           
$ 16,041     $ 1,014     $ 10,334     $ 299     $ 5,883  
                           
                                     
$ 11,665     $ 200     $ 7,445     $ 138     $ 4,737  
  2,562       256       1,914       6       633  
  1,870       79       1,003       164       512  
  43       104       782             717  
  113       414       408       6       54  
        10       (15 )           215  
                           
$ 16,253     $ 1,063     $ 11,537     $ 314     $ 6,868  
                           
                                     
$ 10,666     $ 202     $ 7,023     $ 100     $ 4,076  
  2,374       276       1,819       6       610  
  1,800       77       997       124       489  
  60       93       (24 )           184  
  108       437       400       12       61  
        29       (16 )           129  
                           
$ 15,008     $ 1,114     $ 10,199     $ 242     $ 5,549  
                           
     
(1)   Amounts presented are shown net of the effects of reinsurance. See Note 8 to the Consolidated Financial Statements included in CIGNA’s 2009 Annual Report.
 
(2)   The allocation of net investment income is based upon the investment year method, the identification of certain portfolios with specific segments, or a combination of both.
 
(3)   Benefit expenses include Health Care medical claims expense and other benefit expenses.
 
(4)   Other operating expenses include mail order pharmacy cost of goods sold, GMIB (income) expense and other operating expenses, and excludes amortization of deferred policy acquisition expenses.

 

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CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
(in millions)
                                         
                                    Percentage  
            Ceded to     Assumed             of amount  
    Gross     other     from other     Net     assumed  
    amount     companies     companies     amount     to net  
 
                                       
Year Ended December 31, 2009:
                                       
Life insurance in force
  $ 544,687     $ 50,011     $ 71,107     $ 565,783       12.6 %
 
                             
 
                                       
Premiums and fees:
                                       
Life insurance and annuities
  $ 1,909     $ 297     $ 305     $ 1,917       15.9 %
Accident and health insurance
    13,476       156       804       14,124       5.7 %
 
                               
Total
  $ 15,385     $ 453     $ 1,109     $ 16,041       6.9 %
 
                             
 
                                       
Year Ended December 31, 2008:
                                       
Life insurance in force
  $ 392,803     $ 44,116     $ 108,106     $ 456,793       23.7 %
 
                             
 
                                       
Premiums and fees:
                                       
Life insurance and annuities
  $ 1,885     $ 281     $ 333     $ 1,937       17.2 %
Accident and health insurance
    13,605       230       891       14,316       6.6 %
 
                               
Total
  $ 15,490     $ 511     $ 1,224     $ 16,253       7.8 %
 
                             
 
                                       
Year Ended December 31, 2007:
                                       
Life insurance in force
  $ 376,065     $ 42,886     $ 99,281     $ 432,460       23.0 %
 
                             
 
                                       
Premiums and fees:
                                       
Life insurance and annuities
  $ 1,759     $ 280     $ 355     $ 1,834       19.4 %
Accident and health insurance
    13,311       181       44       13,174       0.3 %
 
                               
Total
  $ 15,070     $ 461     $ 399     $ 15,008       2.7 %
 
                             

 

FS-12


Table of Contents

CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in millions)
                                         
            Charged                    
            (Credited)     Charged              
    Balance at     to     (Credited)     Other     Balance  
    beginning     costs and     to other     deductions     at end  
Description   of period     expenses     accounts     -describe (1)     of period  
 
                                       
2009:
                                       
Investment asset valuation reserves:
                                       
Commercial mortgage loans
  $ 3     $ 17     $     $ (3 )   $ 17  
Allowance for doubtful accounts:
                                       
Premiums, accounts and notes receivable
  $ 50     $ (2 )   $     $ (5 )   $ 43  
Deferred tax asset valuation allowance
  $ 126     $ (2 )   $     $ (8 )   $ 116  
Reinsurance recoverables
  $ 23     $ (7 )   $     $ (1 )   $ 15  
 
                                       
2008:
                                       
Investment asset valuation reserves:
                                       
Commercial mortgage loans
  $ 1     $ 2     $     $     $ 3  
Allowance for doubtful accounts:
                                       
Premiums, accounts and notes receivable
  $ 54     $ 12     $ 1     $ (17 )   $ 50  
Deferred tax asset valuation allowance
  $ 150     $ (15 )   $     $ (9 )   $ 126  
Reinsurance recoverables
  $ 27     $ (3 )   $     $ (1 )   $ 23  
 
                                       
2007:
                                       
Investment asset valuation reserves:
                                       
Commercial mortgage loans
  $     $ 1     $     $     $ 1  
Allowance for doubtful accounts:
                                       
Premiums, accounts and notes receivable
  $ 46     $ 15     $     $ (7 )   $ 54  
Deferred tax asset valuation allowance
  $ 174     $ (19 )   $     $ (5 )   $ 150  
Reinsurance recoverables
  $ 161     $ (23 )   $     $ (111 )   $ 27  
     
(1)   Reflects charge-offs upon write-off of underlying receivable balances. The change in the deferred tax valuation allowance in 2009, 2008 and 2007 reflects a reserve release upon the write-off of a portion of the underlying deferred tax asset, resulting in no earnings impact. The change in reinsurance recoverables reflects settlement of underlying reinsurance recoverables, resulting in no earnings impact.

 

FS-13


Table of Contents

INDEX TO EXHIBITS
             
Number   Description   Method of Filing
       
 
   
  3.1    
Restated Certificate of Incorporation of the registrant as last amended April 23, 2008
  Filed as Exhibit 3.1 to the registrant’s Form 10-Q for the period ended March 31, 2008 and incorporated herein by reference.
       
 
   
  3.2    
By-Laws of the registrant as last amended and restated October 28, 2009
  Filed herewith.
       
 
   
  4.1    
Indenture dated August 16, 2006 between CIGNA Corporation and U.S. Bank National Association
  Filed as Exhibit 4.1 to the registrant’s Form S-3ASR on August 17, 2006 and incorporated herein by reference.
       
 
   
  4.2    
Indenture dated January 1, 1994 between CIGNA Corporation and Marine Midland Bank
  Filed herewith.
       
 
   
  4.3    
Indenture dated June 30, 1988 between CIGNA Corporation and Bankers Trust
  Filed herewith.
       
 
   
Exhibits 10.1 through 10.25 are identified as compensatory plans, management contracts or arrangements pursuant to Item 15 of Form 10-K.
       
 
   
  10.1    
Deferred Compensation Plan for Directors of CIGNA Corporation, as amended and restated January 1, 1997
  Filed as Exhibit 10.1 to the registrant’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
       
 
   
  10.2    
Deferred Compensation Plan of 2005 for Directors of CIGNA Corporation, effective January 1, 2005
  Filed as Exhibit 10.2 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.3    
CIGNA Corporation Non-Employee Director Compensation Program as amended and restated effective January 1, 2008
  Filed as Exhibit 10.4 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.4    
CIGNA Corporation Non-Employee Director Compensation Program amended and restated effective January 1, 2010
  Filed herewith.
       
 
   
  10.5    
CIGNA Restricted Share Equivalent Plan for Non-Employee Directors as amended and restated effective January 1, 2008
  Filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.6    
CIGNA Corporation Compensation Program for Independent Vice Chairman/Chairman of the Board of Directors
  Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the period ended September 30, 2009 and incorporated herein by reference.
       
 
   
  10.7    
CIGNA Corporation Stock Plan, as amended and restated through July 2000
  Filed herewith.
       
 
   
  10.8    
CIGNA Stock Unit Plan, as amended and restated effective July 22, 2008
  Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the period ended September 30, 2008 and incorporated herein by reference.
       
 
   
  10.9    
CIGNA Executive Severance Benefits Plan as amended and restated effective July 22, 2008
  Filed as Exhibit 10.2 to the registrant’s Form 10-Q for the period ended September 30, 2008 and incorporated herein by reference.

 

E-1


Table of Contents

             
Number   Description   Method of Filing
       
 
   
  10.10    
Description of Severance Benefits for Executives in Non-Change of Control Circumstances
  Filed herewith.
       
 
   
  10.11    
CIGNA Executive Incentive Plan amended and restated as of January 1, 2008
  Filed as Exhibit 10.8 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.12    
CIGNA Long-Term Incentive Plan as amended and restated effective as of January 1, 2008
  Filed as Exhibit 10.9 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.13    
CIGNA Deferred Compensation Plan, as amended and restated October 24, 2001
  Filed as Exhibit 10.10 to the registrant’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
       
 
   
  10.14    
CIGNA Deferred Compensation Plan of 2005 effective as of January 1, 2005
  Filed as Exhibit 10.12 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.15 (a)  
CIGNA Supplemental Pension Plan as amended and restated effective August 1, 1998
  Filed herewith.
       
 
   
    (b)  
Amendment No. 1 to the CIGNA Supplemental Pension Plan, amended and restated effective as of September 1, 1999
  Filed herewith.
       
 
   
    (c)  
Amendment No. 2 dated December 6, 2000 to the CIGNA Supplemental Pension
  Filed as Exhibit 10.12(c) to the registrant’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
       
 
   
  10.16 (a)  
CIGNA Supplemental Pension Plan of 2005 effective as of January 1, 2005
  Filed as Exhibit 10.15 to the registrant’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
       
 
   
    (b)  
Amendment No. 1 to the CIGNA Supplemental Pension Plan of 2005
  Filed as Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2009 and incorporated herein by reference.

 

E-2


Table of Contents

             
Number   Description   Method of Filing
       
 
   
  10.17    
CIGNA Supplemental 401(k) Plan effective January 1, 2010
  Filed herewith.
       
 
   
  10.18    
Description of CIGNA Corporation Financial Services Program
  Filed herewith.
       
 
   
  10.19    
Description of Mandatory Deferral of Non-Deductible Executive Compensation Arrangement
  Filed as Exhibit 10.14 to the registrant’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
       
 
   
  10.20    
Agreement and Release dated December 9, 2009 with Mr. Hanway
  Filed as Exhibit 10.1 to the registrant’s Form 8-K filed on December 9, 2009 and incorporated herein by reference.
       
 
   
  10.21    
Schedule regarding Amended Deferred Stock Unit Agreements effective December 31, 2008 with Messrs. Hanway, Bell and Murabito and Form of Amended Deferred Stock Unit Agreement
  Filed as Exhibit 10.20 to the registrant’s Form 10-K for the period ended December 31, 2008 and incorporated herein by reference.
       
 
   
  10.22    
Agreement and Release dated May 22, 2009 with Mr. Bell
  Filed as Exhibit 10.1 to the registrant’s Form 8-K filed on May 26, 2009 and incorporated herein by reference.
       
 
   
  10.23    
Form of CIGNA Long-Term Incentive Plan: Nonqualified Stock Option and Grant Letter
  Filed as Exhibit 10.22 to the registrant’s Form 10-K for the period ended December 31, 2007 and incorporated herein by reference.
       
 
   
  10.24    
Form of CIGNA Long-Term Incentive Plan: Restricted Stock Grant and Grant Letter
  Filed herewith.
       
 
   
  10.25    
Asset and Stock Purchase Agreement by and among Great-West Life & Annuity Insurance Company, et al and Connecticut General Life Insurance Company
  Filed as Exhibit 10.23 to the registrant’s Form 10-K for the period ended December 31, 2007 and incorporated herein by reference.
       
 
   
  12    
Computation of Ratios of Earnings to Fixed Charges
  Filed herewith.
       
 
   
  21    
Subsidiaries of the Registrant
  Filed herewith.
       
 
   
  23    
Consent of Independent Registered Public Accounting Firm
  Filed herewith.

 

E-3


Table of Contents

             
Number   Description   Method of Filing
       
 
   
  31.1    
Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
  Filed herewith.
       
 
   
  31.2    
Certification of Chief Financial Officer of CIGNA Corporation pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
  Filed herewith.
       
 
   
  32.1    
Certification of Chief Executive Officer of CIGNA Corporation pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350
  Furnished herewith.
       
 
   
  32.2    
Certification of Chief Financial Officer of CIGNA Corporation pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350
  Furnished herewith.
The registrant will furnish to the Commission upon request a copy of any other instruments defining the rights of holders of long-term debt.
Shareholders may obtain copies of exhibits by writing to CIGNA Corporation, Shareholder Services Department, 1601 Chestnut Street, TL18, Philadelphia, PA 19192.

 

E-4

Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
CIGNA CORPORATION,
a Delaware corporation
incorporated on November 3, 1981
Dated: October 28, 2009

 

 


 

BY-LAWS OF
CIGNA CORPORATION
(A Delaware Corporation)
ARTICLE I
Offices
SECTION 1. Registered Office . The registered office of the Corporation within the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. Other Offices . The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Shareholders
SECTION 1. Place of Meetings . All meetings of the shareholders for the election of directors or for any other purpose shall be held at any such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.
SECTION 2. Annual Meeting . The annual meeting of shareholders shall be held on the fourth Wednesday in April of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding day not a legal holiday, at 3:30 P.M., or at such other time or on such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, the shareholders shall elect directors to the Board of Directors and transact such other business as may properly be brought before the meeting. A nominee for director shall be elected to the Board of Directors if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election; provided, however, that directors shall be elected by a plurality of the votes cast at any meeting of shareholders for which (i) the Corporate Secretary of the Corporation receives a notice that a shareholder has nominated a person for election to the Board of Directors in compliance with Article II, Section 11(b) of these By-Laws and (ii) such nomination has not been withdrawn by such shareholder on or prior to the day next preceding the date the Corporation first mails its notice of meeting for such meeting to the shareholders. If directors are to be elected by a plurality of the votes cast, shareholders shall not be permitted to vote against a nominee.
SECTION 3. Special Meetings . Special meetings of shareholders, unless otherwise prescribed by statute, may be called at any time by the Board of Directors or the Chief Executive Officer. At any special meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors.

 

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SECTION 4. Notice of Meetings . Except as otherwise expressly required by statute, written notice, or notice in the form of electronic transmission to shareholders who have consented to receive notice in such form, of each annual and special meeting of shareholders stating the place, date and time of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder of record entitled to notice of the meeting. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. If mailed, such notice shall be sent in a postage prepaid envelope, addressed to the shareholder at his or her address as it appears on the records of the Corporation. Such notice shall be deemed given (i) if by mail, at the time when the same shall be deposited in the United States mail, postage prepaid; (ii) if by facsimile telecommunication, when directed to a number at which the shareholder has consented to receive notice; (iii) if by electronic mail, when directed to an electronic mail address at which the shareholder has consented to receive such notice; (iv) if by a posting on an electronic network together with a separate notice to the shareholder of such specific posting, upon the later to occur of (a) such posting, or (b) the giving of the separate notice of such posting; or (v) if by any other form of electronic communication, when directed to the shareholder in the manner consented to by the shareholder. Any such consent shall be revocable by the shareholder by written notice to the Corporation. Any such consent shall be deemed revoked if (1) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (2) such inability becomes known to the Corporate Secretary or Assistant Corporate Secretary of the Corporation or to the transfer agent or other person responsible for giving notice; provided however, that inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice of any meeting shall not be required to be given to any person who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, or a waiver by electronic transmission, in person or by proxy. Neither the business to be transacted at, nor the purpose of, an annual or special meeting of shareholders need be specified in any written waiver of notice.
SECTION 5. List of Shareholders . The Corporate Secretary of the Corporation, or such other person who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, in the manner provided by law. The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present.
SECTION 6. Quorum, Adjournments . The holders of at least two-fifths of the issued and outstanding stock of the Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of shareholders, except as otherwise required by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented by proxy at any meeting of shareholders, the chairman of the meeting or a majority of the voting power entitled to vote thereon, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.

 

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SECTION 7. Organization . At each meeting of shareholders, the Chairman of the Board or, in the Chairman’s absence, a director of the Corporation chosen by the Board of Directors at the meeting, shall act as chairman of the meeting. The Corporate Secretary or, in the Corporate Secretary’s absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting shall act as secretary of the meeting and keep the minutes thereof.
SECTION 8. Order of and Rules for Conducting Business . The order of and the rules for conducting business at all meetings of the shareholders shall be as determined by the chairman of the meeting. The chairman shall have the power to adjourn the meeting to another place, date or time.
SECTION 9. Voting . Except as otherwise provided by statute, the Certificate of Incorporation, or any resolution or resolutions adopted by the Board of Directors pursuant to the authority vested in it by the Certificate of Incorporation, each shareholder of the Corporation shall be entitled at each meeting of shareholders to one vote for each share of capital stock of the Corporation standing in such shareholder’s name on the record of shareholders of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 7 of Article V of these By-Laws as the record date for the determination of the shareholders who shall be entitled to vote at such meeting; or
(b) if no such record date shall have been fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given, or, if notice is waived by all shareholders, at the close of business on the day next preceding the day on which the meeting is held.

 

4


 

Each shareholder entitled to vote at any meeting of shareholders may vote in person or may authorize another person or persons to act for such shareholder by a proxy authorized by an instrument in writing or by a transmission permitted by law delivered to the Inspectors of Election, but no such proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A shareholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering an instrument in writing or a transmission permitted by law revoking the proxy or constituting another valid proxy bearing a later date to the Inspectors. Any such proxy shall be delivered to the Inspectors, or such other person so designated to receive proxies, at or prior to the time designated in the order of business for so delivering such proxies. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the voting power of the Corporation present in person or by proxy at such meeting and entitled to vote on the subject matter, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation or of these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by the shareholder’s proxy, if there be such proxy, and shall state the number of shares voted.
SECTION 10. Inspectors of Election . The Board of Directors , the Chairman of the Board or the Chief Executive Officer shall, in advance of any meeting of shareholders, appoint one or more Inspectors of Election to act at the meeting or at any adjournment and make a written report thereof, and may designate one or more persons as alternate Inspectors to replace any Inspectors who fail to act. If no Inspector or alternate is able to act at a meeting of shareholders, the chairman of the meeting shall appoint one or more Inspectors to act at the meeting. Each Inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of Inspector at such meeting with strict impartiality and according to the Inspector’s best ability. The Inspectors shall determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting and the validity of proxies and ballots, receive and count all votes and ballots, determine all challenges and questions arising in connection with the right to vote, retain for a reasonable period a record of the disposition of any challenges made to any determination by the Inspectors, and certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots and report the same to the chairman of the meeting, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. The Inspectors may appoint or retain other persons or entities to assist the Inspectors in the performance of the duties of the Inspectors. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting by the chairman of the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery upon application by a shareholder shall determine otherwise. On request of the chairman of the meeting, the Inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an Inspector of an election of directors. Inspectors need not be shareholders.

 

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Section 11. Nomination of Directors . Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. For nominations to be properly brought before a meeting by a shareholder pursuant to clause (b) of the preceding sentence, (1) the shareholder must have given timely notice thereof in writing to the Corporate Secretary of the Corporation and (2) the shareholder and any beneficial owner on whose behalf a nomination is made must comply with the representation set forth in such shareholder’s Nomination Solicitation Statement (as defined herein). To be timely, a shareholder’s notice shall be received by the Corporate Secretary of the Corporation at the principal executive offices of the Corporation not less than 90 days prior to the meeting; provided, however, that in the event that less than 90 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was first given or such public disclosure was first made. Such shareholder’s notice shall set forth (1) as to each person whom the shareholder proposes to nominate for election or reelection as a director (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended , and the rules and regulations promulgated thereunder (such Act and such rules and regulations, collectively, the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (ii) a statement whether such person, if elected, intends to tender, promptly following such person’s election, an irrevocable resignation effective upon such person’s failure to receive the required vote for reelection at any future meeting at which such person would face reelection and upon acceptance of such resignation by the Board of Directors, in accordance with the Corporation’s Board Practice on Director Selection and Membership; and (2) as to the shareholder giving notice and the beneficial owner, if any, on whose behalf the nomination is made (i) the name and address, as they appear on the Corporation’s stock ledger, of such shareholder and of such beneficial owner, (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and by such beneficial owner and (iii) a statement whether or not such shareholder or beneficial owner intends to deliver a proxy statement and form of proxy to a sufficient number of holders of the Corporation’s voting shares reasonably believed by such shareholder or beneficial owner to elect such nominee or nominees (such statement, a “Nomination Solicitation Statement”). At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Corporate Secretary of the Corporation that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election at any meeting of shareholders as a director of the Corporation unless nominated in compliance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in compliance with the procedures prescribed by the By-Laws, and if the chairman of the meeting should so determine, he or she shall so declare to the meeting and the defective nominations shall be disregarded.
Notwithstanding anything in this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public disclosure naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the meeting, a shareholder’s notice required by these By-Laws shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Corporate Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public disclosure is first made by the Corporation.

 

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SECTION 12. Notice of Shareholder Business . At the annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business (other than nominations for election to the Board of Directors of the Corporation, which are governed by Section 11 of this Article II) must be a proper subject for shareholder action under the Delaware General Corporation Law (the “DGCL”) and must be (a) specified in the notice of meeting (or any supplement thereto) given by the Corporation; (b) brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section, who has complied with the notice procedures set forth in this Section, and who shall be entitled to vote on such business. For business (other than nominations for election to the Board of Directors of the Corporation, which are governed by Section 11 of this Article II) to be properly brought before an annual meeting by a shareholder, (1) the shareholder must have given timely notice thereof in writing to the Corporate Secretary of the Corporation, (2) such business must be a proper matter for shareholder action under the DGCL and (3) the shareholder and any beneficial owner on whose behalf such business is proposed must comply with the representation set forth in such shareholder’s Business Solicitation Statement (as defined herein). To be timely, a shareholder’s notice must be delivered to or mailed and received by the Corporate Secretary of the Corporation at the principal executive offices of the Corporation, not less than 90 days prior to the meeting; provided, however, that in the event that less than 90 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder, to be timely, must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the annual meeting was first mailed or such public disclosure was first made. A shareholder’s notice to the Corporate Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (b) as to the shareholder giving such notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address, as they appear on the Corporation’s stock ledger, of such shareholder and of such beneficial owner, (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner, and (iii) a statement whether or not such shareholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of at least the percentage of the Corporation’s voting shares required under applicable law to carry the proposal (such statement, a “Business Solicitation Statement”). Notwithstanding anything in the By-Laws to the contrary, no business (other than nominations for election to the Board of Directors of the Corporation, which are governed by Section 11 of this Article II) shall be conducted at an annual meeting except in compliance with the procedures set forth in this Section 12. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in compliance with the provisions of this Section 12, and if the chairman of the meeting should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

 

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ARTICLE III
Board of Directors
SECTION 1. General Powers . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the shareholders.
SECTION 2. Number, Qualifications, Election and Term of Office . The Board of Directors shall consist of not less than 8 nor more than 16 directors. The number of directors may be fixed, from time to time, by the affirmative vote of a majority of the entire Board of Directors. Any decrease in the number of directors shall be effective at the time of the next succeeding annual meeting of shareholders unless there shall be vacancies in the Board of Directors, in which case such decrease may become effective at any time prior to the next succeeding annual meeting to the extent of the number of such vacancies. Directors need not be shareholders. The directors (other than members of the initial Board of Directors) shall be divided into three classes which shall be divided as evenly as practicable with respect to the number of members of each class; the term of office of those of the first class to expire at the annual meeting commencing in April, 1983; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after such classification and election, directors shall be chosen by class for a term of three years, or for such shorter term as the shareholders may specify to complete the unexpired term of a predecessor, or to preserve the division of the directors into classes as provided herein. Each director shall hold office until his or her successor shall have been elected and qualified, or until death, or until such director shall have resigned, or shall have been removed, as hereinafter provided in these By-Laws.
SECTION 3. Chairman of the Board .
(a) The Directors shall elect a Chairman of the Board from among the independent members of the Board of Directors who shall serve for a term of three years unless sooner removed, with or without cause, by a majority of the Board of Directors. The Board of Directors shall fill any vacancy in the position of Chairman of the Board of Directors at such time and in such manner as the Board of Directors shall determine. In addition, the Board of Directors may appoint one or more directors to serve in roles with such titles (including the titles of Vice Chairman, Lead Director and Presiding Director), powers, duties and compensation as it may approve.
(b) The Chairman shall perform all duties incident to the office of Chairman of the Board and such other duties as may from time to time be assigned by the Board of Directors, including presiding at all meetings of the shareholders of the Corporation, all meetings of the Board of Directors, and all meetings of the Executive Committee, at which the Chairman shall be present. Except as may otherwise be determined by the Board or provided in these By-Laws, the Chairman may serve as a member of any committee of the Board subject to applicable laws, regulations and standards and, even when not named a standing member of a committee, shall have the right to attend and participate in all meetings of any committee of the Board of Directors as if he or she were a member of such committee, including having the right to vote on any mater brought before the committee and being counted for the purposes of determining whether a quorum of the committee is present.

 

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SECTION 4. Place of Meetings . Meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting.
SECTION 5. Regular Meetings . Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these By-Laws.
SECTION 6. Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board or by one-third of the members of the Board of Directors of the Corporation.
SECTION 7. Notice of Meetings . Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Corporate Secretary as hereinafter provided in this Section. Any such notice shall state the place, date and time of the meeting. Except as otherwise required by these By-Laws, such notice need not state the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, addressed to the director’s residence or usual place of business, by first-class mail, at least two days before the day on which such meeting is to be held, or shall be sent addressed to the director at such place by telegraph, cable, telex, telecopier, electronic transmission or other similar means, or be delivered to the director personally or be given to the director by telephone or other similar means, at least twelve hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice, or waiver by electronic transmission or who shall attend such meeting, except when the director shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
SECTION 8. Quorum and Manner of Acting . A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute or the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such.

 

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SECTION 9. Organization . At each meeting of the Board of Directors, the Chairman of the Board, or, in the absence of the Chairman of the Board, another director chosen by a majority of the directors present shall act as chairman of the meeting and preside thereat. The Corporate Secretary or, in the Corporate Secretary’s absence, any person appointed by the chairman of the meeting shall act as secretary of the meeting and keep the minutes thereof.
SECTION 10. Resignations . Any director of the Corporation may resign at any time by giving notice in writing or by electronic transmission of his or her resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 11. Vacancies . Any vacancy in the Board of Directors, whether arising from death, disqualification, resignation, removal for cause, an increase in the number of directors or any other cause, may be filled by the vote of a majority of the directors then in office, though less than a quorum, or by the sole remaining director. Each director so elected shall hold office until his or her successor shall have been elected and qualified.
SECTION 12. Removal of Directors . Any director may be removed, only for cause, at any time, by the holders of a majority of the voting power of the issued and outstanding capital stock of the Corporation entitled to vote at an election of directors.
SECTION 13. Compensation . The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors, including the Chairman of the Board, for services to the Corporation in any capacity.
SECTION 14. Committees .
(a) The Board shall create an Executive Committee, which shall consist of no less than two nor more than seven members of the Board and shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it, except the Executive Committee shall not have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the shareholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to shareholders for approval or (ii) adopting, amending or repealing any By-Law of the Corporation.

 

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(b) The Board shall create an Audit Committee and a People Resources Committee, each of which shall consist of three (3) or more members of the Board of Directors of the Corporation, none of whom shall be employees of the Corporation or its subsidiaries.
(c) The Board may also create such other committees, with such authority and duties, as the Board may from time to time deem advisable, and may authorize any of such committees to appoint one or more subcommittees. Each such committee or subcommittee, to the extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors and may authorize the seal of the Corporation to be affixed to all papers which require it but shall have no greater powers than those given the Executive Committee by these By-Laws and as restricted by statute or the Certificate of Incorporation. Each such committee or subcommittee shall serve at the pleasure of the Board of Directors or of the committee creating it as the case may be, and have such name as may be determined from time to time by resolution adopted by the Board of Directors or by the committee creating it. Each committee shall keep regular minutes of its meeting and report the same to the Board of Directors or the committee creating it.
(d) The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
SECTION 15. Action by Consent . Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
SECTION 16. Telephonic Meeting . Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting.

 

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ARTICLE IV
Officers
SECTION 1. Selection and Qualifications . The officers of the Corporation shall be elected by the Board of Directors except as otherwise provided herein or in a resolution adopted by the Board of Directors and may include the President, the Chief Executive Officer, one or more Vice Presidents, and such other officers as the Board of Directors may choose. The Board may authorize the Chief Executive Officer to appoint one or more classes of officers with such titles (including the titles of Vice President, Corporate Secretary and Treasurer), powers, duties and compensation as the Chief Executive Officer may approve. Any two or more offices may be held by the same person. Each officer shall hold office until his or her successor shall have been duly elected or appointed and shall have qualified, or until death, or until such officer shall have resigned or have been removed, as hereinafter provided in these By-Laws.
SECTION 2. Resignations . Any officer of the Corporation may resign at any time by giving written notice of such resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective.
SECTION 3. Removal . Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors at any meeting thereof. Any appointed officer of the Corporation may also be removed, either with or without cause, at any time, by the Chief Executive Officer.
SECTION 4. Chief Executive Officer . The Chief Executive Officer shall have responsibility for the general and active management of the business, property and affairs of the Corporation, subject, to the control of the Board of Directors. The Chief Executive Officer shall perform such other duties as may be specified in the By-Laws or assigned by the Board of Directors.
SECTION 5. President . The President shall perform all duties incident to the Office of President and such other duties as may from time to time be assigned to the President by the Chief Executive Officer or the Board of Directors.
SECTION 6. Vice Presidents . Each Vice President shall perform such duties as from time to time may be assigned to the Vice President by the Board of Directors, the Chief Executive Officer, or such other officer as may be designated by one of the foregoing.
SECTION 7. Treasurer . The Treasurer shall:
  (a)   have charge and custody of, and be responsible for, all the funds and securities of the Corporation;
 
  (b)   keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation;
 
  (c)   deposit all moneys and other valuables to the credit of the Corporation in such depositories as may be designated by the Board of Directors or pursuant to its direction;

 

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  (d)   receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever;
 
  (e)   disburse the funds of the Corporation and supervise the investments of its funds, taking proper vouchers therefor;
 
  (f)   render to the Board of Directors, whenever the Board of Directors may require, an account of the Corporation’s cash position; and
 
  (g)   in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board of Directors, or the Chief Executive Officer, or such other officer as may be designated by one of the foregoing.
SECTION 8. Corporate Secretary . The Corporate Secretary shall:
  (a)   keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the shareholders;
 
  (b)   see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law;
 
  (c)   Be custodian of the records and the seal of the Corporation and affix and attest the seal to all certificates for shares of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal;
 
  (d)   see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed in order to maintain the Corporation’s legal existence are properly kept and filed; and
 
  (e)   in general, perform all duties incident to the office of Corporate Secretary and such other duties as from time to time may be assigned by the Board of Directors, the Chief Executive Officer, or such other officer as may be designated by one of the foregoing.
SECTION 9. The Assistant Treasurer . The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their seniority), shall, in the absence of the Treasurer or in the event of the inability or refusal of the Treasurer to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chief Executive Officer, the Treasurer, or such other officer as may be designated by one of the foregoing.

 

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SECTION 10. The Assistant Corporate Secretary . The Assistant Corporate Secretary, or if there be more than one, the Assistant Corporate Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their seniority), shall, in the absence of the Corporate Secretary or in the event of the inability or refusal of the Corporate Secretary to act, perform the duties and exercise the powers of the Corporate Secretary and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the President and Chief Executive Officer, the Corporate Secretary, or such other officer as may be designated by one of the foregoing.
SECTION 11. Designation . The Board of Directors may, by resolution, designate one or more officers to be any of the following: Chief Operating Officer, President , Chief Financial Officer, General Counsel, or Chief Accounting Officer.
SECTION 12. Agents and Employees . If authorized by the Board of Directors, the Chief Executive Officer or any officer or employee of the Corporation designated by the Board or the Chief Executive Officer may appoint or employ such agents and employees as shall be requisite for the proper conduct of the business of the Corporation, and may fix their compensation and the conditions of their employment, subject to removal by the appointing or employing person.
SECTION 13. Officers’ Bonds or Other Security . If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of such officer’s duties, in such amount and with such surety as the Board of Directors may require.
SECTION 14. Compensation . The compensation of all officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors unless by resolution of the Board that authority is delegated to a committee of the Board, the Chief Executive Officer, or any other officer of the Corporation. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that such officer is also a director of the Corporation.
SECTION 15. Terms . Unless otherwise specified by the Board of Directors in any particular election or appointment, each officer shall hold office, and be removable, at the pleasure of the Board.

 

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ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. Stock Certificates; Uncertificated Shares . The shares of the Corporation shall be represented by certificates; provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such resolution by the Board of Directors, every holder of stock represented by certificates, and upon request every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Corporate Secretary or an Assistant Corporate Secretary, representing the number of shares registered in certificate form. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restriction of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required or permitted to be set forth or stated on certificates pursuant to this section or otherwise pursuant to the Delaware General Corporation Law. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
SECTION 2. Facsimile Signatures . Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person was such officer, transfer agent or registrar at the date of issue.
SECTION 3. Lost Certificates . The Corporation may issue a new certificate or certificates, or uncertificated shares, in the place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed. The Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or the owner’s legal representative, to give the Corporation a bond in such sum as it may direct sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
SECTION 4. Transfers of Stock . Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority or transfer, or upon receipt by the transfer agent of a proper instruction from the registered holder of uncertificated shares, it shall be the duty of the Corporation to transfer such shares upon its records and, in connection with the transfer of a share that will be certificated, to issue a new certificate to the person entitled thereto and to cancel the old certificate; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the Corporation for transfer, or when proper instructions with respect to the transfer of uncertificated shares are received, both the transferor and the transferee request the Corporation to do so.

 

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SECTION 5. Transfer Agents and Registrars . The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars.
SECTION 6. Regulations . The Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation.
SECTION 7. Fixing the Record Date . In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may, except as otherwise required by law, fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining shareholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto . A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. To the extent permitted by law, the record date for determining the shareholders entitled to receive notice of a meeting may be different from the record date for determining the shareholders entitled to vote at such meeting.
In order that the Corporation may determine the shareholders entitled to consent to corporate action without a meeting, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not more than ten (10) days after the date upon which the resolution fixing the record date is adopted. If no record date has been fixed by the Board of Directors and no prior action by the Board of Directors is required by the DGCL, the record date shall be the first date on which a consent setting forth the action taken or proposed to be taken is delivered to the Corporation in the manner prescribed by the DGCL. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the DGCL with respect to the proposed action by consent of the shareholders without a meeting, the record date for determining shareholders entitled to consent to corporate action without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

 

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SECTION 8. Registered Shareholders . The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
Indemnification
SECTION 1. Right to Indemnification . Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she (i) is or was a director or an officer of the Corporation or (ii) is or was serving at the request of the Corporation as a director, officer, employee, agent, partner or trustee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (the persons in clauses (i) and (ii) hereinafter referred to as an “indemnitee”), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 3 of this Article VI with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
SECTION 2. Right to Advancement of Expenses . In addition to the right to indemnification conferred in Section 1 of this Article VI, an indemnitee shall also have the right to be paid by the Corporation the expenses (including attorney’s fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided, however, that if the DGCL requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise.

 

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SECTION 3. Right of Indemnitee to Bring Suit . If a claim under Section 1 or 2 of this Article VI is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its shareholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VI or otherwise shall be on the Corporation.
SECTION 4. Non-Exclusivity of Rights . The rights to indemnification and to the advancement of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation’s Certificate of Incorporation, agreement, vote of shareholders or directors or otherwise.
SECTION 5. Insurance . The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.
SECTION 6. Indemnification of Employees and Agents of the Corporation . The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
SECTION 7. Nature of Rights . The rights conferred upon indemnitees in this Article VI shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee, agent, partner or trustee and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. Any amendment, alteration or repeal of this Article VI that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.

 

18


 

ARTICLE VII
General Provisions
SECTION 1. Dividends . Subject to the provisions of statute and the Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation.
SECTION 2. Seal . The seal of the Corporation shall be in such form as shall be approved by the Board of Directors.
SECTION 3. Fiscal Year . The fiscal year of the Corporation shall be fixed, and once fixed, may thereafter be changed, by resolution of the Board of Directors.
SECTION 4. Contributions . The Board of Directors shall have the authority from time to time to make such contributions as the Board in its discretion shall determine, for public and charitable purposes.
SECTION 5. Borrowing, etc . No officer, agent or employee of the Corporation shall have any power or authority to borrow money on its behalf, to pledge its credit, or to mortgage or pledge its real or personal property, except within the scope and to the extent of the authority delegated by resolution of the Board of Directors. Authority may be given by the Board for any of the above purposes and may be general or limited to specific instances.
SECTION 6. Deposits . All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may approve or designate, and all such funds shall be withdrawn only upon checks, drafts, notes or other orders for payment signed by such one or more officers, employees or other persons as the Board shall from time to time determine.
SECTION 7. Execution of Contracts, Deeds, etc. The Board of Directors may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances.
SECTION 8. Voting of Stock in Other Corporations . If authorized by the Board of Directors, any officer of the Corporation may appoint an attorney or attorneys (who may be or include such officer), in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation any of whose shares or other securities are held by or for the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or in connection with the ownership of such shares or other securities, to consent in writing to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its seal such written proxies or other instruments as such proxy may deem necessary or proper in the circumstances.

 

19


 

SECTION 9. Form of Records . Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of punch cards, magnetic tape, photographs, microphotographs, or any other information storage device; provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same.
ARTICLE VIII
Amendments
These By-Laws may be adopted, amended or repealed by the affirmative vote of the holders of a majority of the voting power of the capital stock of the Corporation outstanding and entitled to vote thereon; provided, however, that Section 2 of Article III of these By-Laws may not be amended or repealed, nor may any provision be adopted that is inconsistent with such section, in any case by action of the stockholders, unless such amendment, repeal or adoption is approved by the affirmative vote of the holders of at least 80% of the voting power of the capital stock of the Corporation outstanding and entitled to vote thereon. The Board of Directors shall also have the power to adopt, amend or repeal any provision of these By-Laws of the Corporation without any vote of the stockholders of the Corporation .
ARTICLE IX
Definitions
Section 1. “ Certificate of Incorporation . ” The term “Certificate of Incorporation,” as used herein, includes not only the original Certificate of Incorporation filed to create the Corporation but also all other certificates, agreements of merger or consolidation, plans of reorganization, or other instruments, howsoever designated, which are filed pursuant to the Delaware General Corporation Law, and which have the effect of amending or supplementing in some respect this Corporation’s original Certificate of Incorporation.
Section 2. “ Electronic Transmission . ” The term “electronic transmission” as used herein shall mean any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such recipient through an automated process or that otherwise may be permitted as an electronic transmission by the Delaware General Corporation law, as amended from time to time.

 

20

Exhibit 4.2
(b)
CIGNA CORPORATION
TO
MARINE MIDLAND BANK, N.A.,
Trustee
Indenture
Dated as of January 1, 1994

 

 


 

CIGNA Corporation
Certain Sections of this Indenture relating to Sections 310 through 318,
inclusive, of the Trust Indenture Act of 1939:
     
Trust Indenture    
Act Section   Indenture Section
§310(a)(1)
  609
(a)(2
  609
(a)(3)
  Not Applicable
(a)(4)
  Not Applicable
(b)
  608
 
  610
§311(a)
  613
(b)
  613
§312(a)
  701
 
  702(a)
(b)
  702(b)
(c)
  702(c)
§313(a)
  703(a)
(b)
  703(b)
(c)
  703(a)
(d)
  703(b)
§314(a)
  704
(a)(4)
  101
(b)
  Not Applicable
(c)(1)
  102
(c)(2)
  102
(c)(3)
  Not Applicable
(d)
  Not Applicable
(e)
  102
§315(a)
  601
(b)
  602
(c)
  601
(d)
  601
(e)
  514
§316(a)
  101
(a)(1)(A)
  502
 
  512
(a)(1)(B)
  513
(a)(2)
  Not Applicable
(b)
  508
(c)
  104(c)
§317(a)(1)
  503
(a)(2)
  504
(b)
  1003
§318(a)
  107
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.

 


 

TABLE OF CONTENTS
         
    PAGE  
 
       
PARTIES
    1  
RECITALS OF THE COMPANY
    1  
 
       
ARTICLE ONE
       
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
       
 
       
SECTION 101. Definitions:
       
Act
    2  
Affiliate; control
    2  
Authenticating Agent
    2  
Board of Directors
    2  
Board Resolution
    2  
Business Day
    2  
Commission
    3  
Company
    3  
Company Request; Company Order
    3  
Corporate Trust Office
    3  
corporation
    3  
Defaulted Interest
    3  
Depository
    3  
Designated Subsidiary
    3  
Event of Default
    3  
Global Security
    4  
Holder
    4  
Indenture
    4  
interest
    4  
Interest Payment Date
    4  
Maturity
    4  
Officers’ Certificate
    4  
Opinion of Counsel
    4  
Original Issue Discount Security
    5  
Outstanding
    5  
Paying Agent
    6  
Person
    6  
Place of Payment
    6  
Predecessor Security
    6  
Redemption Date
    6  
Redemption Price
    7  
Regular Record Date
    7  
NOTE: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

 


 

         
    PAGE  
 
       
Responsible Officer
    7  
Securities
    7  
Security Register and Security Registrar
    7  
Special Record Date
    7  
Stated Maturity
    7  
Subsidiary; voting stock
    7  
Trustee
    7  
Trust Indenture Act
    8  
U.S. Government Obligations
    8  
Vice President
    8  
SECTION 102. Compliance Certificates and Opinions
    8  
SECTION 103. Form of Documents Delivered to Trustee
    9  
SECTION 104. Acts of Holders; Record Dates
    10  
SECTION 105. Notices, Etc., to Trustee and Company
    11  
SECTION 106. Notice to Holders; Waiver
    12  
SECTION 107. Conflict with Trust Indenture Act
    12  
SECTION 108. Effect of Headings and Table of Contents
    12  
SECTION 109. Successors and Assigns
    12  
SECTION 110. Separability Clause
    13  
SECTION 111. Benefits of Indenture
    13  
SECTION 112. Governing Law
    13  
SECTION 113. Legal Holidays
    13  
 
       
ARTICLE TWO
       
SECURITY FORMS
       
 
       
SECTION 201. Forms Generally
    13  
SECTION 202. Form of Face of Security
    14  
SECTION 203. Form of Reverse of Security
    17  
SECTION 204. Form of Trustee’s Certificate of Authentication
    21  
SECTION 205. Additional Provisions Required in Global Security
    21  
 
       
ARTICLE THREE
       
THE SECURITIES
       
 
       
SECTION 301. Amount Unlimited; Issuable in Series
    22  
SECTION 302. Denominations
    25  
SECTION 303. Execution, Authentication, Delivery and Dating
    25  
SECTION 304. Temporary Securities
    27  
SECTION 305. Registration, Registration of Transfer and Exchange
    28  
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities
    30  
SECTION 307. Payment of Interest; Interest Rights Preserved
    31  
SECTION 308. Persons Deemed Owners
    32  
SECTION 309. Cancellation
    33  
SECTION 310. Computation of Interest
    34  

 

ii


 

         
    PAGE  
 
       
ARTICLE FOUR
       
SATISFACTION AND DISCHARGE
       
 
       
SECTION 401. Satisfaction and Discharge of Indenture
    34  
SECTION 402. Application of Trust Money
    35  
SECTION 403. Defeasance and Discharge of Securities of any Series
    36  
 
       
ARTICLE FIVE
       
REMEDIES
       
 
       
SECTION 501. Events of Default
    39  
SECTION 502. Acceleration of Maturity; Rescission and Annulment
    41  
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee
    42  
SECTION 504. Trustee May File Proofs of Claim
    43  
SECTION 505. Trustee May Enforce Claims Without Possession of Securities
    43  
SECTION 506. Application of Money Collected
    44  
SECTION 507. Limitation on Suits
    44  
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest
    45  
SECTION 509. Restoration of Rights and Remedies
    45  
SECTION 510. Rights and Remedies Cumulative
    46  
SECTION 511. Delay or Omission Not Waiver
    46  
SECTION 512. Control by Holders
    46  
SECTION 513. Waiver of Past Defaults
    47  
SECTION 514. Undertaking for Costs
    47  
SECTION 515. Waiver of Stay or Extension Laws
    48  
 
       
ARTICLE SIX
       
THE TRUSTEE
       
 
       
SECTION 601. Certain Duties and Responsibilities
    48  
SECTION 602. Notice of Defaults
    48  
SECTION 603. Certain Rights of Trustee
    49  
SECTION 604. Not Responsible for Recitals or Issuance of Securities
    50  
SECTION 605. May Hold Securities
    50  
SECTION 606. Money Held in Trust
    50  
SECTION 607. Compensation and Reimbursement
    50  
SECTION 608. Disqualification; Conflicting Interests
    51  
SECTION 609. Corporate Trustee Required; Eligibility
    51  
SECTION 610. Resignation and Removal; Appointment of Successor
    51  
SECTION 611. Acceptance of Appointment by Successor
    53  

 

iii


 

         
    PAGE  
 
       
SECTION 612. Merger, Conversion, Consolidation or Succession to Business
    55  
SECTION 613. Preferential Collection of Claims Against Company
    55  
SECTION 614. Appointment of Authenticating Agent
    55  
 
       
ARTICLE SEVEN
       
HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY
       
 
       
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders
    57  
SECTION 702. Preservation of Information; Communications to Holders
    58  
SECTION 703. Reports by Trustee
    58  
SECTION 704. Reports by Company
    59  
 
       
ARTICLE EIGHT
       
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
       
 
       
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms
    59  
SECTION 802. Successor Corporation Substituted
    60  
 
       
ARTICLE NINE
       
SUPPLEMENTAL INDENTURES
       
 
       
SECTION 901. Supplemental Indentures Without Consent of Holders
    61  
SECTION 902. Supplemental Indentures With Consent of Holders
    62  
SECTION 903. Execution of Supplemental Indentures
    64  
SECTION 904. Effect of Supplemental Indentures
    64  
SECTION 905. Conformity with Trust Indenture Act
    64  
SECTION 906. Reference in Securities to Supplemental Indentures
    64  
 
       
ARTICLE TEN
       
COVENANTS
       
 
       
SECTION 1001. Payment of Principal, Premium and Interest
    65  
SECTION 1002. Maintenance of Office or Agency
    65  
SECTION 1003. Money for Securities Payments to Be Held in Trust
    65  
SECTION 1004. Corporate Existence
    67  
SECTION 1005. Maintenance of Properties
    67  
SECTION 1006. Limitation on Liens on Common Stock of Designated Subsidiaries
    68  
SECTION 1007. Defeasance of Certain Obligations and Certain Events of Default
    68  
SECTION 1008. Statement by Officers as to Default
    70  
SECTION 1009. Waiver of Certain Covenants
    70  

 

iv


 

         
    PAGE  
 
       
ARTICLE ELEVEN
       
REDEMPTION OF SECURITIES
       
 
       
SECTION 1101. Applicability of Article
    71  
SECTION 1102. Election to Redeem; Notice to Trustee
    71  
SECTION 1103. Selection by Trustee of Securities to Be Redeemed
    71  
SECTION 1104. Notice of Redemption
    72  
SECTION 1105. Deposit of Redemption Price
    73  
SECTION 1106. Securities Payable on Redemption Date
    73  
SECTION 1107. Securities Redeemed in Part
    73  
 
       
ARTICLE TWELVE
       
SINKING FuNDS
       
 
       
SECTION 1201. Applicability of Article
    74  
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities
    74  
SECTION 1203. Redemption of Securities for Sinking Fund
    75  
TESTIMONIUM
    76  
SIGNATURES AND SEALS
    76  
ACKNOWLEDGMENTS
    77  
INDENTURE, dated as of January 1, 1994, between CIGNA Corporation , a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal office at One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19192, and Marine Midland Bank, N.A., a national banking association duly organized and existing under the laws of the United States of America, as Trustee (herein called the “Trustee”).
Recitals of the Company
The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as in this Indenture provided.
All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.
Now, Therefore, This Indenture Witnesseth:
For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:
ARTICLE ONE
Definitions and Other Provisions of General
Application
SECTION 101. Definitions
For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in

 

1


 

this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

 

2


 

(3) All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and
(4) the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
“Act”, when used with respect to any Holder, has the meaning specified in Section 104.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series.
“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board.
“Board Resolution” means a copy of a resolution certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.
“Business Day”, when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close.

 

3


 

“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.
“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person.
“Company Request” or “Company Order” means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Corporate Secretary or an Assistant Corporate Secretary, and delivered to the Trustee.
“Corporate Trust Office” means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which office at the date of this Indenture is located at 140 Broadway, New York, N.Y. 10015.
“corporation” means a corporation, association, company, jointstock company or business trust.
“Defaulted Interest” has the meaning specified in Section 307.
“Depository” means, unless otherwise specified by the Company pursuant to Section 301, with respect to Securities of any series issuable or issued (in whole or in part) in the form of one or more Global Securities, The Depository Trust Company, New York, New York, or any successor thereto registered as a clearing agency under the Securities and Exchange Act of 1934, as amended.
“Designated Subsidiary” means each of CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company and Insurance Company of North America, so long as it remains a Subsidiary, or any Subsidiary which is a successor of such Designated Subsidiary.
“Event of Default” has the meaning specified in Section 501.

 

4


 

“Global Security” means a Security in the form prescribed in Section 205 evidencing all or a part of any series of Securities which is executed by the Company and authenticated and delivered by the Trustee to the Depository or pursuant to the Depository’s instruction, all in accordance with this Indenture and pursuant to a Company Order, which shall be registered in the name of the Depository or its nominee.
“Holder” means a Person in whose name a Security is registered in the Security Register.
“Indenture” means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument, and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term “Indenture” shall also include the terms of particular series of Securities established as contemplated by Section 30l.
“interest”, when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity.
“Interest Payment Date”, when used with respect to any Security, means the Stated Maturity of an instalment of interest on such Security.
“Maturity”, when used with respect to any Security, means the date on which the principal of such Securities or an instalment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.
“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Corporate Secretary or an Assistant Corporate Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers’ Certificate given pursuant to Section 1008 shall be the principal executive, financial or accounting officer of the Company.
“Opinion of Counsel” means a written opinion of counsel, who may be counsel for (including an employee of) the Company, and who shall be reasonably acceptable to the Trustee.

 

5


 

“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.
“Outstanding”, when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Securities for whose payment or redemption money or U.S.
Government Obligations in the necessary amount has been theretofore deposited with the Trustee (or another trustee satisfying the requirements of Section 609) in trust for the Holders of such Securities in accordance with Section 403; and
(iv) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon acceleration of the Maturity thereof pursuant to Section 502, (ii) the principal amount of a Security denominated in one or more foreign currencies or currency units shall be the U.S. dollar equiv-

 

6


 

alent, determined in the manner provided as contemplated by Section 301 on the date of original issuance of such Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent on the date of original issuance of such Security of the amount determined as provided in (i) above) of such Security, and (iii) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
“Paying Agent” means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company.
“Person” means any individual, corporation, partnership, joint venture, association, trust, unincorporated organization or government or any agency or political subdivision thereof.
“Place of Payment”, when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and interest on the Securities of that series are payable as specified as contemplated by Section 301.
“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.
“Redemption Date”, when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

 

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“Redemption Price”, when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.
“Regular Record Date” for the interest payable on any Interest Payment Date on the Securities of any series means the date specifiedfor that purpose as contemplated by Section 301.
“Responsible Officer”, when used with respect to the Trustee, shall mean any officer within the Corporate Trust and Agency Group (or any successor group of the Trustee), including any vice-president, assistant vice president, assistant secretary, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers or to whom any corporate trust matter is referred at the Corporate Trust Office because of his knowledge of and familiarity with the particular subject.
“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.
“Security Register” and “Security Registrar” have the respective meanings specified in Section 305.
“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307.
“Stated Maturity”, when used with respect to any Security or any instalment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such instalment of principal or interest is due and payable.
“Subsidiary” means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting stock” means stock which ordinarily has voting power for the election of directors, whether at all times or only as long as no senior class of stock has such voting power by reason of any contingency.
“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and

 

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thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.
“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.
“U.S. Government Obligations” means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), which has a combined capital and surplus of not less than $50,000,000, as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.
“Vice President”, when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president”.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers’ Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and

 

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shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture.
Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include
(1) a statement that each individual signing suc4 certificate or opinion has read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

 

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Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
SECTION 104. Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing, or by any Person duly authorized by means of any written certification, proxy or other authorization furnished by a Depository; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or, in the case of the Depository, furnishing the written certification, proxy or other authorization pursuant to which such instrument or instruments are signed. Proof of execution of any such instrument, any writing appointing any such agent or authorizing any such Person or any such written certification or proxy shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument, writing, certification or proxy may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument, writing, certification or proxy acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument, writing, certification or proxy or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any date as the record date for the purpose of deter-

 

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mining the Holders of Securities of any series entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders of Securities of such series. If not set by the Company prior to the first solicitation of a Holder of Securities of such series made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date for action to be taken by the Holders of one or more series of Securities, only the Holders of Securities of such series on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action.
(d) The ownership of Securities shall be proved by the Security Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.
SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Services, or
(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, Attention: Corporate Secretary, addressed to the Company at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company.

 

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SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

 

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SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, Maturity or Stated Maturity of any Securities shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of the Securities of any series which specifically states that such provision shall apply in lieu of this Section) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Maturity or Stated Maturity, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Maturity or Stated Maturity, as the case may be.
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.
The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution, or an Officers’ Certificate executed by

 

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officers of the Company authorized by Board Resolution, or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, or an Officers’ Certificate executed by officers of the Company authorized by Board Resolution, a copy of an appropriate record of such action shall be certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities.
The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.
SECTION 202. Form of Face of Security.
[If the Security is an Original Issue Discount Security, insert
For Purposes of Sections 1273 and 1275 of the Internal Revenue Code, the amount of original issue discount on this Security is ___% of its principal amount, the issue date is , 19___ And the yield to maturity is ___% (, the method used to determine the yield is ___ and the amount of the original issue discount applicable to the short accrual period of ___, 19__ to ___, 19__ is  _____  ___% of the principal amount of this security.
CIGNA Corporation
____________________________________
         
No.
    $______
CIGNA Corporation , a Delaware corporation (herein called the “Company”), for value received, hereby promises to pay to _____________________________ , or registered assigns, the principal sum of

 

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                Dollars [If applicable, substitute other currency] on               [If the Security is to bear interest prior to Maturity, insert—, and to pay interest thereon from               or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on           and        in each year, commencing          , at the rate of             % per annum, until the principal hereof is paid or made available for payment. [If applicable insert—, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of               % per annum on any overdue principal and premium and on any overdue instalment of interest]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the               or               (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture].
[If the Security is not to bear interest prior to Maturity, insert— The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal of this Security shall bear interest at the rate of               % per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such default in payment to the date payment of such principal has been made or duly provided for. Interest on any overdue principal shall be payable on demand. Any such interest on any overdue principal that is not so paid on demand shall bear interest at the rate of               % per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date

 

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of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest shall also be payable on demand.]
Payment of the principal of (and premium, if any) and [if applicable, insert— any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in         , in such coin or currency of the United States of America [if applicable, substitute other currency] as at the time of payment is legal tender for payment of public and private debts [if applicable, insert-; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register].
Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.
Dated:
[Seal]
         
  CIGNA Corporation
 
 
  By      
       
 
Attest:
 ___________________________ 

 

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SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of  _____  ,19  _____  (herein called the “Indenture”), between the Company and Marine Midland Bank, N.A. (herein called the “Trustee”, which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof[, limited in aggregate principal amount to $  _____].
[If applicable, insert— The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, [if applicable, insert— (1) on               in any year commencing with the year               and ending with the year               through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [on or after  _____  , 19___], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [on or before  _____,  _____%, and if redeemed] during the 12-month period beginning ..of the years indicated,
                         
    Redemption             Redemption  
Year   Price     Year     Price  
 
                       
and thereafter at a Redemption Price equal to  _____  % of the principal amount, together in the case of any such redemption [if applicable, insert— (whether through operation of the sinking fund or otherwise)] with accrued interest to the Redemption Date, but interest instalments

 

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whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]
[If applicable, insert— The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, (1) on  _____  in any year commencing with the year and ending with the year  _____  through operation of the sinking fund for this series at the Redemption Prices for redemption through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below, and
(2) at any time [on or after  ___________________  ], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below: If redeemed during the 12-month period beginning  __________  of the years indicated,
                 
            Redemption Price  
    Redemption Price     For Redemption  
    For Redemption     Otherwise  
    Through Operation     Than Through  
    of the     Operation of the  
Year   Sinking Fund     Sinking Fun  
 
               
and thereafter at a Redemption Price equal to  _____  , % of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, but interest instalments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]

 

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[Notwithstanding the foregoing, the Company may not, prior to               , redeem any Securities of this series as contemplated by [Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than               % per annum.]
[The sinking fund for this series provides for the redemption on        in each year beginning with the year               to and including the               year               of [not less than] $           [(“mandatory sinking fund”) and not more than $...] aggregate principal amount of Securities of this series. [Securities of this series acquired or redeemed by the Company otherwise than through [mandatory] sinking fund payments may be credited against subsequent [mandatory] sinking fund payments otherwise required to be made [if applicable— in the inverse order in which they become due.]]
[ If this Security is subject to redemption , In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.]
[The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness on this Security and (b) certain restrictive covenants and certain Events of Default upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Security.]
[If the Security is not an Original Issue Discount Security,— If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.]
[If the Security is an Original Issue Discount Security,— If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to—insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal

 

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and overdue interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company’s obligations in respect of the payment of the principal of and interest, if any, on the Securities of this series shall terminate.]
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than 66%% in aggregate principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of th~ Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the right of the Holder of this Security, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

 

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The Securities of this series are issuable only in registered form without coupons in denominations of $               and any integral multiple [thereof] [of $           in excess thereof]. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for other Securities of this series, of a like tenor and aggregate principal amount but of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
SECTION 204. Form of Trustee’s Certificate of Authentication.
The Trustee’s certificate of authentication shall be in substantially the following form:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
         
  MARINE MIDLAND BANK, N .A.
as Trustee
 
 
  By:      
    Authorized Officer    
       
 
SECTION 205. Additional Provisions Required in Global Security.
Any Global Security issued hereunder shall, in addition to the provisions contained in Sections 202 and 203, bear the following legend (and/or such additional or alternate legend(s) relative to the terms of

 

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Global Securities as the Depository may request or the Company authorize in an Officers’ Certificate pursuant to Section 201):
“This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depository or a nominee of a Depository. This Global Security is exchangeable for Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances hereinafter described and may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository.”
In addition, any Global Security issued hereunder shall include a provision containing the language set forth below, or language of similar effect:
“This Security is a Global Security and shall be exchangeable for Securities registered in the names of Persons other than the Depository with respect to this Global Security or its nominee only if (x) such Depository notifies the Company that it is unwilling or unable to continue as Depository for this Global Security or at any time ceases to be a clearing agency registered as such under the Securities Exchange Act of 1934, as amended, (y) the Company executes and delivers to the Trustee a Company Order that this Global Security shall be exchangeable or (z) there shall have occurred and be continuing an Event of Default with respect to the Securities. If this Global Security is exchangeable pursuant to the preceding sentence it shall be exchangeable for Securities issuable in denominations of $1,000 and any integral multiple thereof, registered in such names as such Depository shall direct.”
ARTICLE THREE
The Securities
SECTION 301. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. Prior to the issuance of Securities of any series, there shall be (i) established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or

 

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determined in the manner provided, in an Officers’ Certificate, or (ii) established in one or more indentures supplemental hereto:
(1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities or any other series);
(2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sections 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder);
(3) the Person to whom any interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date of such interest;
(4) the date or dates (or manner of determining the same) on which the principal of the Securities of the series is payable;
(5) the rate or rates (or manner of determining the same) at which the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable and the Regular Record Date for any interest payable on any Interest Payment Date;
(6) if other than as set forth herein, the place or places where the principal of (and premium, if any) and interest on Securities of the series shall be payable;
(7) the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company;
(8) the obligation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

 

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(9) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable;
(10) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502;
(11) the currency, currencies or currency units in which payment of the principal of and any premium and interest on any Securities of the series shall be payable if other than the currency of the United States of America and the manner of determining the equivalent thereof in the currency of the United States of America for purposes of the definition of “Outstanding” in Section 101;
(12) if the amount of payments of principal of (and premium, if any) or interest on the Securities of the series may be determined with reference to an index, the manner in which such amounts shall be determined;
(13) the application, if any, of Section 403 to the Securities of the series;
(14) the application, if any, of Section 1007 to the Securities of the series;
(15) if any of the Securities of the series are to be issued in whole or in part in the form of one or more Global Securities, a statement to that effect and, in such case, the Depository for such Global Security or Securities, which Depository shall be a clearing agency registered under the Securities Exchange Act of 1934, as amended; and
(16) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture except as permitted by Section 901(5)).
All Securities of anyone series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers’ Certificate referred to above.
If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such

 

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action shall be certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate setting forth the terms of the series.
SECTION 302. Denominations.
The Securities of each series shall be issuable in registered form without coupons in such denominations as shall be specified as contemplated by Section 301. In the absence of any such provisions with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Corporate Secretary or one of its Assistant Corporate Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established in or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating,
(a) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture;
(b) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and
(c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization and other similar laws of general applicability relating to or affecting the enforcement of creditors’ rights and to general equity principles.

 

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With respect to Securities of a series constituting a medium-term note program, the Trustee may conclusively rely on the documents and opinion delivered pursuant to Sections 201 and 301 and this Section 303, as applicable (unless revoked by superseding comparable documents or opinions) as to the authorization of the Board of Directors of any Securities delivered hereunder, the form thereof and the legality, validity, binding effect and enforceability thereof. With respect to Securities of a series constituting a medium-term note program, if the form and general terms of the Securities of such series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, that the Securities have been duly authorized by the Company and, when duly executed by the Company and completed and authenticated by the Trustee in accordance with the Indenture and issued, delivered and paid for in accordance with any applicable distribution agreement, will have been duly issued under the Indenture and will constitute valid and binding obligations of the Company entitled to the benefits provided by the Indenture, except that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally from time to time in force and general principles of equity. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s

 

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own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers’ Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the time of authentication upon original issuance of the first Security of such series.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

 

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If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of anyone or more temporary Securities of any series the Company shall execute and (in accordance with a Company Order delivered at or prior to the authentication of the first definitive Security of such series) the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of authorized denominations and of a like aggregate principal amount and tenor. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept a security register (the register so maintained being herein sometimes referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee shall have the right to examine the Security Register at all reasonable times. Unless otherwise designated by the Company by written notice to the Trustee, Marine Midland Bank, N.A., Corporate Trust Services, 140 Broadway, New York, N.Y. 10015 shall be, and is hereby appointed “Security Registrar” for the purpose of registering Securities and transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security of any series at the office or agency in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor.
At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

 

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All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, or 1107 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of that series selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.
Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, a Global Security of any series shall be exchangeable pursuant to this Section for Securities registered in the names of Persons other than the Depository with respect to such series or its nominee only as provided in this paragraph. A Global Security shall be exchangeable pursuant to this Section if (x) such Depository notifies the Company that it is unwilling or unable to continue as Depository for such series or at any time ceases to be a clearing agency registered as such under the Securities Exchange Act of 1934, as amended, (y) the Company executes and delivers to the Trustee a Company Order that such Global Security shall be so exchangeable or (z) there shall have occurred and be continuing an Event of Default with respect to the Securities. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for Securities issuable in denominations of $1,000 and any integral multiple thereof, registered in such names as the Depository for such Global Security shall direct.

 

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Notwithstanding any other provision of this Section, a Global Security may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them and any agent of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefore a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

 

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Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Except as otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.
Unless otherwise provided with respect to the Securities of any series, at the option of the Company payment of interest may be made (i) by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or (ii) by such method or methods as any Holder shall specify in writing from time to time to the Company or its agent.
Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to

 

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the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed first-class postage prepaid to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

 

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No holder of any beneficial interest in any Global Security held on its behalf by a Depository shall have any rights under this Indenture with respect to such Global Security, and such Depository may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the Trustee from giving effect to any written certification, proxy, or other authorization furnished by a Depository, or impair, as between a Depository and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depository as Holder of any Security.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it; and any Security surrendered to the Trustee for any such purpose shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. Notwithstanding any other provision of this Indenture to the contrary, in the case of a series all the Securities of which are not to be originally issued at one time, a Security of such series shall not be deemed to have been Outstanding at any time hereunder if and to the extent that, subsequent to the authentication and delivery thereof, such Security is delivered to the Trustee for cancellation by the Company or any agent thereof upon the failure of the original purchaser thereof to make payment therefor against delivery thereof, and any Security so delivered to the Trustee shall be promptly cancelled by it. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order.

 

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SECTION 310. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.
ARTICLE FOUR
Satisfaction And Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within one year, or
(iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

 

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and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company under Section 306, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614, if money or U.S. Government Obligations shall have been deposited with the Trustee in accordance with Section 403 or 1007, the obligations of the Company to the Trustee under Section 402(b), and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003, shall survive.
SECTION 402. Application of Trust Money.
(a) Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401, all money and U.S. Government Obligations deposited with the Trustee (or other trustee satisfying the requirements of Section 609, collectively, for purposes of this Section 402, the “Trustee”) pursuant to Section 403 or 1007 and all money received by the Trustee in respect of U.S. Government Obligations deposited with the Trustee pursuant to Section 403, shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with or received by the Trustee or to make mandatory sinking fund payments or analogous payments as contemplated by Section 403 or 1007.

 

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(b) The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations deposited pursuant to Section 403 or 1007 or the interest and principal received in respect of such U.S. Government Obligations other than any such tax, fee or other charge which by law is payable by or on behalf of Holders.
(c) Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 403 or 1007 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then have been required to be deposited for the purpose for which such money or U.S. Government Obligations were deposited or received.
SECTION 403. Defeasance and Discharge of Securities of any Series.
If this Section 403 is specified, as contemplated by Section 301, to be applicable to Securities of any series, then notwithstanding Section 401, the Company shall be deemed to have paid and discharged the entire indebtedness on all the Outstanding Securities of any series, the provisions of this Indenture as it relates to such Outstanding Securities (except as to (A) the rights of Holders of such Outstanding Securities to receive, from the trust funds described in subparagraph (1) below, payment of the principal of (and premium, if any) and any installment of principal of (and premium, if any) or interest on such Securities on the Stated Maturity of such principal or installment of principal or interest or any mandatory sinking fund payments or analogous payments applicable to the Securities of that series on the day on which such payments are due and payable in accordance with the terms of the Indenture and of such Securities, (B) the Company’s obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Four, which in each case shall survive until otherwise terminated or discharged hereunder) shall no longer be in effect, and the Trustee, at the expense of the Company, shall, upon Company Request, execute proper instruments acknowledging the same, provided that the following conditions have been satisfied:

 

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(1) the Company has deposited or caused to be deposited with the Trustee (or another corporate trustee appointed by the Company satisfying the requirements of Section 609 who shall have agreed to comply with the provisions of this Article Four applicable to it), irrevocably (irrespective of whether the conditions in subparagraphs (2), (3), (4), (5), (6) and (7) below have been satisfied, but subject to the provisions of Section 402(c) and the last paragraph of Section 1003), as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of that series, with reference to this Section 403, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (i) or (ii) of this subparagraph (1) money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or such other corporate trustee, as the case may be) to pay and discharge, (i) the principal of (and premium, if any) and each installment of principal (and premium, if any) and interest on such Outstanding Securities on the Stated Maturity of such principal or installment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to Securities of such series on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities;
(2) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound;
(3) no Event of Default under Sections 501(1), 501(2) or 501(3), or event which with the lapse of time would become an Event of Default under Section 501(1), with respect to Securities of that series shall have occurred and be continuing on the date of such deposit, and no Event of Default under Section 501(6) or Section 501(7) or event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 501(6) or Section 501(7) shall have occurred and be continuing on the 91st day after such date of deposit;

 

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(4) the Company has delivered to the Trustee an Opinion of Counsel to the effect that since the date of this Indenture there has been a change in the applicable federal income tax law (including a change in the official interpretation thereof), or the Company has received from, or there has been published by, the Internal Revenue Service a ruling, in any case to the effect that Holders of the Securities of that series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amounts and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred;
(5) if the Securities of that series are then listed on the New York Stock Exchange, Inc., the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause such Securities to be delisted;
(6) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance and discharge of the entire indebtedness on all Outstanding Securities of any such series as contemplated by this Section have been complied with; and
(7) if such deposit is to be made with a trustee, other than the Trustee, pursuant to subparagraph (1) above, such other trustee shall have delivered to the Trustee a certificate satisfactory in form to the Trustee stating that such deposit has been made in accordance with the provisions of this Article Four and that such other trustee agrees to comply with the provisions of this Article Four applicable to it, and the Trustee shall be fully protected in relying upon such certificate.
In the event that any other trustee is appointed by the Company pursuant to subparagraph (1) above, the Trustee shall have no responsibility with respect to the performance by such other trustee of its duties or with respect to any monies or U.S. Government Obligations deposited with such other trustee.

 

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ARTICLE FIVE
Remedies
SECTION 501. Events of Default.
“Event of Default”, wherever used herein with respect to Securities of any series, means anyone of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in the performance of which or the breach of which is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by overnight mail or other same day or overnight delivery service which can provide evidence of delivery, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or
(5) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company (including a default with respect to Securities of any series other than that series) or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company (including this Indenture), whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay such

 

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indebtedness in a principal amount in excess of $20,000,000 when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness in a principal amount in excess of $20,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 15 days after there shall have been given, by overnight mail or other same day or overnight delivery service which can provide evidence of delivery, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a /IN otice of Default” hereunder; or
(6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or
(7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any

 

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applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or
(8) any other Event of Default provided with respect to Securities of that series.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount (or, if any of the Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified in the terms thereof) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable.
At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient to pay
(A) all overdue interest on all Securities of that series,
(B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities,

 

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(C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, the Security Registrar, any Paying Agent and their agents and counsel;
and
(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premi-um, if any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the reasonable costs and expenses of collection, including the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and other amounts due the Trustee under Section 607.

 

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If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607.
No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

 

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SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 607; and
SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and
THIRD: The remainder, if any, to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to receive such remainder or as a court of competent jurisdiction shall direct.
SECTION 507. Limitation on Suits.
No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;
(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

 

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(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) any interest on such Security on the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

 

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SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of law or with this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and
(3) the Trustee shall have the right to decline to follow such direction if the Trustee in good faith shall, by a Responsible Officer or Officers, determine that such direction would be prejudicial to the Holders not joining in such direction or would involve the Trustee in personal liability.
The Trustee may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to so direct the Trustee.

 

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If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to so direct the Trustee, or to amend any such direction, whether or not such Holders remain Holders after such record date; provided that no such direction or amendment shall be valid or effective for more than 90 days after such record date.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or interest on any Security of such series, or
(2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.
With respect to any series of Securities issued hereunder, the Com- pany may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to waive any past default hereunder. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such persons, shall be entitled to waive any default hereunder, or to retract (prior to the delivery to the Trustee of waivers from the Holders of a majority of such Securities) any such waiver previously given, whether or not such Holders remain Holders after such record date; provided, that no such waiver shall be valid or effective for more than 90 days after such record date.
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act.

 

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SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided in the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.
SECTION 602. Notice of Defaults.
If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 501(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.

 

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SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate;
(d) the Trustee may consult with counsel and the written advice of such counselor any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; and
(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.

 

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SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), provided that, unless there has been an Event of Default under Section 501(6) or (7) hereof, such compensation shall be limited to that which may be mutually agreed in writing between the Company and the Trustee;
(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and

 

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(3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.
As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of, premium, if any, or interest on the Securities.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611.

 

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(b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.
then, in any such case, (i) the Company pursuant to a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and

 

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that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

 

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(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall execute any and all instruments which may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.

 

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(d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor).
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee, the Trustee’s certificate of authentication, or the delivery of the Securities to the Trustee for authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticat-

 

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ing Agent, a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent or delivery of Securities to the Authenticating Agent for authentication in place of the Trustee, as the case may be. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticat-

 

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ing Agent shall be appointed unless eligible under the provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607.
If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternate certificate of authentication in the following form:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
         
  Marine Midland Bank, N .A.
As Trustee
 
 
  By      
    As Authenticating Agent    
       
 
     
  By      
    Authorized Officer    
       
 
ARTICLE SEVEN
holders’ lists and reports by trustee and company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not later than May 1 and November 1 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of the preceding April 15 or October 15, as the case may be, and
(b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such re-

 

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quest, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;
excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar.
SECTION 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.
(b) The rights of the Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act.
SECTION 703. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange.

 

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SECTION 704. Reports by Company.
The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission.
ARTICLE EIGHT
consolidation, merger, conveyance, transfer or lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other corporation or, except for conveyances, transfers or leases to one or more Subsidiaries which are wholly-owned by the Company (except for directors’ qualifying shares), convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge into another corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall, expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed;

 

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(2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event related to such transaction which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing;
(3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance which would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and
(4) in case the Company shall consolidate with or merge into Any other corporation or, except for conveyances, transfers or leases to one or more Subsidiaries which are wholly-owned by the Company (except for directors’ qualifying shares), convey, transfer or lease its properties and assets substantially as an entirety-to-any Person, the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with.
SECTION 802. Successor Corporation Substituted.
Upon any consolidation of the Company with, or merger by the Company into, any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor corporation shall be re-

 

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lieved of all obligations and covenants under this Indenture and the Securities.
ARTICLE NINE
supplemental indentures
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or
(3) to add any additional Events of Default; or
(4) to add to or to change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or
(5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (i) shall neither (A) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (B) modify the rights of the Holder of any such Security with respect to such provision or (ii) shall become effective only when there is no such Security Outstanding; or
(6) to secure the Securities pursuant to the requirements of Section 1006 or otherwise; or

 

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(7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or
(8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611(b); or
(9) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Section 403 , provided that any such action shall not adversely affect the interests of the Holders of Securities of such series or any other series of Securities in any material respect; or
(10) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (10) shall not adversely affect the interests of the Holders of Securities of any series in any material respect.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than 66 2 / 3 % in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any instalment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity

 

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thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513 or Section 1009, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Section and Section 1009, or the deletion of this proviso, in accordance with the requirements of Sections 611(b) and 901(8).
A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
With respect to any series of Securities issued hereunder, the Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture or to revoke (prior to the

 

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delivery to the Trustee of consents from the Holders of not less than 66 2 / 3 % of such Securities) any such consent previously given, whether or not such Holders remain Holders after such record date; provided, that no such consent shall be valid or effective for more than 90 days after such record date.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

 

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ARTICLE TEN

covenants
SECTION 1001. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of (and premium, if any) and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. Unless otherwise designated by the Company by written notice to the Trustee, such office or agency shall be the office of Marine Midland Bank, N.A., Corporate Trust Services, 140 Broadway, New York, N.Y. 10015. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
SECTION 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of

 

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the principal of (and premium, if any) or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, and upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series.
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for two years after such principal (and premium, if any) or

 

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interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, and in the Place of Payment for such series if such Place of Payment is outside the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 1004. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders.
SECTION 1005. Maintenance of Properties.
The Company will cause all properties material to the conduct of its business or the business of any Designated Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business

 

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of any Designated Subsidiary and not disadvantageous in any material respect to the Holders.
SECTION 1006. Limitation on Liens on Common Stock of Designated Subsidiaries.
Except as otherwise specified as contemplated by Section 301 for Securities of any series, so long as any Securities of any series shall remain Outstanding, the Company will not, and will not permit any Subsidiary to, directly or indirectly, create, issue, assume, incur or guarantee any indebtedness for money borrowed which is secured by a mortgage, pledge, lien, security interest or other encumbrance of any nature on any of the present or future common stock of a Designated Subsidiary (or any company, other than the Company, having direct or indirect control of any Designated Subsidiary), which common stock is directly or indirectly owned by the Company, unless the Securities and, if the Company so elects, any other indebtedness of the Company ranking at least pari passu with the Securities, shall be secured equally and ratably with (or prior to) such other secured indebtedness for money borrowed so long as it is outstanding.
SECTION 1007. Defeasance of Certain Obligations and Certain Events of Default.
If this Section 1007 is specified, as contemplated by Section 301, to be applicable to Securities of any series, the Company may omit to comply with any term, provision or condition set forth in Section 1005 or 1006, and Section 501(4) with respect to Sections 1005 and 1006, and Section 501(5) shall be deemed not to be an Event of Default, in each case with respect to the Securities of any series, provided that the following conditions have been satisfied:
(1) the Company has deposited or caused to be deposited with the Trustee (or another corporate trustee appointed by the Company satisfying the requirements of Section 609 who shall have agreed to comply with the provisions of this Section 1007) irrevocably (irrespective of whether the conditions in subparagraphs (2), (3), (4), (5), (6), (7) and (8) below have been satisfied, but subject to the provisions of Section 402(c) and the last paragraph of Section 1003), as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of that series, with reference to this Section 1007, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment

 

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of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (i) or (ii) of this subparagraph (1) money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or such other corporate trustee, as the case may be) to pay and discharge, (i) the principal of (and premium, if any) and each instalment of principal (and premium, if any) and interest on the Outstanding Securities of that series on the Stated Maturity of such principal or instalment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to Securities of such series on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities;
(2) such deposit shall not cause the Trustee with respect to the Securities of that series to have a conflicting interest as defined in Section 608 and for purposes of the Trust Indenture Act with respect to the Securities of any series;
(3) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound;
(4) no Event of Default under Sections 501(1), 501(2) or 501(3), or event which with the lapse of time would become an Event of Default under Section 501(1), with respect to the Securities of that series shall have occurred and be continuing on the date of such deposit, and no Event of Default under Section 501(6) or Section 501(7) or event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 501(6) or Section 501(7) shall have occurred and be continuing on the 91st day after such date of deposit;
(5) the Company has delivered to the Trustee an Opinion of Counsel to the effect that Holders of the Securities of such series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and certain Events of Default and will be subject to federal income tax on the same amounts and in the same manner and at the same times, as would have been the case if such deposit and defeasance had not occurred;

 

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(6) if the Securities of that series are then listed on the New York Stock Exchange, Inc., the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit and defeasance will not cause such Securities to be delisted;
(7) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated by the Section have been complied with; and
(8) if such deposit is to be made with a trustee, other than the Trustee, pursuant to subparagraph (1) above, such other trustee shall have delivered to the Trustee a certificate satisfactory in form to the Trustee stating that such deposit has been made in accordance with the provisions of this Section 1007 and that such other trustee agrees to comply with the provisions of Sections 402, 1007 and the last paragraph of Section 1003 applicable to it, and the Trustee shall be fully protected in relying upon such certificate.
In the event that any other trustee is appointed by the Company pursuant to subparagraph (1) above, the Trustee shall have no responsibility with respect to the performance by such other trustee of its duties or with respect to any monies or U.S. Government Obligations deposited with such other trustee.
SECTION 1008. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.
SECTION 1009. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1004 to 1006, inclusive, with respect to the Securities of any series if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities of such series shall, by Act of such Hold-

 

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ers, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.
ARTICLE ELEVEN

redemption of securities
SECTION 1101. Applicability of Article.
Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article.
SECTION 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by an Officers’ Certificate. In case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers’ Certificate evidencing compliance with such restriction.
SECTION 1103. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series are to be redeemed (unless all of the Securities of such series and of a specified tenor are to be redeemed), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by lot or such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of

 

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portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series. If less than all of the Securities of such series and of a specified tenor are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence.
The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.
SECTION 1104. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,
(5) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and

 

72


 

(6) that the redemption is for a sinking fund, if such is the case.
Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company.
SECTION 1105. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date.
SECTION 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by Section 301, instalments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.
SECTION 1107. Securities Redeemed in Part.
Any Security (including any Global Security) which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company

 

73


 

and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered; provided, that if a Global Security is so surrendered, the new Global Security shall be in a denomination equal to the unredeemed portion of the principal of the Global Security so surrendered.
ARTICLE TWELVE

sinking funds
SECTION 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series.
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a “mandatory sinking fund payment”, and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an “optional sinking fund payment.” If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series.
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such

 

74


 

Securities as provided for by the terms of such series; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.
SECTION 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any series of Securities (unless a shorter period of time shall be acceptable to the Trustee), the Company will deliver to the Trustee an Officers’ Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.
This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

 

75


 

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.
         
  CIGNA CORPORATION
 
 
  By   /s/ PAUL H. ROHRKEMPER    
    Treasurer    
       
 
[SEAL]
ATTEST:
/s/ Carol J. Ward
 
Corporate Secretary
         
  MARINE MIDLAND BANK, N.A.
 
 
  By:   /s/ robert a. conrad    
    Assistant Vice President    
       
 
[SEAL]
ATTEST:
/s/ MARCIA MARKOWSKI
 
Assistant Corporate Trust Officer

 

76


 

COUNTY OF PHILADELPHIA
COMMONWEALTH OF PENNSYLVANIA }SS.:
On the 13th day of January, 1994, before me personally came Paul H. Rohrkemper, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of CIGNA Corporation, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
         
     
  /s/ noreen m. tarr    
     
     
 
[SEAL]
         
STATE OF NEW YORK
  }   ss.:
COUNTY OF NEW YORK
   

 

77


 

On the 14th day of January, 1994, before me personally came Robert A. Conrad, to me known, who, being by me duly sworn, did depose and say that he is Assistant Vice President of Marine Midland Bank, N.A., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
         
     
  /s/ metin caner    
     
     
 
[SEAL]

 

78

Exhibit 4.3
CIGNA CORPORATION
TO
BANKERS TRUST COMPANY,
Trustee
 
Indenture
Dated as of June 30, 1988
 
CIGNA Corporation

 

 


 

Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated
as of June 30, 1988
                 
Trust Indenture          
Act Section       Indenture Section
§310 (a)(1)    
 
  609
  (a)(2)    
 
  609
  (a)(3)    
 
  Not Applicable
  (a)(4)    
 
  Not Applicable
  (b)    
 
  608
       
 
  610
§311 (a)    
 
  613(a)
  (b)    
 
  613(b)
  (b)(2)    
 
  703(a)(2)
       
 
  703(b)
§312  (a)    
 
  701
       
 
  702(a)
  (b)    
 
  702(b)
  (c)    
 
  702(c)
§313 (a)    
 
  703(a)
  (b)    
 
  703(b)
  (c)    
 
  703(a),703(b)
  (d)    
 
  703(c)
§314 (a)    
 
  704
  (b)    
 
  Not Applicable
  (c)(l)    
 
  102
  (c)(2)    
 
  102
  (c)(3)    
 
  Not Applicable
  (d)    
 
  Not Applicable
  (e)    
 
  102
§315 (a)    
 
  601(a)
  (b)    
 
  602
       
 
  703(a)(6)
  (c)    
 
  601(b)
  (d)    
 
  601(c)
  (d)(1)    
 
  601(a)(1)
  (d)(2)    
 
  601(a)(1)
  (d)(3)    
 
  601(c)(3)
  (e)    
 
  514
§316 (a)    
 
  101
       
 
  502
  (a)(l)(A)  
 
  512
  (a)(l)(B)  
 
  513
  (a)(2)    
 
  Not Applicable
  (b)    
 
  508
§317 (a)(1)    
 
  503
  (a)(2)    
 
  504
  (b)    
 
  1003
§318 (a)    
 
  107
Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture.

 

 


 

TABLE OF CONTENTS
 
             
        PAGE
PARTIES     1  
RECITALS OF THE COMPANY     1  
 
           
ARTICLES ONE

DEFINISIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
       
SECTION 101.
  Definitions:        
 
  Act     2  
 
  Affiliate; control     2  
 
  Authenticating Agent     2  
 
  Board of Directors Board of Directors     2  
 
  Board Resolution     2  
 
  Business Day     2  
 
  Commission     3  
 
  Company     3  
 
  Company Request; Company Order     3  
 
  Corporate Trust Office     3  
 
  corporation     3  
 
  Defaulted Interest     3  
 
  Depository     3  
 
  Designated Subsidiary     3  
 
  Event of Default     3  
 
  Global Security     4  
 
  Holder     4  
 
  Indenture     4  
 
  interest     4  
 
  Interest Payment Date     4  
 
  Maturity     4  
 
  Officers’ Certificate     4  
 
  Opinion of Counsel     4  
 
  Original Issue Discount Security     4  
 
  Outstanding     5  
 
  Paying Agent     6  
 
  Person     6  
 
  Place of Payment     6  
 
  Predecessor Security     6  
 
  Redemption Date     6  
 
  Redemption Price     6  
 
  Regular Record Date     6  
NOTE: This table of contents shall not, for any purpose, be deemed to be part of the Indenture.

 


 

             
        PAGE
 
  Responsible Officer     6  
 
  Securities     7  
 
  Security Register and Security Registrar     7  
 
  Special Record Date     7  
 
  Stated Maturity     7  
 
  Subsidiary; voting stock     7  
 
  Trustee     7  
 
  Trust Indenture Act     7  
 
  U.S. Government Obligations     7  
 
  Vice President     8  
Section 102.
  Compliance Certificates and Opinions     8  
Section 103.
  Form of Documents Delivered to Trustee     9  
Section 104.
  Acts of Holders     9  
Section 105.
  Notices, Etc., to Trustee and Company     10  
Section 106.
  Notice to Holders; Waiver     11  
Section 107.
  Conflict with Trust Indenture Act     11  
Section 108.
  Effect of Headings and Table of Contents     12  
Section 109.
  Successors and Assigns     12  
Section 110.
  Separability Clause     12  
Section 111.
  Benefits of Indenture     12  
Section 112.
  Governing Law     12  
Section 113.
  Legal Holidays     12  
 
           
ARTICLE TWO

SECURITY FORMS
       
Section 201.
  Forms Generally     13  
Section 202.
  Form of Face of Security     13  
Section 203.
  Form of Reverse of Security     16  
Section 204.
  Form of Trustee’s Certificate of Authentication     20  
Section 205.
  Additional Provisions Required in Global
Security
    20  
 
           
ARTICLE THREE

THE SECURITIES
       
Section 301.
  Amount Unlimited; Issuable in Series     21  
Section 302.
  Denominations     23  
Section 303.
  Execution, Authentication, Delivery and Dating     23  
Section 304.
  Temporary Securities     26  
Section 305.
  Registration, Registration of Transfer and Exchange     26  
Section 306.
  Mutilated, Destroyed, Lost and Stolen Securities     28  
Section 307.
  Payment of Interest; Interest Rights Preserved     29  
Section 308.
  Persons Deemed Owners     31  
Section 309.
  Cancellation     31  
Section 310.
  Computation of Interest     32  
 
           
ARTICLE FOUR

SATISFACTION AND DISCHARGE
       

 


 

             
        PAGE
Section 401.
  Satisfaction and Discharge of Indenture     32  
Section 402.
  Application of Trust Money     33  
Section 403.
  Defeasance and Discharge of Securities of any Series     34  
 
           
ARTICLE FIVE

REMEDIES
       
Section 501.
  Events of Default     37  
Section 502.
  Acceleration of Maturity; Rescission and Annulment     39  
Section 503.
  Collection of Indebtedness and Suits for Enforcement by Trustee     40  
Section 504.
  Trustee May File Proofs of Claim     41  
Section 505.
  Trustee May Enforce Claims Without Possession of Securities     42  
Section 506.
  Application of Money Collected     42  
Section 507.
  Limitation on Suits     43  
Section 508.
  Unconditional Right of Holders to Receive Principal, Premium and Interest     44  
Section 509.
  Restoration of Rights and Remedies     44  
Section 510.
  Rights and Remedies Cumulative     44  
Section 511.
  Delay or Omission Not Waiver     45  
Section 512.
  Control by Holders     45  
Section 513.
  Waiver of Past Defaults     45  
Section 514.
  Undertaking for Costs     46  
Section 515.
  Waiver of Stay or Extension Laws     47  
 
           
ARTICLE SIX

THE TRUSTEE
       
Section 601.
  Certain Duties and Responsibilities     47  
Section 602.
  Notice of Defaults     48  
Section 603.
  Certain Rights of Trustee     49  
Section 604.
  Not Responsible for Recitals or Issuance of Securities     50  
Section 605.
  May Hold Securities     50  
Section 606.
  Money Held in Trust     50  
Section 607.
  Compensation and Reimbursement     50  
Section 608.
  Disqualification; Conflicting Interests     51  
 
  (a) Elimination of Conflicting Interest or Resignation        
 
  (b) Notice of Failure to Eliminate Conflicting Interest or Resign     51  

 


 

             
        PAGE
 
  (c) “Conflicting Interest” Defined     52  
 
  (d) Definitions of Certain Terms Used in This Section 55     55  
 
  (e) Calculation of Percentages of Securities     56  
Section 609.
  Corporate Trustee Required; Eligibility     57  
Section 610.
  Resignation and Removal; Appointment of Successor     58  
Section 611.
  Acceptance of Appointment by Successor     59  
Section 612.
  Merger, Conversion, Consolidation or Succession to Business     61  
Section 613.
  Preferential Collection of Claims Against Company     61  
 
  (a) Segregation and Apportionment of Certain Collections by Trustee, Certain Exceptions     61  
 
  (b) Certain Creditor Relationships Excluded from Segregation and Apportionment     64  
 
  (c) Definitions of Certain Terms Used in This Section     65  
Section 614.
  Appointment of Authenticating Agent     66  
 
           
ARTICLE SEVEN

HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY
       
Section 701.
  Company to Furnish Trustee Names and Addresses of Holders     68  
Section 702.
  Preservation of Information; Communication to Holders     68  
Section 703.
  Reports by Trustee     69  
Section 704.
  Reports by Company     71  
 
           
ARTICLE EIGHT

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
       
Section 801.
  Company May Consolidate, Etc., Only on Certain Terms     72  
Section 802.
  Successor Corporation Substituted     73  
 
           
ARTICLE NINE

SUPPLEMENTAL INDENTURES
       
Section 901.
  Supplemental Indentures Without Consent of Holders     74  
Section 902.
  Supplemental Indentures With Consent of Holders     75  
Section 903.
  Execution of Supplemental Indentures     76  

 


 

             
        PAGE
Section 904.
  Effect of Supplemental Indentures     77  
Section 905.
  Conformity with Trust Indenture Act     77  
Section 906.
  Reference in Securities to Supplemental Indentures     77  
 
           
ARTICLE TEN

COVENANTS
       
Section 1001.
  Payment of Principal, Premium and Interest     77  
Section 1002.
  Maintenance of Office or Agency     78  
Section 1003.
  Money for Securities Payments to Be Held in Trust     78  
Section 1004.
  Corporate Existence     80  
Section 1005.
  Maintenance of Properties     80  
Section 1006.
  Limitation on Liens on Common Stock of Designated Subsidiaries        
Section 1007.
  Defeasance of Certain Obligations and Certain Events of Default     81  
Section 1008.
  Statement by Officers as to Default     81  
Section 1009.
  Waiver of Certain Covenants     83  
 
           
ARTICLE ELEVEN

REDEMPTION OF SECURITIES
       
Section 1101.
  Applicability of Article     84  
Section 1102.
  Election to Redeem; Notice to Trustee     84  
Section 1103.
  Selection by Trustee of Securities to Be Redeemed     84  
Section 1104.
  Notice of Redemption     85  
Section 1105.
  Deposit of Redemption Price     85  
Section 1106.
  Securities Payable on Redemption Date     86  
Section 1107.
  Securities Redeemed in Part     86  
 
           
ARTICLE TWELVE

SINKING FUNDS
       
Section 1201.
  Applicability of Article     87  
Section 1202.
  Satisfaction of Sinking Fund Payments with Securities     87  
Section 1203.
  Redemption of Securities for Sinking Fund     88  
TESTIMONIUM     89  
SIGNATURES AND SEALS     89  
ACKNOWLEDGMENTS     90  

 


 

INDENTURE, dated as of June 30, 1988, between CIGNA CORPO-RATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal office at One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19192, and BANKERS TRUST COMPANY, a banking corporation duly organized and existing under the laws of the State of New York, as Trustee (herein called the “Trustee”).
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as in this Indenture provided.
All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions
For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;
(3) All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and
(4) the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that Article.
“Act”, when used with respect to any Holder, has the meaning specified in Section 104.

 

 


 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Authenticating Agent” means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Securities.
“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board.
“Board Resolution” means a copy of a resolution certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.
“Business Day”, when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law to close .
“Commission” means the Securities and Exchange Commission, as time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.
“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and hereafter “Company” shall mean such successor corporation.
“Company Request” or “Company Order” means a written request or order signed in the name of the Company by its Chairman of the Board, a Vice Chairman, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Corporate Secretary or an Assistant Corporate Secretary, and delivered to the Trustee.
“Corporate Trust Office” means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which office at the date of this Indenture is located at Four Albany Street, New York, New York 10015.
“corporation” includes corporations, associations, companies and business trusts.
“Defaulted Interest” has the meaning specified in Section 307.
“Depository” means, unless otherwise specified by the Company pursuant to Section 301, with respect to Securities of any series issuable or issued (in whole or in part) in the form of one or more Global Securities, The Depository Trust Company, New York, New York, or any successor thereto registered as a clearing agency under the Securities and Exchange Act of 1934, as amended.
“Designated Subsidiary” means each of CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company and Insurance Company of North America, so long as it remains a Subsidiary, or any Subsidiary which is a successor of such Designated Subsidiary.

 

 


 

“Event of Default” has the meaning specified in Section 501.
“Global Security” means a Security in the form prescribed in Section 205 evidencing all or a part of any series of Securities which is executed by the Company and authenticated and delivered by the Trustee to the Depository or pursuant to the Depository’s instruction, all in accordance with this Indenture and pursuant to a Company Order, which shall be registered in the name of the Depository or its nominee.
“Holder” means a Person in whose name a Security is registered in the Security Register.
“Indenture” means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities established as contemplated by Section 301.
“interest”, when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity.
“Interest Payment Date”, when used with respect to any Security, means the Stated Maturity of an instalment of interest on such Security.
“Maturity”, when used with respect to any Security, means the date on which the principal of such Securities or an instalment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.
“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Corporate Secretary or an Assistant Corporate Secretary, of the Company, and delivered to the Trustee.
“Opinion of Counsel” means a written opinion of counsel, who may be counsel for (including an employee of) the Company, and who shall be reasonably acceptable to the Trustee.
“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.
“Outstanding”, when used with respect to Securities, means, as of date of determination, all Securities theretofore authenticated and delivered under this Indenture, except :
(i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;
(ij) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities in accordance with Section 401; provided that , if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefore satisfactory to the Trustee has been made;
(iii) Securities for whose payment or redemption money or U.S. Government Obligations in the necessary amount has been theretofore deposited with the Trustee (or another trustee satisfying the requirements of Section 609) in trust for the Holders of such Securities in accordance with Section 403; and

 

 


 

(iv) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledge establishes to the satisfaction of Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
“Paying Agent” means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company.
“Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
“Place of Payment”, when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and interest on the Securities of that series are payable as specified as contemplated by Section 301.
“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.
“Redemption Date”, when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.
“Redemption Price”, when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.
“Regular Record Date” for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301.
“Responsible Officer”, when used with respect to the Trustee, shall mean any officer within the Corporate Trust and Agency Group (or any successor group of the Trustee), including any vice-president, assistant vice president, assistant secretary, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers or to whom any corporate trust matter is referred at the Corporate Trust office because of his knowledge of and familiarity with the particular subject.

 

 


 

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.
“Security Register” and “Security Registrar” have the respective meanings specified in Section 305.
“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307.
“Stated Maturity”, when used with respect to any Security or any instalment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such instalment of principal or interest is due and payable.
“Subsidiary” means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting stock” means stock which ordinarily has voting power for the election of directors, whether at all times or only as long as no senior class of stock has such voting power by reason of any contingency.
“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.
“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 905.
“U.S. Government Obligations” means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), which has a combined capital and surplus of not less than $50,000,000, as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.
“Vice President”, when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president”.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions

 

 


 

precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include
(1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
SECTION 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing, or by any Person duly authorized by means of any written certification, proxy or other authorization furnished by a Depository; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced

 

 


 

thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or, in the case of the Depository, furnishing the written certification, proxy or other authorization pursuant to which such instrument or instruments are signed. Proof of execution of any such instrument, any writing appointing any such agent or authorizing any such Person or any such written certification or proxy shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument, writing, certification or proxy may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument, writing, certification or proxy acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument, writing, certification or proxy or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.
(c) The ownership of Securities shall be proved by the Security Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefore or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.
SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,
(l) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust and Agency Group, or
(2) the Company by one Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, Attention: Corporate Secretary, addressed to Company at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each holder affected by such event, at his address as it appears in the Security register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders, Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

 

 


 

In case by reason of the suspension of regular mail service or by on of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 113. Legal Holidays.
In any case where any Interest Payment bate, Redemption Date, Maturity or Stated Maturity of any Securities shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Maturity or Stated Maturity, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Maturity or Stated Maturity, as the case may be.

 

 


 

ARTICLE TWO SECURITY FORMS
SECURITY FORMS
SECTION 201. Forms Generally.
The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution, or an Officers’ Certificate executed by Officers of the Company authorized by Board Resolution, or in one or ore indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or her marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. If the form of Securities of any series is established by action taken Pursuant to a Board Resolution, or an Officers’ Certificate executed by Officers of the Company authorized by Board Resolution, a copy of an appropriate record of such action shall be certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such securities.
The Trustee’s certificates of authentication shall be in substantially the form set forth in this Article.
The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.
SECTION 202. Form of Face of Security.
[ If the Security is an Original Issue Discount Security, insert- FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON SECURITY IS  _____  % OF ITS PRINCIPAL AMOUNT, THE ISSUE DATE IS  _____  , 19  _____  AND ‘THE YIELD TO MATURITY IS  _____  % (, THE METHOD USED TO DETERMINE THE Y’IELD IS  _____  AND THE AMOUNT OF THE ORIGINAL ISSUE DISCOUNT APPLICABLE TO THE SHORT ACCRUAL PERIOD OF  _____  , 19  _____  TO  _____  , 19  _____  IS  _____  % OF THE PRINCIPAL AMOUNT OF THIS SECURITY)]
CIGNA CORPORATION
 
No._____
CIGNA CORPORATION, a Delaware corporation (herein called the “Company”), for value received, hereby promises to pay to                      , or registered assigns, the principal sum of                       , Dollars [ If applicable, substitute other currency] on                                                                                                                                                                                                                                                                         [If the Security is to bear interest prior to Maturity, insert-, and to pay interest thereon from  _____  or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on  _____  and  _____  in each year, commencing  _____  , at the rate of  _____  % per annum, until the principal hereof is paid or made available for payment. [ If applicable insert-, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of  _____  % per annum on any overdue principal and premium and on any overdue installment of interest]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security

 

 


 

(or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ___ or ___ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture].
[ If the Security is not to bear interest prior to Maturity , insert- The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal of this Security shall bear interest at the rate of  _____  % per annum (to the extent t the payment of such interest shall be legally enforceable), which shall accrue from the date of such default in payment to the date payment of such principal has been made or duly provided for. Interest on any overdue principal shall be payable on demand. Any such interest on any overdue principal that is not so paid on demand shall bear interest at the rate of  _____  % per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date such demand for payment to the date payment of such interest has en made or duly provided for, and such interest shall also be payable on demand.]
Payment of the principal of (and premium, if any) and [ if applicable, insert- any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in  _____  , in such coin or currency of the United States of America [ if applicable, substitute other currency ] as at the time of payment is legal tender for payment of public and private debts [ if applicable, insert-; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register].
Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.
Dated:
[SEAL]
         
  CIGNA CORPORATION
 
 
  By:      
       
       
 
Attest:
                                         

 

 


 

SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of June 30, 1988 (herein called the “Indenture”), between the Company and Bankers Trust Company (herein called the “Trustee”, which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof[, limited in aggregate principal amount to $                      ].
[ If applicable, insert- The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, [if applicable, insert— (l) on                      in any year commencing with the year  _____  and ending with the year  _____  through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [on or after                      , 19  _____  ], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [on or before                      ,  _____  %, and if redeemed] during the 12-month period beginning._____ of the years indicated,
                         
    Redemption             Redemption  
Year   Price     Year     Price  
 
                       
 
                       
 
                       
 
                       
and thereafter at a Redemption Price equal to  _____  % of the principal amount, together in the case of any such redemption [ if applicable, insert— (whether through operation of the sinking fund or otherwise)] with accrued interest to the Redemption Date, but interest instalments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record dates referred to on the face hereof, all as provided in the Indenture.]
[ If applicable , insert -The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, (1) on  _____  in any year commencing with the year____ and ending with the year  _____  through operation of the sinking fund for this series at the Redemption Prices for redemption through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below, and (2) at any time [on or after  _____  ], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in he table below: If redeemed during the 12-month period beginning_____ of the years indicated,
                 
            Redemption Price  
    Redemption Price     for Redemption  
    For Redemption     Otherwise  
    Through Operation     Than Through  
    Of the     Operation of the  
Year   Sinking Fund     Sinking Fund  
 
               

 

 


 

and thereafter at a Redemption Price equal to  _____  % of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, but interest instalments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such securities, or one or more Predecessor Securities, of record at the close at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]
[Notwithstanding the foregoing, the Company may not, prior to  __________, redeem any Securities of this series as contemplated by [Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than ____ % per annum.]
[The sinking fund for this series provides for the redemption on                      in each year beginning with the year  _____  to and including the year  _____  of [not less than] $                      [(“mandatory sinking fund”) and not more than $  _____  [aggregate principal amount of Securities of this series. [Securities of this series acquired or redeemed by the Company otherwise than through [mandatory] sinking fund payments may be credited against subsequent [mandatory] sinking fund payments otherwise required to be made [ if applicable -in the inverse order in which they become due.]]
In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
[The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness on this Security and (b) certain restrictive covenants and certain Events of Default upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Security.]
[ If the Security is not an Original Issue Discount Security ,-If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.]
[ If the Security is an Original Issue Discount Security ,-If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to- insert formula for determining the amount . Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal and overdue interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company’s obligations in respect of the payment of the principal of and interest, if any, on the Securities of this series shall terminate;]
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than 66 and 2/3% in aggregate principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain

 

 


 

provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security shall alter or impair the right of the Holder of this Security, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $  _____  and any integral multiple [thereof] [of $  _____  in excess thereof]. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for other Securities of this series, of a like tenor and aggregate principal amount but of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
SECTION 204. Form o/Trustee’s Certificate of Authentication.
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
         
  BANKERS TRUST COMPANY
As Trustee
 
 
  By:      
    Authorized Officer    
       

 

 


 

         
SECTION 205. Additional Provisions Required in Global Security.
Any Global Security issued hereunder shall, in addition to the provisions contained in Sections 202 and 203, bear the following legend (and/or such additional or alternate legend(s) relative to the terms of Global Securities as the Depository may request or the Company authorize in an Officers’ Certificate pursuant to Section 201):
“This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depository or a nominee of a Depository. This Global Security is exchangeable for Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances hereinafter described and may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository.”
In addition, any Global Security issued hereunder shall include a provision containing the language set forth below, or language of similar effect:
“This Security is a Global Security and shall be exchangeable for Securities registered in the names of Persons other than the Depository with respect to this Global Security or its nominee only if (x) such Depository notifies the Company that it is unwilling or unable to continue as Depository for this Global Security or at any time ceases to be a clearing agency registered as such under the Securities Exchange Act of 1934, as amended, (y) the Company executes and delivers to the Trustee a Company Order that this Global Security shall be exchangeable or (z) there shall have occurred and be continuing an Event of Default with respect to the Securities. If this Global Security is exchangeable pursuant to the preceding sentence it shall be exchangeable for Securities issuable in denominations of $1,000 and any integral multiple thereof, registered in such names as such Depository shall direct.”
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series .
The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. Prior to the issuance of Securities of any series, there shall be (i) established in or pursuant to a Board Resolution and, subject to Section 303, set forth in an Officers’ Certificate, or (ii) established in one or more indentures supplemental hereto:
(1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities);
(2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sections 304, 305, 306, 906 or 1107);

 

 


 

(3) the date or dates (or manner of determining the same) on which the principal of the Securities of the series is payable;
(4) the rate or rates (or manner of determining the same) at which the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and the Regular Record Date for the interest payable on any Interest Payment Date;
(5) if other than as set forth herein, the place or places where the principal of (and premium, if any) and interest on Securities of the series shall be payable;
(6) the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at ,the option of the Company; .
(7) the obligation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;
(8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable;
(9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502;
(10) if other than the currency of the United States of America, the currency or currencies, including composite currencies, in which payment of the principal of (and premium, if any) and interest on the Securities of the series shall be payable;
(11) if the amount of payments of principal of (and premium, if any) or interest on the Securities of the series may be determined with reference to an index, the manner in which such amounts shall be determined;
(12) the application, if any, of Section 403 to the Securities of the series;
(13) the application, if any, of Section 1007 to the Securities of the series;
(14) if any of the Securities of the series are to be issued in whole or in part in the form of one or more Global Securities, a statement to that effect and, in such case, the Depository for such Global Security or Securities, which Depository shall be a clearing agency registered under the Securities Exchange Act of 1934, as amended; and
(15) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture).
All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such Board Resolution and set forth in such Officers’ Certificate (pursuant to Section 303) or in any such indenture supplemental hereto.

 

 


 

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Corporate Secretary or an Assistant Corporate Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate setting forth the terms of the terms of the series.
SECTION 302. Denominations.
The Securities of each series shall be issuable in registered form without coupons in such denominations as shall be specified as contemplated by Section 301. In the absence of any such provisions with respect the Securities of any series, the Securities of such series shall be issuable in denominations of $l,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating .
The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Corporate Secretary or one of its Assistant Corporate Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established in or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating,
(a) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture;
(b) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and
(c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors’ rights and to general equity principles.
With respect to Securities of a series constituting a medium-term note program, the Trustee may conclusively rely on the documents and opinion delivered pursuant to Sections 201 and 301 and this Section 303, as applicable (unless revoked by superseding comparable documents or opinions) as to the authorization of the Board of Directors of any Securities delivered hereunder, the form thereof and the

 

 


 

legality, validity, binding effect and enforceability thereof. With respect to Securities of a series constituting a medium-term note program, if the form and general terms of the Securities of such series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, that the Securities have been duly authorized by the Company and, when duly executed by the Company and completed and authenticated by the Trustee in accordance with the Indenture and issued, delivered and paid for in accordance with any applicable distribution agreement, will have been duly issued under the Indenture and will constitute valid and binding obligations of the Company entitled to the benefits provided by the indenture, except that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally from time to time in force and general principles of equity. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers’ Certificate otherwise required pursuant to Section 301 or the Company Order and opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the time of authentication upon original issuance of the first Security of such series.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.
If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of anyone or more temporary Securities of any series the Company shall execute and (in accordance with a Company Order delivered at or prior to the authentication of the first definitive Security of such series) the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.

 

 


 

SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept a security register (the register so maintained being herein sometimes referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee shall have the right to examine the Security Register at all reasonable times. Unless otherwise designated by the Company by written notice to the Trustee, Bankers Trust Company, Corporate Trust and Agency Group, Four Albany Street. New York, New York 10015 shall be, and is hereby appointed “Security Registrar” for the purpose of registering Securities and transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security of any series at the office or agency in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of a like tenor and aggregate principal amount.
At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of a like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer of exchange.
Every Security presented or surrendered for registration of transfer for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, or 1107 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of that series selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.
Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, a Global Security of any series shall be exchangeable pursuant to this Section for Securities registered in the names of Persons other than the Depository with respect to such series or its nominee only as provided in this paragraph. A Global Security shall be exchangeable pursuant to this Section if (x) such Depository notifies the Company that it is unwilling or unable to continue as Depository for such series or at any time ceases to be a clearing agency registered as such under the Securities Exchange Act of 1934, as amended, (y) the Company executes and delivers to the Trustee a Company Order that such Global Security shall be so exchangeable or (z) there shall have occurred and be continuing an Event of Default with respect to the Securities. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for Securities issuable in denominations of $1,000 and any integral multiple thereof, registered in such names as the Depository for such Global Security shall direct.

 

 


 

Notwithstanding any other provision of this Section, a Global Security may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities .
If any mutilated Security is surrendered to the Trustee, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them and any agent of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding,
In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.
Unless otherwise provided with respect to the Securities of any series, at the option of the Company payment of interest may be made (i) by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or (ii) by such method or methods as any Holder shall specify in writing from time to time to the Company or its agent.

 

 


 

Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed. first-class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Securitv delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners .
Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (of premium, if any) and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
No holder of any beneficial interest in any Global Security held on it behalf by a Depository shall have any rights under this Indenture with respect to such Global Security, and such Depository may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent

 

 


 

the Company, the Trustee, or any agent of the Company or the Trustee from giving effect to any written certification, proxy, or other authorization furnished by a Depository, or impair, as between a Depository and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depository as Holder of any Security.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it; and any Security surrendered to the Trustee for any such purpose shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. Notwithstanding any other provision of this Indenture to the contrary, in the case of a series all the Securities of which are not to be originally issued at one time, a Security of such series shall not be deemed to have been Outstanding at any time hereunder if and to the extent that, subsequent to the authentication and delivery thereof, such Security is delivered to the Trustee for cancellation by the Company or any agent thereof upon the failure of the original purchaser thereof to make payment therefor against delivery thereof, and any Security so delivered to the Trustee shall be promptly cancelled by it. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order.
SECTION 310. Computation of Interest .
Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 36O-day year of twelve 3o-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture .
This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the Trustee for cancellation
(i) have become due and payable, or

 

 


 

(ii) will become due and payable at their Stated Maturity within one year, or
(iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and;
(3) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company under Section 306, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee any Authenticating Agent under Section 614, if money or U.S. Government Obligations shall have been deposited with the Trustee in accordance with Section 403 or 1007, the obligations of the Company to the Trustee under Section 402(b), and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003, shall survive.
SECTION 402. Application of Trust Money.
(a) Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401, all money and U.S. Government Obligations deposited with the Trustee (or other trustee satisfying the requirements of Section 609, collectively, for purposes of this Section 402, the “Trustee”) pursuant to Section 403 or 1007 and all money received by the Trustee in respect of U.S. Government Obligations deposited with the Trustee pursuant to Section 403, shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with or received by the Trustee or to make mandatory sinking fund payments or analogous payments as contemplated by Section 403 or 1007.
(b) The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations deposited pursuant to Section 403 or 1007 or the interest and principal received in respect of such U.S. Government Obligations other than any such tax, fee or other charge which by law is payable by or on behalf of Holders.
(c) Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 403 or 1007 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then have been required to be deposited for the purpose for which such money or U.S. Government Obligations were deposited or received.

 

 


 

SECTION 403. Defeasance and Discharge of Securities of any Series.
If this Section 403 is specified, as contemplated by Section 301, to be applicable to Securities of any series, then notwithstanding Section 401, the Company shall be deemed to have paid and discharged the entire indebtedness on all the Outstanding Securities of any series, the provisions of this Indenture as it relates to such Outstanding Securities (except as to (A) the rights of Holders of such Outstanding Securities to receive, from the trust funds described in subparagraph (1) below, payment of the principal of (and premium, if any) and any instalment of principal of (and premium, if any) or interest on such Securities on the Stated Maturity of such principal or instalment of principal or interest or any mandatory sinking fund payments or analogous payments applicable to the Securities of that series on the day on which such payments e due and payable in accordance with the terms of the Indenture and such Securities, (B) the Company’s obligations with respect to such securities under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Four, which in each case shall survive until otherwise terminated or discharged hereunder) shall no longer be in effect, and the Trustee, at the expense of the Company, shall, upon Company Request, execute proper instruments acknowledging the same, provided that the following conditions have been satisfied:
(1) the Company has deposited or caused to be deposited with the Trustee (or another corporate trustee appointed by the Company satisfying the requirements of Section 609 who shall have agreed to comply with the provisions of this Article Four applicable to it), irrevocably (irrespective of whether the conditions in subparagraphs (2), (3), (4), (5), (6) and (7) below have been satisfied, but subject to the provisions of Section 402(c) and the last paragraph of Section 1003), as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of that series, with reference to this Section 403, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (i) or (ii) of this subparagraph (1) money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or such other corporate trustee, as the case may be) to pay and discharge, (i) the principal of (and premium, if any) and each instalment of principal (and premium, if any) and interest on such Outstanding Securities on the Stated Maturity of such principal or instalment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to Securities of such series on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities;
(2) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound;
(3) no Event of Default under Sections 501(1), 501(2) or 501(3), or event which with the lapse of time would become an Event of Default under Section 501(1), with respect to Securities of that series shall have occurred and be continuing on the date of such deposit, and no Event of Default under Section 501(6) or Section 501(7) or event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 501(6) or Section 501(7) shall have occurred and be continuing on the 91st day after such date of deposit;

 

 


 

(4) the Company has delivered to the Trustee an Opinion of Counsel to the effect that since the date of this Indenture there has been a change in the applicable federal income tax law (including a change in the official interpretation thereof), or the Company has received from, or there has been published by, the Internal Revenue Service a ruling, in any case to the effect that Holders of the Securities of that series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amounts and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred;
(5) if the Securities of that series are then listed on the New York Stock Exchange, Inc., the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause such Securities to be delisted;
(6) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance and discharge of the entire indebtedness on all Outstanding Securities of any such series as contemplated by this Section have been complied with; and
(7) if such deposit is to be made with a trustee, other than the Trustee, pursuant to subparagraph (1) above, such other trustee shall have delivered to the Trustee a certificate satisfactory in form to the Trustee stating that such deposit has been made in accordance with the provisions of this Article Four and that such other trustee agrees to comply with the provisions of this Article Four applicable to it, and the Trustee shall be fully protected in relying upon such certificate.
In the event that any other trustee is appointed by the Company pursuant to subparagraph (1) above, the Trustee shall have no responsibilities with respect to the performance by such other trustee of its duties or with respect to any monies or U.S. Government Obligations deposited such other trustee.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default .
“Event of Default”, wherever used herein with respect to Securities of any series, means anyone of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or .involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in the performance of which or the breach

 

 


 

of which is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by overnight mail or other same day or overnight delivery service which can provide evidence of delivery, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or
(5) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed. by the Company (including a default with respect to Securities of any series other than that series) or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company (including this Indenture), whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay such indebtedness in a principal amount in excess of $20,000,000 when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness in a principal amount in excess of $20,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 15 days after there shall have been given, by overnight mail or other same day or overnight delivery service which can provide evidence of delivery, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a “Notice of Default” hereunder; or
(6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or
(7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or
(8) any other Event of Default provided with respect to Securities of that series.

 

 


 

SECTION 502. Acceleration of Maturity; Rescission and Annulment
If an Event of Default with respect to Securities of any series at time Outstanding occurs and is continuing, then in every such case Trustee or the Holders of not less than 25% in principal amount of Outstanding Securities of that series may declare the principal amount (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all of the Securities of that series to be due payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable.
At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient to pay
(A) all overdue interest on all Securities of that series,
(B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities,
(C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, the Security Registrar, any Paying Agent and their agents and counsel;
and
(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof,

 

 


 

the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the reasonable costs and expenses of collection, including the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and other amounts due the Trustee under Section 607.
If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated.
If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim .
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607.
Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

 

 


 

SECTION 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected .
Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 607; and
SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and
THIRD: The remainder, if any, to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to receive such remainder or as a court of competent jurisdiction shall direct.
SECTION 507. Limitation on Suits .
No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;
(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;

 

 


 

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies .
If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. .
SECTION 510. Rights and Remedies Cumulative .
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver .
No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, the Trustee or by the Holders, as the case may be.
SECTION 512. Control by Holders .
The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of law or with this Indenture,

 

 


 

(2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and
(3) the Trustee shall have the right to decline to follow such direction if the Trustee in good faith shall, by a Responsible Officer or Officers, determine that such direction would be prejudicial to the Holders not joining in such direction or would involve the Trustee in personal liability.
The Trustee may, but shall not be obligated to, fix a record date for purpose of determining the Persons entitled to so direct the Trustee. If a ‘record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to so direct the Trustee, or to amend any such direction, whether or not such Holders remain Holders after such record date; provided that no such direction or amendment shall be valid or effective for more than 90 days after such record date.
SECTION 513. Waiver of Past Defaults .
The Holders of not less than a majority in principal amount of the outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or interest on any Security of such series, or
(2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.
With respect to any series of Securities. issued hereunder, the Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to waive any past default hereunder. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such persons, shall be entitled to waive any default hereunder, or to retract (prior to the delivery to the Trustee of waivers from the Holders of a majority of such Securities) any such waiver previously given, whether or not such Holders remain Holders after such record date; provided , that no such waiver shall be valid or effective for more than 90 days after such record date.
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs .
All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date).

 

 


 

SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE SIX THE TRUSTEE
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities of any series, determined as provided in Section 512, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such series; and

 

 


 

(4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.
SECTION 602. Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit by mail to all Holders of Securities of such series, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security of such series or in the payment of any sinking fund instalment with respect to Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice in the interest of the Holders of Securities of such series; and provided, further, that in the case of any default of the character specified in Section 501(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate;
(d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

 

 


 

(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; and
(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.
SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), provided that, unless there has been an Event of Default under Section 501(6) or (7) hereof, such compensation shall be limited to that which may be mutually agreed in writing between the Company and the Trustee;
(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any Claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

 

 


 

As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of, premium, if any, or interest on the Securities.
SECTION 608. Disqualification; Conflicting Interests .
(a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, with respect to the Securities of any series, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign with respect to the Securities of that series in the manner and with the effect hereinafter specified in this Article.
(b) In the event that the Trustee shall fail to comply with the provisions of Subsection (a) of this Section with respect to the Securities of any series, the Trustee shall, within 10 days after the expiration of such 90-day period, transmit by mail to all Holders of Securities of that series, as their names and addresses appear in the Security Register, notice of such failure.
(c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to the Securities of any series if
(1) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any series other than that series or is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture, provided that there shall be excluded from the operation of this paragraph this Indenture with respect to the Securities of any series other than that series or any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if
(i) this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of the Trust Indenture Act that differences exist between the provisions of this Indenture with respect to Securities of that series and one or more other series or the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under such other indenture or indentures, or
(ii) the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to the Securities of that series and such other series or such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under such other indenture or indentures;

 

 


 

(2) the Trustee or any of its directors or executive officers is an obligor upon the Securities or an underwriter for the Company;
(3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Company or an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (i) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Company but may not be at the same time an executive officer of both the Trustee and the Company; (ii) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Company; and (iii) the Trustee may be designated by the Company or by any underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this Subsection, to act as trustee, whether under an indenture or otherwise;
(5) 10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner or executive officer thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons;
(6) the Trustee is the beneficial owner of, or holds as collateral security for, an obligation which is in default (as hereinafter in this Subsection defined), (i) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (ii) 10% or more of any class of security of an underwriter for the Company;
(7) the Trustee is the beneficial owner of, or holds as collateral security for, an obligation which is in default (as hereinafter in this Subsection defined), 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company;
(8) the Trustee is the beneficial owner of, or holds as collateral security for, an obligation which is in default (as hereinafter in this Subsection defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; or
(9) the Trustee owns, on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7) or (8) of this Subsection. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such

 

 


 

securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of the principal of (or premium, if any) or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this Subsection.
The specification of percentages in paragraphs (5) to (9), inclusive, of this Subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this Subsection.
For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection only, (i) the terms “security” and “securities” shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be “in default” when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (A) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (B) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (C) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity.
(d) For the purpose of this Section:
(1) The term “underwriter”, when used with reference to the Company, means every person who, within three years prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission.
(2) The term “director” means any director of a corporation or any individual performing similar functions with respect to any organization, whether incorporated or unincorporated.
(3) The term “person” means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization or a government or political sub-division thereof. As used in this paragraph, the term “trust” shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security.
(4) The term “voting security” means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person.

 

 


 

(5) The term “Company” means any obligor upon the Securities.
(6) The term “executive officer” means the president, every vice president, every trust officer, the cashier, the secretary and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors.
(e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions:
(1) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section (each of whom is referred to as a “person” in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person.
(2) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding.
(3) The term “amount”, when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units if relating to any other kind of security.
(4) The term “outstanding” means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise;
(iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and
(iv) securities held in escrow if placed in escrow by the issuer thereof;
provided, however , that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof.
(5) A security shall be deemed to be the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however , that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further , that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture.

 

 


 

SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a Corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers which has a combined capital and surplus of at least $50,000,000 and is subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611.
(b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608(a) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.
then, in any such case, (i) the Company pursuant to a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.

 

 


 

(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor, Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities of such series as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.
(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder

 

 


 

administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall execute any and all instruments which may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 613. Preferential Collection of Claims Against Company.
(a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within four months prior to a default, as defined in Subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the holders of other indenture securities, as defined in Subsection (c) of this Section:
(1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such four month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and
(2) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months’ period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds.

 

 


 

Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law;
(B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months’ period;
(C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months’ period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (c) of this Section, would occur within four months; or
(D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in paragraph (B) or (C), as the case may be, to the extent of the fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months’ period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the “ purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee and Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, but after crediting thereon receipts on account the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term “dividends” shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Holders and the holders of other indenture securities in accordance with the provisions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to

 

 


 

the Trustee and the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula.
Any Trustee which has resigned or been removed after the beginning of such four months’ period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months’ period, it shall be subject to the provision of this Subsection if and only if the following conditions exist:
(i) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such four months’ period; and
(ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal.
(b) There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from:
(1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in this Indenture;
(3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity;
(4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section;
(5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; and
(6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper, as defined in Subsection (c) of this Section.
(c) For the purposes of this Section only:
(1) the term “default” means any failure to make payment in full of the principal of or interest on any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable;

 

 


 

(2) the term “other indenture securities” means securities upon which the Company is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account;
(3) the term “cash transaction” means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand;
(4) the term “self-liquidating paper” means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation;
(5) the term “Company” means any obligor upon the Securities; and
6) the term “Federal Bankruptcy Act” means the Bankruptcy Act or Title 11 of the United States Code.
SECTION 614. Appointment of Authenticating Agent.
At any time when any of the Securities remain Outstanding the Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee, the Trustee’s certificate of authentication, or the delivery of the Securities to the Trustee for authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent, a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent or delivery of Securities to the Authenticating Agent for authentication in place of the Trustee, as the case may be. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.

 

 


 

Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607.
If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternate certificate of authentication in the following form:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
         
  BANKERS TRUST COMPANY
As Trustee
 
 
  By      
    As Authenticating Agent   
     
  By      
    Authorized Officer   
       
 
ARTICLE SEVEN
HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not later than May 1 and November 1 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of the preceding April 15 or October 15, as the case may be, and

 

 


 

(b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;
excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar.
SECTION 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.
(b) If three or more Holders (herein referred to as “applicants”) apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Indenture or under the Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five business days after the receipt of such application, at its election, either
(i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(a), or
(ii) inform such applicants as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such formation, the Trustee shall, upon the written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 702(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within within 5 days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b).

 

 


 

SECTION 703. Reports by Trustee.
(a) Within 60 days after May 15 of each year commencing with the year 1989, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such May 15 with respect to:
(1) its eligibility under Section 609 and its qualifications under Section 608, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under said Sections, a written statement to such effect;
(2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on any property or funds held or collected by it as Trustee except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 112 of 1% of the principal amount of the Securities Outstanding on the date of such report;
(3) the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 613(b)(2), (3), (4) or (6);
(4) the property and funds, if any, physically in the possession of the Trustee as such on the date of such report;
(5) any additional issue of Securities which the Trustee has not previously reported; and
(6) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 602-
(b) The Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Securities Outstanding at such time, such report to be transmitted within 90 days after such time.

 

 


 

(c) a copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any Stock exchange.
SECTION 704. Reports by Company.
The Company shall:
(1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe), which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms .
The Company shall not consolidate with or merge into any other corporation or, except for conveyances, transfers or leases to one or more Subsidiaries which are wholly-owned by the Company (except for directors’ qualifying shares), convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge into another corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed;

 

 


 

(2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event related to such transaction which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing;
(3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance which would not be permitted by this Indenture, the Company or such successor corporation or Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and
(4) in case the Company shall consolidate with or merge into any other corporation or, except for conveyances, transfers or leases to one or more Subsidiaries which are wholly-owned by the Company (except for directors’ qualifying shares), convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with.
SECTION 802. Successor Corporation Substituted.
Upon any consolidation by the Company with or merger by the Company into any other corporation or any conveyance, transfer or lease of properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter, except in e case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Securities.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders .
Without the consent of any Holders; the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or

 

 


 

(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or
(3) to add any additional Events of Default; or
(4) to add to or to change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons; or
(5) to change or eliminate any of the provisions of this Indenture, provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or
(6) to secure the Securities pursuant to the requirements of Section 1006 or otherwise; or
(7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or
(8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 61l(b); or
(9) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Section 403, provided that any such action shall not adversely affect the interests of the Holders of Securities of such series or any other series of Securities in any material respect; or
(10) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided such action shall not adversely affect the interests of the Holders of Securities of any series in any material respect.
SECTION 902. Supplemental Indentures with Consent of Holders .
With the consent of the Holders of not less than 66 and 2/3 in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however , that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the

 

 


 

Maturity thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513 or Section 1009, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, provided, however , that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Section and Section 1009, or the deletion of this proviso, in accordance with the requirements of Sections 611(b) and 901(8).
A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
With respect to any series of Securities issued hereunder, the Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture or to revoke (prior to the delivery to the Trustee of consents from the Holders of not less than 66 and 2/3% of such Securities) any such consent previously given, whether or not such Holders remain Holders after such record date; provided , that no such consent shall be valid or effective for more than 90 days after such record date.
SECTION 903. Execution of Supplemental Indentures .
In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures .
Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such {supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

 

 


 

SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.
ARTICLE 10
COVENENANTS
SECTION 1001. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of securities that it will duly and punctually pay the principal of (and premium, if any) and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. Unless otherwise designated by the Company by written notice to the Trustee, such office or agency shall be the office of Bankers Trust Company, Corporate Trust and Agency Group, Four Albany Street, New York, New York 10015. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, howeve r, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
SECTION 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.

 

 


 

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided:
(2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment of principal (and premium, if any) or interest on the Securities of that series; and
(3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, and in the Place of Payment for such series if such Place of Payment is outside the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 1004. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights, (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders.

 

 


 

SECTION 1005. Maintenance of Properties.
The Company will cause all properties material to the conduct of its business or the business of any Designated Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Designated Subsidiary and not disadvantageous in any material respect to the Holders.
SECTION 1006. Limitation on Liens on Common Stock of Designated Subsidiaries.
Except as otherwise specified as contemplated by Section 301 for Securities of any series, so long as any Securities of any series shall remain Outstanding, the Company will not, and will not permit any Subsidiary to, directly or indirectly, create, issue, assume, incur or guarantee any indebtedness for money borrowed which is secured by a mortgage, pledge, lien, security interest or other encumbrance of any nature on any of the present or future common stock of a Designated Subsidiary (or any company, other than the Company, having direct or indirect control of any Designated Subsidiary), which common stock is directly or indirectly owned by the Company, unless the Securities and, if the Company so elects, any other indebtedness of the Company ranking at least pari passu with the Securities, shall be secured equally and ratably with (or prior to) such other secured indebtedness for money borrowed so long as it is outstanding.
SECTION 1007. Defeasance of Certain Obligations and Certain Events of Default.
If this Section 1007 is specified, as contemplated by Section 301, to be applicable to Securities of any series, the Company may omit to comply with any term, provision or condition set forth in Section 1005 or 1006, and Section 501(4) with respect to Sections 1005 and 1006, and Section 501(5) shall be deemed not to be an Event of Default, in each case with respect to the Securities of any series, provided that the following conditions have been satisfied:
(1) the Company has deposited or caused to be deposited with the Trustee (or another corporate trustee appointed by the Company satisfying the requirements of Section 609 who shall have agreed to comply with the provisions of this Section 1007) irrevocably (irrespective of whether the conditions in subparagraphs (2), (3), (4), (5), (6), (7) and (8) below have been satisfied, but subject to the provisions of Section 402(c) and the last paragraph of Section 1003), as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of that series, with reference to this Section 1007, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (i) or (ii) of this subparagraph (1) money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or such other corporate trustee, as the case may be) to pay and discharge, (i) the principal of (and premium, if any) and each installment of

 

 


 

principal (and premium, if any) and interest on the Outstanding Securities of that series on the Stated Maturity of such principal or installment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to Securities of such series on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities;
(2) such deposit shall not cause the Trustee with respect to the Securities of that series to have a conflicting interest as defined in Section 608 and for purposes of the Trust Indenture Act with respect to the Securities of any series;
(3) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound;
(4) no Event of Default under Sections 501(1), 501(2) or 501(3), or event which with the lapse of time would become an Event of Default under Section 501(1), with respect to the Securities of that series shall have occurred and be continuing on the date of such deposit, and no Event of Default under Section 501(6) or Section 501(7) or event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 501(6) or Section 501(7) shall have occurred and be continuing on the 91st day after such date of deposit;
(5) the Company has delivered to the Trustee an Opinion of Counsel to the effect that Holders of the Securities of such series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and certain Events of Default and will be subject to federal income tax on the same amounts and in the same manner and at the same times, as would have been the case if such deposit and defeasance had not occurred;
(6) if the Securities of that series are then listed on the New York Stock Exchange, Inc., the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit and defeasance will not cause such Securities to be delisted;
(7) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated by the Section have been complied with; and
(8) if such deposit is to be made with a trustee, other than the Trustee, pursuant to subparagraph (1) above, such other trustee shall have delivered to the Trustee a certificate satisfactory in form to the Trustee stating that such deposit has been made in accordance with the provisions of this Section 1007 and that such other trustee agrees to comply with the provisions of Sections 402, 1007 and the last paragraph of Section 1003 applicable to it, and the Trustee shall be fully protected in relying upon such certificate.
In the event that any other trustee is appointed by the Company pursuant to subparagraph (1) above, the Trustee shall have no responsibility with respect to the performance by such other trustee of its duties or with respect to any monies or U.S. Government Obligations deposited with such other trustee.
SECTION 1008. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of Sections 1004 to 1006, inclusive, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

 

 


 

SECTION 1009. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1004 to 1006, inclusive, with respect to the Securities of any series if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article.
Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article.
SECTION 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by an Officers’ Certificate. In case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers’ Certificate evidencing compliance with such restriction.
SECI10N 1103. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by lot or such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series.
The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.

 

 


 

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.
SECTION 1104. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,
(5) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and
(6) that the redemption is for a sinking fund, if such is the case.
Notice of redemption of Securities to be redeemed at the election of Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company.
SECTION 1105. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date.
SECTION 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, howeve r, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.

 

 


 

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.
SECTION 1107. Securities Redeemed in Part.
Any Security (including any Global Security) which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered; provided, that if a Global Security is so surrendered, the new Global Security shall be in a denomination equal to the unredeemed portion of the principal of the Global Security so surrendered.
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series.
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a “mandatory sinking fund payment”, and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an “optional sinking fund payment.” If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series.
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such securities as provided for by the terms of such series; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

 

 


 

SECTION 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any series of Securities (unless a shorter period of time shall be acceptable to the Trustee), the Company will deliver to the Trustee an Officers’ Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.
This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

 

 


 

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.
         
  CIGNA CORPORATION
 
 
  By   /s/ Paul H. Rohrkemper    
    Treasurer    
[SEAL]
ATTEST:
         
     
/s/ Carol J. Ward      
Assistant Corporate Secretary      
     
 
         
  BANKERS TRUST COMPANY
 
 
  By   /s/ Daniel C. Brown, Jr.    
    Vice President    
       
 
[SEAL]
ATTEST:
         
     
/s/ Anthony A. Bocchino      
Vice President      
     

 

 


 

COMMONWEALTH OF PENNSYLVANIA
COUNTY OF PHILADELPHIA      } ss.:
On the 5th day of October, 1990, before me personally came Paul H. Rohrkemper, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of CIGNA Corporation, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
         
     
    /s/ Noreen M. Kiriloff  
[SEAL]
STATE OF NEW YORK COUNTY OF NEW YORK } ss.:
On the 5th day of October, 1990, before me personally came Daniel C. Brown, Jr., to me known, who, being by me duly sworn, did depose and say that he is Vice President of Bankers Trust Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
         
     
    /s/ Desiree Marshall  
[SEAL]

 

 

Exhibit 10.4
CIGNA Corporation Non-Employee Director Compensation Program
Amended and Restated Effective January 1, 2010
I . Board and Committee Retainers
A. Annual Board Retainer . Each non-employee director of CIGNA Corporation (“Director”) receives $225,000 annually for Board membership (“Annual Board Retainer”). The manner in which the Annual Board Retainer is paid will vary, depending on a Director’s share ownership position as of December 1 of the prior year relative to the share ownership guidelines set forth in Section V below (“Ownership Guidelines”).
    Directors Meeting Ownership Guidelines . Directors who satisfy the Ownership Guidelines may, on or before December 31 of the prior year, elect among the following vehicles or a combination thereof for payment of their Annual Board Retainers: cash, CIGNA Corporation Common Stock (“Common Stock”), Deferred Stock Units (“Units”) settled in cash, or Units settled in Common Stock. If no election is made by a Director who satisfies the Ownership Guidelines, 100% of the Annual Board Retainer will be paid in cash.
    Directors Not Meeting Ownership Guidelines .
    Directors who do not satisfy the Ownership Guidelines (including new Directors, except as provided below) will receive up to fifty percent (50%) of their Annual Board Retainers (or such lesser amount as may be necessary in order to meet the Ownership Guidelines) as mandatory equity awards. For 2010, the mandatory equity awards will be in Units settled, at the election of the Director, in either cash or Common Stock. If shareholders approve an equity plan for Directors of CIGNA Corporation, for years after 2010, the mandatory equity awards will be in Common Stock, but Directors may alternatively elect, on or before December 31 of the prior year, to receive their mandatory equity awards in Units settled either in cash or in Common Stock.
    For the balance of their Annual Board Retainers, Directors who do not satisfy the Ownership Guidelines may elect among the same payment vehicles available to Directors who satisfy the Ownership Guidelines.
    New Directors. New directors will be permitted, before commencing service, to make the same elections as are available to other Directors. Directors who commence service after the annual meeting of shareholders will receive a pro-rated Annual Board Retainer, determined based on the number of calendar quarters during the year that they are in active service for at least one day.

 


 

    Common Stock Elections. Elections by a Director to receive Common Stock or Units settled in Common Stock are contingent on shareholder approval of an equity plan for Directors of CIGNA Corporation. In the event such approval is not obtained, amounts that would otherwise have been paid in Common Stock will be paid in cash and Units that would otherwise have been settled in Common Stock will be settled in cash.
B. Committee Member Retainer . Each Director receives $10,000 annually for each committee membership. The Committee member retainer is payable in cash. Members of the Executive Committee do not receive this retainer for their service on the Executive Committee.
C. Committee Chair Retainer . Each Committee chair other than the chair of the Executive Committee receives $5,000 annually payable in cash for service as a Committee Chair.
II. Award and Payment of Retainers
A. Cash Retainers . All cash retainer payments are made quarterly. Cash retainers are paid during a quarter to Directors who are in active service at any time during that calendar quarter.
B. Annual Board Retainer Equity Awards : Common Stock and Deferred Stock Units
Awards
    Common Stock and Units are awarded in the second calendar quarter on the first day of the open trading period beginning after the annual meeting of shareholders to Directors who are in active service on the date of the annual meeting of shareholders. For Directors who commence service after the annual meeting of shareholders, Common Stock and Units are awarded in the fourth calendar quarter on the first day of the last open trading period of the year. A Director who commences service after the close of the last open trading period of a year will not receive an Equity Award and his or her Annual Retainer for that year will be paid entirely in cash.
    The number of shares of Common Stock or Units awarded is determined by dividing the dollar amount of the applicable award by the closing price of CIGNA common stock, as reported on the NYSE or successor or alternate means of publishing stock price (“Closing Price”) on the award date. Fractional shares and fractional Units are not awarded. For Common Stock, the number of shares awarded is rounded down to a whole number of shares and the cash value of any fractional share is paid as soon as practicable after the award date. For Units, the cash value of any fractional unit is accumulated together with dividend equivalents and treated as reinvested.

 

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Deferred Stock Units — Additional Terms
    Dividend equivalents (an amount equal to the dividends declared and paid on a share of CIGNA stock) are credited on Units (to the extent the record date for any such actual dividend occurs while a Unit is outstanding), treated as reinvested in additional whole Units and tracked separately for each award. The number of additional Units resulting from the reinvestment of dividend equivalents and the cash value of fractional units is determined by dividing the amount to be reinvested by the dividend reinvestment price. The dividend reinvestment price is provided by CIGNA’s Transfer Agent and is the price used under the CIGNA Dividend Reinvestment Plan for reinvestment of actual dividends for CIGNA shareholders who participate in that plan.
    Units (including Units resulting from the reinvestment of related dividend equivalents) plus any remaining residual cash are payable upon the earlier of: (a) the Director’s separation from service (within the meaning of Treas. Reg. §1.409A-1(h) or any successor provision), or (b) the third anniversary of the award date. Payments to be made upon separation from service shall be made in a lump sum on the last business day of the second month of the calendar quarter following the quarter in which separation from service occurs. Payments to be made upon the third anniversary of the award date shall be made in a lump sum on the last business day of the second month of the calendar quarter in which the third anniversary of the award date occurs.
    Units may be settled in cash or in Common Stock if and to the extent that settlement in Common Stock is authorized pursuant to an equity plan approved by the shareholders of CIGNA Corporation. For each Unit, a director will receive on the date of payment either one actual share of Common Stock or a cash payment equal to the Closing Price on such date. Units cease to be outstanding and a director will cease to have any rights under them as of the date they are paid.
    In the event of a combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in CIGNA’s corporate structure, the Board may make such equitable adjustments, to prevent dilution or enlargement of rights, as it may deem appropriate, in the number of Units outstanding. Outstanding Units shall be adjusted proportionally to reflect any recapitalization, stock split or stock dividend. Units issued as a consequence of any such changes in CIGNA’s corporate structure or shares shall be subject to the same restrictions and provisions applicable to the Units with respect to which they are issued.
C. Deferred Compensation Elections . Directors may elect to defer some or all of their compensation described above under the Deferred Compensation Plan of 2005 for Directors of CIGNA Corporation.

 

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III. Other Benefits
A. Benefits for Active Directors
    Basic Group-Term Life Insurance coverage. Each Director is provided coverage in the amount of the Annual Board Retainer.
    Travel Accident Insurance coverage. Each Director is provided coverage in the amount of three times the Annual Board Retainer.
    Financial Planning. Directors may use the financial planning services available to CIGNA executive officers. Any reimbursements paid to Directors under this program shall be paid on or before March 15 of the year after the year the expense is incurred.
    Insurance. Directors may purchase or participate, on an after-tax basis, in life insurance, medical/dental care programs, long-term care, property/casualty personal lines and various other insurance programs available to CIGNA employees.
    Matching Gifts. Directors may participate in the matching charitable gift program available to CIGNA employees, under which up to $5,000 annually may be matched.
B. Post-Separation Benefits
    Directors serving on January 1, 2006 are eligible, upon separation from service after nine years of service, to participate on an after-tax basis in medical/dental care programs available to retired employees for two years and to use the financial planning services available to active Directors (up to $5,000) for one year following separation from service. These Directors are also provided $10,000 basic group term life insurance coverage for life.
    All Directors may, at their own expense and if otherwise eligible, also continue life insurance, long-term care insurance and property/casualty personal lines insurance pursuant to the terms of the applicable policies.
For all taxable post-separation benefits or reimbursements, the amount provided or eligible for reimbursement during a particular year may not affect the expenses eligible for reimbursement or benefits provided in any other year. The reimbursement of an eligible expense is made on or before the last day of the year after the year in which the expense was incurred. The right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.

 

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IV. General
To the extent that a benefit under this program is subject to Internal Revenue Code Section 409A (“Section 409A”), it is intended that this program as applied to that benefit comply with the requirements of Section 409A, and the program shall be so administered and interpreted.
Notwithstanding any other provision of this program, if a Director is a specified employee (within the meaning of Treas. Reg. §1.409A-1(i) or any successor provision) as of the date of separation from service (within the meaning of Treas. Reg. §1.409A-1(h) or any successor provision), payments and taxable benefits due upon separation from service shall be delayed until the seventh month following the date of separation from service.
A Director’s right to receive program benefits represents an unsecured claim against CIGNA’s general assets. Except as otherwise permitted by applicable law, no right to receive program payments shall be transferable or assignable by a Director or subject in any manner to anticipation, sale, alienation, pledge, encumbrance, attachment or garnishment by a Director’s creditors, and any such attempt shall be void and of no force or effect.
V. Share Ownership Guidelines
Each Director is required to hold at least $500,000 worth of Common Stock, Units, Restricted Share Equivalents, Hypothetical Shares of Common Stock or a combination.

 

5

Exhibit 10.7
CIGNA CORPORATION
STOCK PLAN
(As Amended through July 2000)
ARTICLE 1
Statement of Purpose
The CIGNA Corporation Stock Plan (the “Plan”) is intended to reward and provide incentives for key employees of CIGNA Corporation and its Subsidiaries by providing them with an opportunity to acquire an equity interest in CIGNA Corporation, thereby increasing their personal interest in its continued success and progress. It also is intended to aid the Company in attracting key personnel of exceptional ability.
ARTICLE 2
Definitions
  2.2   Defined Terms. For all purposes of this Plan, except as otherwise expressly provided or defined herein or unless the context otherwise requires, the terms defined in this Article shall have the following meanings:
“Board of Directors” means either the board of directors of CIGNA Corporation or any duly authorized committee of that board.
“Change of Control” means:
  (i)   a corporation, person or group acting in concert as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), holds or acquires beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of a number of preferred or common shares of CIGNA Corporation having voting power which is either (I) more than 50% of the voting power of the shares which voted in the election of directors of CIGNA Corporation at the shareholders’ meeting immediately preceding such determination, or (ii) more than 25% of the voting power of CIGNA Corporation’s outstanding common shares; or
  (ii)   as a result of a merger or consolidation to which CIGNA Corporation is a party, either (I) CIGNA Corporation is not the surviving corporation or (ii) Directors of CIGNA Corporation immediately prior to the merger or consolidation constitute less than a majority of the Board of Directors of the surviving corporation; or

 

 


 

  (iii)   a change occurs in the composition of the Board at any time during any consecutive 24-month period such that the “Continuity Directors” cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence “Continuity Directors” shall mean those members of the Board who either: (I) were directors at the beginning of such consecutive 24-month period; or (ii) were elected by, or on nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board.
“Committee” means the People Resources Committee of the Board of Directors or any successor committee with responsibility for compensation. The number of Committee members and their qualifications shall at all times be sufficient to meet the requirements of Securities and Exchange Commission Rule 16b-3 as in effect from time to time.
“Common Stock” means the common stock, par value $1 per share, of CIGNA Corporation.
“Company” means CIGNA Corporation, a Delaware corporation, and/or its Subsidiaries.
“Deferred Compensation Account” means a separate account established pursuant to a Deferred Compensation Plan.
“Deferred Compensation Plan” means and refers to a deferred compensation plan of the Company which has been designated by the Committee as a “Deferred Compensation Plan” for purposes of this Plan.
“Disability” means permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code.
“Early Retirement” means a Termination of Employment, after appropriate notice to the Company, (I) on or after age 55 and before age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon such terms and conditions approved by the Committee or officers of the Company designated by the Board of Directors or the Committee.
“Eligible Employee” means a salaried officer or other key employee of the Company who (I) occupies a position with the Company that has been designated by the Committee as an eligible position for participation in this Plan or (ii) has been specifically authorized or designated by the Committee to participate in this Plan.

 

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“Fair Market Value” means the mean between the highest and lowest quoted selling prices as reported on the Composite Tape (or other successor means of publishing stock prices) on the date as of which any determination of such value is or is required to be made, or, if the Composite Tape or such successor publication is not published on such date, on the next preceding date of publication. In the absence of such sales, Fair Market Value shall be determined by the Committee, which shall take into account all relevant facts and circumstances.
“Incentive Stock Option” means a stock option granted in accordance with Section 422A of the Internal Revenue Code.
“Participant” means an Eligible Employee to whom any one or more of the awards authorized in this Plan shall have been granted.
“Payment Date” means the date that payment of an award pursuant to a Qualifying Incentive Plan, or of a benefit pursuant to a Qualifying Supplemental Benefit Plan, is made or would have been made but for deferral pursuant to Section 3.7(b).
“Qualifying Incentive Plan” means any Company bonus plan, short-term or long-term incentive compensation plan or any other incentive compensation arrangement, including but not limited to the Company’s Performance Recognition Award Program.
“Qualifying Supplemental Benefit Plan” means any plan of the Company pursuant to which benefits which would have been paid under a tax qualified retirement plan but for legal limitations are payable in cash to eligible employees of the Company.
“Retirement” means a Termination of Employment, after appropriate notice to the Company, (I) on or after age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon such terms and conditions approved by the Committee, or officers of the Company designated by the Board of Directors or the Committee.
“Subsidiary” means any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote, or other equity interest, is directly or indirectly owned by CIGNA Corporation; or a partnership, joint venture or other unincorporated entity of which more than a 50% interest in the capital, equity or profits is directly or indirectly owned by CIGNA Corporation.
“Termination for Cause” means a Termination of Employment initiated by the Company on account of the conviction of Participant of a felony involving fraud or dishonesty directed against the Company.

 

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“Termination of Employment” means the termination of the Participant’s active employment relationship with the Company, unless otherwise expressly provided by the Committee, or the occurrence of a transaction by which the Participant’s employing Company ceases to be a Subsidiary.
“Termination Upon a Change of Control” means a Termination of Employment upon or within two years after a Change of Control (I) initiated by the Company or a successor corporation other than pursuant to Termination for Cause or (ii) initiated by the Participant and pursuant to the Participant’s certification that the Change of Control has rendered him unable to perform the duties and responsibilities of the position he held immediately prior to the Change of Control by adverse changes in his authority, compensation, office location, duties, responsibilities, or title.
  2.2   General. Certain terms are defined in other Articles of this Plan. The terms defined in this Article and elsewhere in this Plan shall include the feminine as well as the masculine gender and the plural as well as the singular, as the context in which they are used requires.
ARTICLE 3
Authorized Stock Incentive Awards
  3.1   Authorized Awards. The awards authorized are as follows:
  (a)   stock options,
  (b)   stock appreciation rights,
  (c)   restricted stock grants,
  (d)   dividend equivalent rights, and
  (e)   Common Stock in lieu of cash or other awards payable under a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan.
  3.2   General Powers of the Committee. Subject to the provisions of this Plan, the Committee is authorized and empowered in its sole discretion to select Participants and to grant to them any one or more of the awards authorized above in such amounts and combinations and upon such terms and conditions as it shall determine.

 

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  3.3   Stock Options. ( Paragraphs (d), (f), (g) and (h) below apply only to options granted on or after February 24, 1999. ) The Committee shall have the authority to grant Eligible Employees options to purchase Common Stock upon such terms and conditions as it shall establish, including restrictions on the right to exercise options, subject in all events to the following limitations and provisions of general application:
 
  (a)   The option price per share of any option shall not be less than the Fair Market Value on the date of grant. The option price may be paid in cash or, if the Committee so provides, in Common Stock (including Common Stock subject to a Restricted Period pursuant to Section 3.5(a)). Common Stock used to pay the option price shall be valued using the Fair Market Value on the date of exercise. To the extent the option price is paid in shares of restricted stock, an equal number of the shares of Common Stock purchased upon exercise of the option shall be subject to identical restrictions which shall continue in effect for the remaining part of the Restricted Period applicable to the restricted stock used to pay the option price.
  (b)   No option shall be for a term of more than 10 years from the date of grant.
  (c)   No option may be exercised during a leave of absence except to the extent exercisable immediately prior to commencement of the leave of absence, unless otherwise expressly provided by the Committee.
  (d)   Except as provided elsewhere in this Section 3.3, in the event of Termination of Employment (including termination during an approved leave of absence) for any reason of a Participant holding an outstanding option, the term of the option shall expire on the earlier of the date of Termination of Employment or the expiration date set forth in the option.
  (e)   In the event of Termination of Employment due to death or Disability (including death or Disability during an approved leave of absence) of a Participant holding an outstanding Incentive Stock Option, the option shall be fully exercisable immediately and the term of the option shall expire on the earlier of 12 months from the date of Termination of Employment or the expiration date set forth in the option.
  (f)   Any outstanding option granted on or after July 26, 2000 and held by a Participant at Termination of Employment due to death, Disability, Early Retirement or Retirement shall become or remain exercisable in accordance with the terms and conditions established by the Committee at the time of grant.
  (g)   In the event of Termination of Employment due to Early Retirement or Retirement (including during an approved leave of absence) of a Participant holding an outstanding Incentive Stock Option or Termination of Employment Upon a Change of Control of a Participant holding an outstanding option, the term of the option shall expire on the earlier of 3 months from the date of Termination of Employment or the expiration date set forth in the option.

 

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  (h)   Notwithstanding the provisions of Section 3.3(f), in the event of a Termination of Employment due to Early Retirement (including during an approved leave of absence) of a Participant holding an outstanding option, the Committee or its designee may, in its or his sole discretion, curtail the exercise period of the option from the expiration date set forth in the option to any earlier date up to and including the date of Participant’s Termination of Employment.
 
  3.4   Stock Appreciation Rights. The Committee shall have the authority to grant stock appreciation rights to Eligible Employees who are granted options under this Plan upon such terms and conditions as it shall establish, subject in all events to the following limitations and provisions of general application:
  (a)   Each right shall relate to a specific option granted under this Plan and shall be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee.
  (b)   The right shall entitle an optionee to receive a number of shares of Common Stock, without payment to the Company, determined by dividing — (1) the total number of shares which the optionee is eligible to purchase as of the exercise date under the related option multiplied by the amount by which the Fair Market Value of a share of Common Stock on the exercise date of the right exceeds the Fair Market Value of a share of Common Stock on the date, as determined by the Committee, that the right or related option was granted to the optionee; by (2) the Fair Market Value of a share of Common Stock on the exercise date.
  (c)   In lieu of issuing shares on an exercise of a right, the Committee may elect to pay the cash equivalent of the Fair Market Value on the date of exercise of any or all the shares which would otherwise be issuable pursuant to such exercise.
  (d)   Shares under an option to which a right is related shall be used not more than once to calculate a number of shares or cash to be received pursuant to an exercise of such right.
  (e)   The number of shares which may be purchased pursuant to an exercise of the related option will be reduced to the extent such shares are used in calculating the number of shares or cash to be received pursuant to an exercise of a related right.

 

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  (f)   In the event of Termination of Employment of a Participant holding an outstanding right, the right shall be exercisable only to the extent and upon the conditions that its related option is exercisable.
  3.5   Restricted Stock Grants. The Committee shall have the authority to award Common Stock to Eligible Employees by grant (a “Grant”) upon such terms and conditions as it shall establish, subject in all events to the following limitations, restrictions and provisions of general application:
  (a)   Except as expressly provided below, the Common Stock awarded by a Grant shall not be sold, transferred, assigned, pledged or otherwise disposed of by the Participant during the period or periods established by the Committee (each such period, a “Restricted Period”). Common Stock subject to a Restricted Period may be used to exercise options pursuant to Section 3.3(a). The Committee may establish different Restricted Periods applicable to such number of the shares of Common Stock evidenced by a single Grant as it deems appropriate.
  (b)   The Common Stock awarded by a Grant shall be issued by the Company as of the date of the Grant. During the Restricted Period, the Participant shall be entitled to vote the shares. Shares issued as a consequence of stock dividends, splits or reclassifications shall be issued subject to the same limitations, restrictions and provisions applicable to the Common Stock with respect to which they are issued.
  (c)   In the event of Termination of Employment of a Participant during a Restricted Period, except Termination Upon a Change of Control or termination by reason of death or Disability, ownership of the Common Stock subject to any Restricted Period at the date of Termination of Employment and all rights therein shall be forfeited to the Company, unless otherwise expressly provided by the Committee. In the event of Termination of Employment by reason of Retirement of a Participant during a Restricted Period, the Committee or its designee in the sole discretion of either may provide, before the Participant’s Retirement, that the Restricted Period applicable to any outstanding Grant at the date of Retirement shall lapse immediately upon the Participant’s Retirement.
  (d)   In the event of Termination Upon a Change of Control or Termination of Employment by reason of death or Disability of a Participant during a Restricted Period, the Restricted Period applicable to any outstanding Grant at the date of Termination of Employment shall lapse immediately.

 

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  (e)   The effect of approved leaves of absence on the running of applicable Restricted Periods shall be determined by the Committee, provided, however, that no Restricted Period shall lapse during an approved leave of absence unless expressly provided by the Committee.
  (f)   Notwithstanding the other provisions of this Section 3.5, options which have been granted under this Plan to any Company employees who become employed by Lincoln National Corporation or one or more of its subsidiaries or affiliates on or about January 1, 1998 as a result of the sale of the assets of the CIGNA Individual Insurance Division and which options remain unexercised and unexpired as of December 31, 1997, shall not expire before the earlier of (1) 10 years from the date of grant or (2) the later of the close of business on March 31, 1998 or ninety (90) days following the closing of such sale of assets.
  3.6   Dividend Equivalent Rights. The Committee shall have the authority to grant dividend equivalent rights to Eligible Employees upon such terms and conditions as it shall establish, subject in all events to the following limitations and provisions of general application:
  (a)   Each right may relate to a specific option granted under this Plan and may be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee, or each right may be granted independent of any option.
  (b)   The right shall entitle a holder to receive, for a period of time to be determined by the Committee, a payment equal to the quarterly dividend declared and paid by the Company on one share of Common Stock. If the right relates to a specific option, the period shall not extend beyond the earliest of the date the option is exercised, the date any stock appreciation right related to the option is exercised, or the expiration date set forth in the option.
  (c)   The Committee shall determine at time of grant whether payment pursuant to a right shall be immediate or deferred and whether it shall be in the form of cash or Common Stock, or a combination of cash and Common Stock. If immediate, the Company shall make payments pursuant to each right within 90 days after the Company has paid the quarterly dividend to holders of Common Stock. If deferred, the payments shall accumulate (with interest computed in a manner to be determined by the Committee) until a date or event specified by the Committee and then shall be made within 90 days after the occurrence of the specified date or event, unless the right is forfeited under the terms of the Plan.

 

8


 

  (d)   In the event of Termination of Employment (including termination during an approved leave of absence) of a Participant for any reason, any dividend equivalent right held by such Participant at Termination of Employment shall be forfeited, unless otherwise expressly provided by the Committee.
  3.7   Common Stock in Lieu of Other Awards. The Committee shall have the authority to award an Eligible Employee Common Stock, including Common Stock awarded by a Grant under Section 3.5, (collectively referred to as a “Stock Payment”) in lieu of all or a portion (determined by the Committee) of an award otherwise payable pursuant to a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan. The Stock Payment shall comprise the number of shares of Common Stock that have an aggregate Fair Market Value, determined as of the Payment Date, equal to the amount of the award in lieu of which the Stock Payment is made. All Stock Payments shall be subject to the following limitations and provisions of general application:
  (a)   Unless the Committee, in its sole discretion, provides otherwise, a Stock Payment which has been awarded to a Participant who dies or whose employment otherwise terminates before the Payment Date, shall be paid in the form of Common Stock to the Participant (or to his spouse or estate).
  (b)   The right to receive all or a portion of Stock Payments in the form of Common Stock shall be deferred if the Participant has elected to defer the award otherwise payable in cash under a Deferred Compensation Plan, subject to the provisions of such Deferred Compensation Plan.
ARTICLE 4
Shares Authorized under the Plan
  4.1   Maximum Number Authorized. The number of shares of Common Stock Authorized to be issued pursuant to stock options, rights, Grants or Stock Payments awarded under this Plan is 3,500,000.
  4.2   Maximum Number Per Participant. No more than 10% of the maximum number of shares of Common Stock authorized pursuant to this Plan shall be acquired by any one Participant by way of option (including Common Stock subject to option), right, Grant or Stock Payment under this Plan.

 

9


 

  4.3   Unexercised Options, Grant Forfeitures and Options Exercised with Common Stock.
  (a)   All Common Stock (1) under options granted under this Plan which expire or are canceled or surrendered or (2) which is forfeited pursuant to Section 3.5, shall be available for further awards under this Plan upon such expiration, cancellation, surrender or forfeiture; and
  (b)   Any Common Stock which is used by a Participant as full or partial payment to the Company for the purchase of Common Stock acquired upon exercise of a stock option granted under this Plan, and any shares withheld by the Company to satisfy a Participant’s tax withholding obligations, shall be available for further awards under this Plan.
  4.4   No Fractional Shares. No fractional shares of Common Stock shall be issued pursuant to this Plan.
  4.5   Source of Shares. Common Stock may be issued from authorized but unissued shares or out of shares held in CIGNA Corporation’s treasury, or both.
ARTICLE 5
Antidilution Provisions
      Except as otherwise expressly provided herein, the following provisions shall apply to all Common Stock authorized for issuance, and options, granted or awarded under this Plan:
  5.1   Stock Dividends, Splits, Etc. In the event of a stock dividend, stock split, or other subdivision or combination of the Common Stock, the number of shares of Common Stock authorized under this Plan will be adjusted proportionately. Similarly, in any such event there will be a proportionate adjustment in the number of shares of Common Stock subject to unexercised stock options (but without adjustment to the aggregate option price) and in the number of shares of Common Stock then subject to Restricted Periods under a Grant.

 

10


 

  5.2   Merger, Exchange or Reorganization. In the event that the outstanding shares of Common Stock are changed or converted into, exchanged or exchangeable for, a different number or kind of shares or other securities of CIGNA Corporation or of another corporation, by reason of a reorganization, merger, consolidation, reclassification or combination, appropriate adjustment shall be made by the Committee in the number of shares and kind of Common Stock for which options, rights, Grants and Stock Payments may be or may have been awarded under this Plan, to the end that the proportionate interests of Participants shall be maintained as before the occurrence of such event, provided, however, that in the event of any contemplated transaction which may constitute a Change of Control of CIGNA Corporation, the Committee, with the approval of a majority of the members of the Board of Directors who are not then Participants, may modify any and all outstanding options, rights, Grants and Stock Payments (except those deferred pursuant to Section 3.7(b)), so as to accelerate, as a consequence of or in connection with such transaction, the vesting of a Participant’s right to exercise any such options or stock appreciation right or the unqualified ownership of Common Stock subject to a Grant or the accelerated payment of any deferred dividend equivalent rights.
ARTICLE 6
Administration of Plan
  6.1   General Administration. The Plan is to be administered by the Committee, subject to such requirements for review and approval by the Board of Directors as the Board of Directors may establish.
  6.2   Administrative Rules. The Committee shall have the power and authority to adopt, amend and rescind administrative guidelines, rules and regulations pertaining to this Plan and to interpret and rule on any questions respecting any provision of this Plan.
  6.3   Committee Members Not Eligible. No member of the Committee shall be eligible to participate in this Plan.
  6.4   Decisions Binding. Decisions of the Committee concerning this Plan shall be binding on CIGNA Corporation and its Subsidiaries and their respective boards of directors, and on all Eligible Employees and Participants.

 

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ARTICLE 7
Amendments
All amendments to this Plan shall be in writing and shall be effective when approved by the Board of Directors, provided, however, that an amendment shall not be effective without the prior approval of the shareholders of CIGNA Corporation if such approval is necessary under Internal Revenue Service or Securities and Exchange Commission regulations, or the rules of the New York Stock Exchange or any applicable law. The Board of Directors may make any changes required to conform this Plan and option agreements with applicable provisions of the Internal Revenue Code or regulations thereunder pertaining to Incentive Stock Options. Unless otherwise expressly provided by an amendment or the Board of Directors, no amendment to this Plan shall apply to grants of options, rights or Restricted Stock made before the effective date of the amendment.
ARTICLE 8
Other Provisions
  8.1   Effective Date. This Plan is effective on May 1, 1991 (the “Effective Date”).
  8.2   Duration of the Plan. The Plan shall remain in effect until all options and rights granted under this Plan have been satisfied by the issuance of Common Stock, or terminated under the terms of this Plan, provided that options, rights, Grants and Stock Payments under this Plan must be awarded on or after the Effective Date.
  8.3   Early Termination. Notwithstanding the provisions of Section 8.2, the Board of Directors may terminate this Plan at any time; but no such action by the Board of Directors shall adversely affect the rights of Participants which exist under this Plan immediately before its termination.
  8.4   General Restriction. No Common Stock issued pursuant to this Plan shall be sold or distributed by a Participant until all appropriate listing, registration and qualification requirements and consents and approvals have been obtained, free of any condition unacceptable to the Board of Directors.
  8.5   Awards Not Assignable.
  (a)   No derivative security (as defined in rules promulgated under Section 16 of the Securities Exchange Act of 1934), including any right to receive Common Stock (such as options, stock appreciation rights or similar rights) or any right to payment pursuant to this Plan, shall be assignable or transferable by a Participant except by will or by the laws of descent and distribution. Any other attempted assignment or alienation shall be void and of no force or effect. Any right to receive Common Stock or any other derivative security (including options, stock appreciation rights or similar rights) shall be exercisable during a Participant’s lifetime only by the Participant or by the Participant’s guardian or legal representatives.

 

12


 

  (b)   Notwithstanding the restrictions set forth above in Section 8.5(a), the Committee shall have the authority, in its discretion, to grant (or to sanction by way of amendment of an existing grant, including, without limitation, grants made before the effective date of this Section 8.5(b)) derivative securities which may be transferred without consideration by the Participant during his lifetime to any member of his immediate family, to a trust established for the exclusive benefit of one or more members of his immediate family, to a partnership of which the only partners are members of his immediate family, or to such other person as the Committee shall permit. In the case of a grant, the written documentation containing the terms and conditions of such derivative security shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A derivative security transferred as contemplated in this Section 8.5(b) may not be subsequently transferred by the transferee except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee, in its sole discretion at the time the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. As used in this subparagraph, “immediate family” shall mean, with respect to any person, a spouse, any child, stepchild or grandchild, and shall include relationships arising from legal adoption.
  8.6   Withholding Taxes. Whenever Common Stock is to be issued or delivered in satisfaction of options or other awards granted hereunder, the Company shall have the right to require the Participant to remit an amount sufficient to satisfy federal, state and local withholding taxes prior to delivery of any certificate for such shares. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises.
  8.7   Safekeeping of Certificates. The certificate evidencing Common Stock awarded by a restricted stock grant or purchased upon exercise of an option shall be retained for safekeeping by the Company, or by a custodian appointed by the Company, except the Committee may in its discretion cause the certificate to be delivered to the Participant after a restricted stock grant or a purchase upon exercise of an option. The Company will deliver any such retained certificates that are not subject to a Restricted Period to the Participant within a reasonable period after a Participant requests delivery of such certificates.

 

13

Exhibit 10.10
Description of Severance Benefits for Executives in
Non-Change of Control Circumstances
Severance benefits may be provided to executive level employees whose employment is terminated because of job elimination or any other reason. The amount of these benefits is subject to the discretion of the CEO (and, in the case of senior executives, the People Resources Committee). The following factors are typically considered in the exercise of such discretion: length of service; the executive’s total compensation target and the executive’s career plans following termination of employment with CIGNA.

 

Exhibit 10.15(a)
CIGNA SUPPLEMENTAL PENSION PLAN
(Amended and Restated effective August 1, 1998)
CIGNA Corporation, for itself and its subsidiaries and affiliates which participate in the CIGNA Pension Plan, established the CIGNA Supplemental Pension Plan, effective January 1, 1983, to provide eligible employees with retirement benefits which cannot be provided by the CIGNA Pension Plan because of certain restrictions.
This Plan is an “excess benefit plan” under ERISA section 3(36) and an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under ERISA section 401(a)(1).
CIGNA is amending and restating the Plan in its entirety to reflect the adoption of a new benefit accrual formula under the CIGNA Pension Plan as of January 1, 1998 and the expansion of benefit distribution options effective August 1, 1998.
Article I Definitions
Except as otherwise provided in this document, Plan terms with capitalized initial letters shall have the same definitions as in the CIGNA Pension Plan. The following definitions apply to this Plan:
1.1  
“Beneficiary” means the person(s) (or trust) designated by a Participant, or determined by the Plan Administrator, under Section 4.7.
 
1.2  
“CIGNA” means CIGNA Corporation, a Delaware corporation, or its successor.
 
1.3  
“Committee” means the Corporate Benefit Plan Committee of CIGNA, or a successor committee or person designated by CIGNA’s Chief Executive Officer.
 
1.4  
“Company” means CIGNA Corporation and those of its subsidiaries and affiliates which participate in the CIGNA Pension Plan.
 
1.5  
“Deferred Compensation Plan” means the Deferred Compensation Plan of CIGNA Corporation, any successor plan, and any similar plans or arrangements maintained by the Company.
 
1.6  
“Participant” means any Eligible Employee who is eligible to participate in the Plan but only to the extent that the employee has (or might in the event of Retirement at his earliest Early Retirement Date under the Pension Plan have) an Accrued Benefit as defined in Section 3.1.
 
1.7  
“Plan” means the CIGNA Supplemental Pension Plan, as amended and restated effective August 1, 1998.

 

 


 

1.8  
“Plan A Participant” means, beginning January 1, 1998, a Participant whose Pension Plan benefit does not accrue under the formula described in the Part B version of the Pension Plan.
 
1.9  
“Plan B Participant” means, beginning January 1, 1998, a Participant whose Pension Plan benefit does accrue under the formula described in the Part B version of the Pension Plan.
 
1.10  
“Pension Plan” means the CIGNA Pension Plan, a defined benefit pension plan, or its successor plan(s).
 
1.11  
“Rabbi Trust” means a grantor trust, the assets of which will not be subject to the claims of creditors of the Company, except in the case of the bankruptcy or insolvency of the Company.
 
1.12  
“Supplemental Pension Benefit” means the benefit payable to a Plan Participant as described in Section 3.1.
 
1.13  
“Supplemental Pre-Retirement Surviving Spouse Benefit” means the benefit payable to Participant’s surviving Spouse as described in Section 4.3.
 
1.14  
“Survivor” means a Participant’s Spouse or other person designated in writing by the Participant under procedures established by the Plan Administrator, to the extent the Spouse or other person remains living after the Participant’s death.
 
1.15  
“Financial Emergency” means a Participant’s severe and unforeseeable financial hardship, resulting from a sudden and unexpected illness or accident, casualty loss, sudden financial reversal, or similar unforeseeable occurrence arising as a result of events beyond the Participant’s control. Cash needs arising from foreseeable events (such as the purchase of a home or educational expenses for children) shall not be considered to be a Financial Emergency.
Article II Eligibility
All Eligible Employees of the Company who are participants in the Pension Plan shall be eligible to participate in this Plan. In no event shall an employee who is not entitled to benefits under the Pension Plan be entitled to benefits under this Plan.

 

 


 

Article III Supplemental Pension Benefit
3.1 Accrual of Benefit
(a)  
A Participant shall accrue a Supplemental Pension Benefit equal to the excess of (1) over (2) where:
  (1)  
is the Accrued Benefit the Participant would have under the Pension Plan if the Pension Plan did not have:
  (A)  
a limit on retirement benefits under Code section 415;
 
  (B)  
a limit on compensation under Code section 401(a)(17); and
 
  (C)  
an exclusion from Eligible Earnings of compensation deferred under the Deferred Compensation Plan; and
  (2)  
is the Participant’s actual Accrued Benefit under the Pension Plan.
(b)  
For a Plan A Participant, the Supplemental Pension Benefit shall include the actuarial lump sum present value determined using the applicable assumptions and methods under the Pension Plan (as modified by Section 3.3) as of the date of payment, of the excess of (1) over (2) where:
  (1)  
is the post-retirement surviving Spouse benefit which would be payable to the Spouse under the Pension Plan if the Pension Plan did not have the provisions listed in Section 3.1 (a)(1)(A), (B) and (C); and
 
  (2)  
is the post-retirement surviving Spouse benefit which is actually payable under the Pension Plan.
3.2  
Vesting
The vesting of a Participant’s Supplemental Pension Benefit shall be subject to the Pension Plan’s vesting provisions.
3.3 Calculation of Benefits
For all calculations of actuarial equivalence under the Plan, the applicable actuarial factors and methods described in the Pension Plan shall be used except that, for Plan A Participants, the Applicable Interest Rate shall be the same rate(s) used, for the applicable time period(s), to calculate the present value of pension benefits guaranteed by the Pension Benefit Guaranty Corporation in case of a plan termination.
3.4 Coordination with Other Retirement Benefits
The Supplemental Pension Benefit shall be added to, and treated as being part of, the benefits payable to a Participant (or a Spouse or a Beneficiary) under the Pension Plan when applying provisions of other Company retirement plans, arrangements or agreements which provisions reduce benefits payable under these plans, arrangements or agreements by the amount of benefits payable under the Pension Plan.

 

 


 

3.5 Duration of Accruals
No Participant shall accrue any Supplemental Pension Benefit under this Plan during any period in which benefit accruals under the Pension Plan have been suspended or after benefit accruals under the Pension Plan have ceased.
Article IV Payment of Benefits
4.1 Standard Form of Benefits
(a)  
Except as provided in Section 4.2, the Supplemental Pension Benefit under Section 3.1 shall be paid to the Participant in the form of a single lump sum in the January following Participant’s termination of employment from the Company or, if later, the January following the year in which the Participant reaches age 55.
 
(b)  
The amount of the single lump sum payment shall be the actuarially equivalent present value, determined as of the date of payment, of (1) the Supplemental Pension Benefit described in Section 3.1(a) and (2) for a Plan A Participant, the amount described in Section 3.1(b), with both (1) and (2) stated in the form of a single life annuity.
4.2 Optional Payment Methods; Optional Payment Date
(a)  
A Participant may request that the Supplemental Pension Benefit be paid, beginning on the dates described in Section 4.1(a), in one of the following Optional Payment Methods:
  (1)  
Single life annuity for the Participant’s life;
  (2)  
Life annuity for the Participant’s life with a 50% or 100% contingent Survivor annuity;
 
  (3)  
Annual installments for five, ten or fifteen years (with any remaining installments after Participant’s death payable to Participant’s Beneficiary).
   
The contingent Survivor annuity under paragraph 4.2(a)(2) shall be payable to the Participant’s Survivor only if the Participant predeceases the Survivor and shall be paid in monthly installments beginning in the month following the Participant’s death and ending in the month the Participant’s Survivor dies.
 
(b)  
Regardless whether the Participant has requested an Optional Payment Method under Section 4.2(a), a Participant may request that the date of payment under Section 4.1 or the date payments begin under Section 4.2(a) be postponed to January of any later year, but no later than the year after the Participant reaches age 70.
 
(c)  
A Participant’s request for payment of the Supplemental Pension Benefit in an Optional Payment Method, or for a postponed payment date, shall be made in writing to the Plan Administrator. The request must be received by the Plan Administrator no later than the earlier of (1) 13 months before the earliest scheduled date of payment or (2) Participant’s termination of employment date.

 

 


 

(d)  
Notwithstanding Section 4.2(c), the Plan Administrator may provide, as soon as is reasonably practicable after August 1, 1998, to Participants whose Supplemental Pension Benefit payments have not yet started an opportunity to request an Optional Payment Method or a postponed payment date, or both, or to revoke or modify a prior election. The nature and duration of that opportunity shall be determined by the Plan Administrator in its sole and absolute discretion.
 
(e)  
A Participant may, before his termination of employment date, make a written request to the Plan Administrator for an Optional Payment Method, a change to another Optional Payment Method or a change to the standard single lump sum form of benefit under Section 4.1.
 
(f)  
The Plan Administrator shall consider any request made under Section 4.2(a), (b), (d) or (e). In determining whether the request should be granted, the Plan Administrator shall consider:
  (1)  
the Participant’s financial needs, including any other sources of retirement income;
 
  (2)  
the needs and financial security of the Participant’s dependents;
 
  (3)  
the projected financial needs of the Company; and
 
  (4)  
for requests under Section 4.2(e), any changed or unusual circumstances (such as the Participant’s involuntary termination of employment).
If the Plan Administrator, in its sole and absolute discretion, determines that the request should be granted, the request shall be deemed to be an election by the Participant, effective as of the date the Plan Administrator received the Participant’s request, and payment of the Participant’s Supplemental Pension Benefit shall be in the form, and at the time, requested by the Participant.
4.3 Pre-Retirement Death Benefits — Plan A Participants
(a)  
If a Plan A Participant who dies before the Supplemental Pension Benefit payment has been made under Section 4.1 (or before the date as of which payments have commenced under Section 4.2) has a surviving Spouse who is eligible for a pre-retirement surviving Spouse benefit under the Pension Plan, then the Spouse shall be eligible for a Supplemental Pre-Retirement Surviving Spouse Benefit under this Plan (if the amount calculated under Section 4.3(c) is greater than zero).
 
(b)  
The Supplemental Pre-Retirement Surviving Spouse Benefit shall be paid to the eligible Spouse as soon as practicable after the Participant’s death. The form of payment shall be:
  (1)  
A single lump sum if the Participant had not elected an Optional Payment Method under Section 4.2(a);
 
  (2)  
Annual installments for the period selected by the Participant, if the Participant had elected an Optional Payment Method under Section 4.2(a)(3); or

 

 


 

  (3)  
Annual installments for 15 years (with any remaining installments payable to the Spouse’s Beneficiary if the Spouse dies before all installments are paid), if the Participant elected an Optional Payment Method under Section 4.2(a)(1) or (2).
(c)  
The amount of the Supplemental Pre-Retirement Surviving Spouse Benefit shall be equal to the actuarial present value, determined using the applicable assumptions and methods under the Pension Plan (as modified by Section 3.3) as of the date of payment, of the excess of (1) over (2) where:
  (1)  
is the pre-retirement surviving Spouse benefit which would be payable to the Spouse under the Pension Plan if the Pension Plan did not have the provisions listed in Section 3.1 (a)(1) (A), (B) and (C) of this Plan; and
  (2)  
is the pre-retirement surviving Spouse benefit which is actually payable under the Pension Plan.
4.4 Pre-Retirement Death Benefits — Plan B Participants
(a)  
If a Plan B Participant dies before the Supplemental Pension Benefit payment has been made under Section 4.1 (or before the date as of which payments have commenced under Section 4.2), the Participant’s Supplemental Pension Benefit shall be paid to the Participant’s Beneficiary as soon as practicable after the Participant’s death. The form of payment shall be:
  (1)  
A single lump sum if the Participant had not elected an Optional Payment Method under Section 4.2(a);
 
  (2)  
Annual installments for the period selected by the Participant, if the Participant had elected an Optional Payment Method under Section 4.2(a)(3); or
 
  (3)  
Annual installments for 15 years (with any remaining installments payable to the Beneficiary’s Beneficiary if the Beneficiary dies before all installments are paid), if the Participant elected an Optional Payment Method under Section 4.2(a)(1) or (2).
4.5 Lump Sum Benefits
(a)  
At the sole discretion of the Plan Administrator, any benefits payable to the Participant under Section 4.1, to Participant’s Spouse under Section 4.3 or to Participant’s Beneficiary under Section 4.4 which at any time either (1) have a lump sum present value of less than $25,000 or (2) result in monthly installments of less than $250 each may be commuted to a single lump sum payment and paid to the Participant, Spouse, or Beneficiary as appropriate.

 

 


 

(b)  
A Plan A Participant who is paid a Supplemental Pension Benefit in the form of a single lump sum under Sections 4.1, 4.5 or 4.6 and who is later rehired by any Company shall not, upon subsequent Retirement or other termination of employment, be entitled to any additional Supplemental Pension Benefit under this Plan based upon any Credited Service used in the calculation of the initial Supplemental Pension Benefit payment. Furthermore, any Credited Service that is or would be disregarded under the preceding sentence in computing a Plan A Participant’s Supplemental Pension Benefit shall also be disregarded in computing any benefits payable to Participant’s Spouse under Sections 4.3 after Participant’s reemployment.
 
(c)  
A Plan B Participant who is paid a Supplemental Pension Benefit in the form of a single lump sum under Sections 4.1, 4.5 or 4.6 and who is later rehired by any Company shall not, upon subsequent Retirement or other termination of employment, be entitled to any additional Supplemental Pension Benefit under this Plan based upon any Benefit Credits or Interest Credits used in the calculation of the initial Supplemental Pension Benefit payment. Furthermore, any Credits that are or would be disregarded under the preceding sentence in computing a Plan B Participant’s Supplemental Pension Benefit shall also be disregarded in computing any benefits payable to Participant’s Beneficiary under Section 4.4 after Participant’s reemployment.
4.6 Emergency Payment
(a)  
Section 4.6 shall apply only to a Participant who has elected to postpone the date of payment (or the date payments begin) under Section 4.2(b) and only after the later of the date the Participant reaches age 55 or terminates employment with the Company.
 
(b)  
Before the date of payment of a Participant’s Supplemental Pension Benefit (or the date payments are to begin under an Optional Payment Method), a Participant may request an accelerated payment of all or part of the Supplemental Pension Benefit to meet a Financial Emergency. The request must be in writing to the Plan Administrator and must be supported by evidence of a Financial Emergency. The Plan Administrator shall have sole and absolute discretion to grant or deny the Participant’s request. If the request is granted, the accelerated payment shall not be more than the lesser of $50,000 or the amount deemed necessary by the Plan Administrator to meet Participant’s Financial Emergency.
 
(c)  
Any payments under this Section 4.6 shall reduce any remaining benefits to, or related to, the Participant under this Plan.
4.7 Beneficiaries
The Plan Administrator shall provide an opportunity a Participant to designate in writing one or more Beneficiaries to receive Plan benefits following the Participant’s death, and to change any designations. If a Participant dies without a surviving, validly designated Beneficiary and all or part of the Participant’s Accrued Benefit remains payable, the benefit shall be paid to the Participant’s surviving Spouse or, if there is no surviving Spouse, to the Participant’s estate.

 

 


 

4.10 Domestic Relations Orders
A person shall not qualify for a benefit under this Plan solely because he is entitled to a benefit under the Pension Plan by reason of a “qualified domestic relations order” (as defined in ERISA section 206). Notwithstanding Section 7.3, the Plan Administrator shall have the sole and absolute discretion to comply with the terms of a domestic relations order if the Plan Administrator deems compliance to be in the interests of the Participant and the Company.
4.11 Tax Withholding
Plan payments, and under certain circumstances an accrued Supplemental Pension Benefit not yet paid, may be subject to withholding for taxes. To the extent the Company meets any withholding obligations by paying the required withholding, the Participant’s Supplemental Pension Benefit shall be reduced by the amount of the Company’s payment.
Article V Funding
5.1 In General
(a)  
This Plan shall be maintained as an unfunded plan which is not intended to meet the qualification requirements of Code section 401. Plan benefits shall be payable solely from the general assets of the Company which employs the Participant when benefits are accrued, or a Company which has assumed liability for paying the benefits. No separate or special fund shall be established and no segregation of assets shall be made to assure the payment of Plan benefits, though the Company may choose to fund Plan benefits through a Rabbi Trust. A Participant shall have no right, title, or interest in or to any investments which the Company may make to aid in meeting its obligations under this Plan.
 
(b)  
Nothing contained in the Plan, and no action taken under it, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company or the Plan Administrator and a Participant or any other person. To the extent that any person acquires a right to receive Plan benefits, that right shall be no greater than the right of an unsecured creditor of the Company.
Article VI Administration
6.1 Plan Administrator
(a)  
The Plan shall be administered by a Plan Administrator appointed by the Committee, or its designee. The Plan Administrator shall have full power and authority to interpret the Plan; to prescribe, amend and rescind any rules, forms and procedures as it deems necessary or appropriate for the proper administration of the Plan; to make any other determinations including factual determinations and determinations as to eligibility for, and the amount of, benefits payable under the Plan; and to take any other actions it deems necessary or advisable in carrying out its duties under the Plan.
(b)  
All decisions, interpretations and determinations by the Plan Administrator shall be final and binding on the Company, Participants and any other persons having or claiming an interest under this Plan.

 

 


 

6.2 Amendment or Termination
Subject to Section 6.3, CIGNA, through its Board of Directors, or the People Resources Committee of the Board of Directors (or a successor committee), may amend or terminate this Plan at any time, in whole or in part. No amendment or termination shall impair or adversely affect any benefits accrued under the Plan in which the Participant was vested as of the date of that action.
6.3 Change of Control
For a three (3) year period beginning on the effective date of a Change of Control and as to Participants on that date:
(a)  
the Plan shall not be terminated;
 
(b)  
the accrual of Supplemental Pension Benefits shall not be stopped, suspended or otherwise adversely affected; and
 
(c)  
the rate at which Supplemental Pension Benefits accrue shall not be reduced.
CIGNA reserves the right to amend or eliminate this paragraph 6.3 at any time before a Change of Control.
Article VII Miscellaneous
7.1 Notices
A Participant shall be responsible for providing the Plan Administrator with his current and proper address for the mailing of notices, reports and benefit payments. Any notice shall be deemed given if directed to a person’s last known address and mailed by regular United States mail, first-class and prepaid. If any check mailed to that address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Participant, Beneficiary or Survivor provides the proper address.
7.2 Missing Persons
A benefit shall be deemed forfeited if the Plan Administrator is unable to locate the Participant, Beneficiary or Survivor to whom payment is due, after reasonably diligent effort for a period of at least two (2) years, but the Plan Administrator shall have the authority (but not the obligation) to reinstate the benefit upon the later discovery of a proper payee for the benefit. Mailing of a notice in writing, by certified or registered mail, to the last known address of the Participant, Beneficiary or Survivor (if the address of the Beneficiary or Survivor is known to the Plan Administrator) not less frequently than once each year for the two-year period shall be deemed a reasonably diligent effort.

 

 


 

7.3 Nonalienation of Benefits
None of the payments, benefits or rights of any Participant, Beneficiary or Survivor shall be subject to any claim of any creditor. To the fullest extent permitted by law, all Plan payments, benefits and rights shall be free from attachment, garnishment, trustee’s process, or any other legal or equitable process available to any creditor of the Participant, Beneficiary or Survivor. No Participant, Beneficiary or Survivor shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive under this Plan, except the right, to the extent applicable, to designate a Beneficiary or Survivor and change a Beneficiary or Survivor designation.
7.4 Reliance on Data
The Company, the Plan Administrator and all other persons associated with the Plan’s operation shall have the right to rely on the veracity and accuracy of any data provided under this Plan or the Pension Plan by the Participant, Beneficiary or Survivor, including representations as to age, health and marital status. These representations are binding upon any party seeking to claim a benefit through a Participant. The Company, the Plan Administrator and all other persons associated with the Plan’s operation are absolved completely from inquiring into, and may rely upon, the accuracy or veracity of any representation made at any time by a Participant, Beneficiary or Survivor.
7.5 No Contract of Employment
Neither the establishment of the Plan, nor any Plan amendment, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant, or any other person, the right to be employed or continue to be employed by the Company, and all Participants and other persons shall remain subject to discharge to the same extent as if the Plan had never been adopted.
7.6 Effect on Other Plans
Except as provided in the Plan, no Plan benefit shall be deemed salary or other compensation in computing benefits under any employee benefit plan or other arrangement of the Company.
7.7 Severability of Provisions
If any provision of the Plan shall be held invalid or unenforceable, the invalidity or unenforceability shall not affect any other Plan provisions, and the Plan shall be construed and enforced as if that provision had not been included.

 

 


 

7.8 Heirs, Assigns and Personal Representatives
The Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant, Beneficiary or Survivor, present and future.
7.9 Payments to Minors, Etc.
Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of legally accepting receipt shall be deemed paid when paid to the person’s guardian or to the party providing or reasonably appearing to provide for the care of the person, and that payment shall fully discharge the Company, the Plan Administrator and all other parties regarding that benefit payment.
7.10 Headings and Captions
The headings and captions in the Plan are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan.
7.11 Gender and Number
Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa.
7.12 Controlling Law
The Plan shall be construed and enforced according to the laws of the Commonwealth of Pennsylvania, to the extent not preempted by federal law, which shall otherwise control.

 

 

Exhibit 10.15(b)
AMENDMENT NO. 1
To The
CIGNA SUPPLEMENTAL PENSION PLAN
(Amended and Restated effective August 1, 1998)
CIGNA Corporation has retained the right to amend the CIGNA Supplemental Pension Plan (“Plan”) under Article VI, Section 6.2 of the Plan, and CIGNA Corporation wishes to amend the Plan’s benefit payment provisions.
Therefore, the Plan is amended, unless another date is indicated below, effective September 1, 1999 and only for Plan participants who have not as of that date terminated employment with the Company, as follows:
1. Section 4.1(a) of Article IV of the Plan is entirely amended effective as of January 1, 1999 for all Participants, to read:
4.1 Standard Form of Benefits
(a)   Except as provided in Section 4.2, the Supplemental Pension Benefit under Section 3.1 shall be paid to the Participant in the form of a single lump sum in the January following Participant’s severance from employment with the Company or, if later, the January following the year in which the Participant reaches age 55.
2. Section 4.2(a) of Article IV of the Plan is amended by adding a new paragraph at the end to read:
A Participant may make a written request to the Plan Administrator for an Optional Payment Method for 25%, 50%, 75% or 100% of his entire Supplemental Pension Benefit (determined as of the date of participant’s severance from employment).
3. Section 4.2(b) is entirely amended to read:
(b)   A Participant may request that the date of payment under Section 4.1 or the date payments begin under Section 4.2(a) be postponed to January of any later year, but no later than the year after the Participant reaches age 70. A request for a postponed payment by a Participant who also requests an Optional Payment Method for 25%, 50% or 75% of his Supplemental Pension Benefit (or whose prior request for such an Optional Payment Method has been approved) will be approved only if the requested date of future payment under Section 4.1 is the same as the requested date future payments begin under Section 4.2(a).
4. Section 4.2(e) of Article IV of the Plan is entirely amended to read:
(e)   A Participant may, before his termination of employment date, make a written request to the Plan Administrator for an Optional Payment Method for 25%, 50%, 75% or 100% of his Supplemental Pension Benefit (determined as of the date of Participant’s severance from employment), a change to another Optional Payment Method or a change to the standard single lump sum form of benefit under Section 4.1.

 


 

5. Section 4.3(b) of Article IV of the Plan is entirely amended to read:
(b)   The Supplemental Pre-Retirement Surviving Spouse Benefit shall be paid to the eligible Spouse as soon as practicable after the Participant’s death. The form of payment shall be:
  (1)   A single lump sum to the extent and in the same proportion that the Participant had not elected any Optional Payment Method under Section 4.2(a);
 
  (2)   Annual installments for the period selected by the Participant, to the extent and in the same proportion that the Participant had elected an Optional Payment Method under Section 4.2(a)(3); or
 
  (3)   Annual installments for 15 years (with any remaining installments payable to the Spouse’s Beneficiary if the Spouse dies before all installments are paid), to the extent and in the same proportion that the Participant elected an Optional Payment Method under Section 4.2(a)(1) or (2).
6. Section 4.4 of Article IV of the Plan is entirely amended to read:
If a Plan B Participant dies before the Supplemental Pension Benefit payment has been made under Section 4.1 (or before the date as of which payments have commenced under Section 4.2), the Participant’s Supplemental Pension Benefit shall be paid to the Participant’s Beneficiary as soon as practicable after the Participant’s death. The form of payment shall be:
  (1)   A single lump sum to the extent and in the same proportion that the Participant had not elected any Optional Payment Method under Section 4.2(a);
 
  (2)   Annual installments for the period selected by the Participant, to the extent and in the same proportion that the Participant had elected an Optional Payment Method under Section 4.2(a)(3); or
 
  (3)   Annual installments for 15 years (with any remaining installments payable to the Beneficiary’s Beneficiary if the first Beneficiary dies before all installments are paid), to the extent and in the same proportion that the Participant elected an Optional Payment Method under Section 4.2(a)(1) or (2).
7. Section 4.5 of Article IV of the Plan is amended by entirely replacing paragraphs (b) and (c), and by adding at the end a new paragraph (d), to read:
(b)   To the extent a Plan A Participant has been paid a Supplemental Pension Benefit in the form of a single lump sum under Sections 4.1, 4.5(a) or 4.6(b), or has received payments in the form of any Optional Payment Method under Section 4.2, and is later rehired by any Company, he shall not, upon subsequent Retirement or other termination of employment, be entitled to any additional Supplemental Pension Benefit under this Plan based upon any Credited Service used in the calculation of the initial Supplemental Pension Benefit payment. Furthermore, any Credited Service that is or would be disregarded under the preceding sentence in computing a Plan A Participant’s Supplemental Pension Benefit shall also be disregarded in computing any benefits payable to Participant’s Spouse under Sections 4.3 after Participant’s reemployment.
(c)   To the extent a Plan B Participant is paid a Supplemental Pension Benefit in the form of a single lump sum under Sections 4.1, 4.5(a) or 4.6(b) and is later rehired by any Company, he shall not, upon subsequent Retirement or other termination of employment, be entitled to any additional Supplemental Pension Benefit under this Plan based upon any Benefit Credits or Interest Credits used in the calculation of the initial Supplemental Pension Benefit payment. Furthermore, any Credits that are or would be disregarded under the preceding sentence in computing a Plan B Participant’s Supplemental Pension Benefit shall also be disregarded in computing any benefits payable to Participant’s Beneficiary under Section 4.4 after Participant’s reemployment.
(d)   If a Participant who has been paid a Supplemental Pension Benefit in the form of any Optional Payment Method under Section 4.2 is rehired by any Company, upon his subsequent Retirement or other termination of employment, the Plan Administrator shall reduce any additional Supplemental Pension Benefit then payable under this Plan to the extent the Participant received part of his Supplemental Pension benefit before his rehire.

 

Exhibit 10.17
CIGNA SUPPLEMENTAL 401(k) PLAN
(Effective as of January 1, 2010)
CIGNA Corporation is adopting the CIGNA Supplemental 401(k) Plan (“Plan”), effective as of January 1, 2010, to provide Participants certain benefits not available under the CIGNA 401(k) Plan.
ARTICLE 1
Definitions
These terms have the following meanings under the Plan.
1.1   4 01(k) Plan — the CIGNA 401(k) Plan, or any successor plan.
1.2   Account — the separate bookkeeping account established for a Participant that represents the Company’s unfunded, unsecured obligation to make future payments to the Participant.
1.3 Affiliate — the meaning set forth in Rule 12b-2 promulgated under the Exchange Act.
1.4   Beneficial Owner and Beneficially Owned — the meaning set forth in Rule 13d-3 promulgated under the Exchange Act.
1.5   Beneficiary — the same person or persons who receive payment of Participant’s 401(k) Plan account balance after Participant’s death under the terms of the 401(k) Plan.
1.6   Board Committee — the People Resources Committee of the Board of Directors, or any successor committee.
1.7   Board of Directors — the board of directors of CIGNA Corporation.
1.8   Change of Control — any of these events:
  (a)   a corporation, person or group acting in concert, as described in Exchange Act Section 14(d)(2), holds or acquires beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of a number of preferred or common shares of CIGNA Corporation having 25% or more of the combined voting power of CIGNA Corporation’s then outstanding securities; or
  (b)   there is consummated a merger or consolidation of CIGNA Corporation or any direct or indirect subsidiary of CIGNA Corporation with any other corporation, other than:
  (1)   a merger or consolidation immediately following which the individuals who constituted the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity surviving such merger or consolidation or the ultimate parent thereof, or
  (2)   a merger or consolidation effected to implement a recapitalization of CIGNA Corporation (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of CIGNA Corporation (not including in the securities Beneficially Owned by such Person any securities acquired directly from CIGNA Corporation or its Affiliates) representing 25% or more of the combined voting power of the CIGNA Corporation’s then outstanding securities; or

 


 

  (c)   a change occurs in the composition of the Board of Directors at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute a majority of the Board of Directors. For purposes of the preceding sentence “Continuity Directors” shall mean those members of the Board of Directors who either: (1) were directors at the beginning of such consecutive 24-month period; or (2) were elected by, or on nomination or recommendation of, at least a majority of the Board of Directors (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of CIGNA Corporation); or
  (d)   the shareholders of CIGNA Corporation approve a plan of complete liquidation or dissolution of CIGNA Corporation or there is consummated an agreement for the sale or disposition by CIGNA Corporation of all or substantially all of CIGNA Corporation’s assets, other than a sale or disposition by CIGNA Corporation of all or substantially all of CIGNA Corporation’s assets immediately following which the individuals who constituted the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
Notwithstanding the foregoing, a “Change of Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of CIGNA Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of CIGNA Corporation immediately following such transaction or series of transactions.
1.9   Code — the Internal Revenue Code of 1986, as amended.
1.10   Company — CIGNA Corporation and each Subsidiary that has been authorized by the Chief Executive Officer of CIGNA Corporation to participate in the Plan.

 

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1.11   Corporate Committee — the CIGNA Corporation Corporate Benefit Plan Committee, or any successor committee.
1.12   Deferred Compensation Plan — the CIGNA Deferred Compensation Plan of 2005 (Effective as of January 1, 2005), as it may be amended or restated.
1.13   Eligible Earnings — “Eligible Earnings” as defined under the 401(k) Plan.
 
1.14   ERISA — the Employee Retirement Income Security Act of 1974, as amended.
 
1.15   Exchange Act — the Securities Exchange Act of 1934, as amended.
1.16   Participant — an employee of a Company who becomes eligible to participate in the Plan in accordance with the terms and conditions of the Plan.
1.17   Person — the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (a) CIGNA Corporation or any of its Subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of CIGNA Corporation or any of its Affiliates, (c) an underwriter temporarily holding securities pursuant to an offering of such securities, or (d) a corporation owned, directly or indirectly, by the stockholders of CIGNA Corporation in substantially the same proportions as their ownership of stock of CIGNA Corporation.
1.18   Plan — the CIGNA Supplemental 401(k) Plan (Effective as of January 1, 2010), as it may be amended or restated.
1.19   Plan Administrator — the person or committee charged with responsibility for administration of the Plan.
1.20   Plan Year — the calendar year January 1 to December 31.
1.21   Retirement — A Participant’s termination of employment, after appropriate notice to the Company, on or after the later of Participant’s 55 th birthday or the date Participant completes five years of Company service, as calculated under the service-counting rules used to determine eligibility for benefits under the Company’s medical plan for retirees.
1.22   Separation from Service — a Participant’s death, retirement or other termination of employment, from the Participant’s employer or service recipient within the meaning of Treasury Regulation Section 1.409A-1(h). For this purpose, the level of reasonably anticipated, permanently reduced, bona fide services that will be treated as a Separation from Service is 30%. Generally, a Participant’s Separation from Service occurs when the Participant’s level of services to CIGNA Corporation and its affiliates is reduced by 70% or more.

 

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1.23   Subsidiary — a corporation (or a partnership, joint venture or other unincorporated entity) of which more than 50% of the combined voting power of all classes of stock entitled to vote (or more than 50% of the capital, equity or profits interest) is owned directly or indirectly by CIGNA Corporation; provided that such corporation (or other entity) is included in CIGNA Corporation’s consolidated financial statements under generally accepted accounting principles.
1.24   Valuation Date — the date(s) to be determined by the Plan Administrator for valuing Accounts, provided that the last business day of each month shall be a Valuation Date.
ARTICLE 2
Participation; Non-Elective Deferrals
2.1 Eligibility. The Plan is intended primarily to provide deferred compensation for a select group of management and highly compensated employees. Any Company employee who meets the eligibility rules described in Section 2.2 shall be eligible to participate in the Plan and become a Participant.
2.2 Participation. Any Company employee who, for any Plan Year starting after December 31, 2009, meets the requirements described in sub-Sections (a) and (b) below shall be eligible to participate in the Plan for that Plan Year, shall become a Participant as of that Plan Year, and shall remain a Participant until his/her Account is completely paid under Article 4. To be eligible to participate in the Plan for any Plan Year, a Company employee must:
(a)   Either:
  (1)   Defer, under the terms of the Deferred Compensation Plan, Eligible Earnings otherwise payable during the Plan Year; or
  (2)   Receive compensation during the Plan Year that would qualify as Eligible Earnings but for the fact that it exceeds the limit on includable compensation under Code section 401(a)(17); and
(b)   Be employed by the Company on the last day of the Plan Year, unless the employee’s termination of employment during the Plan Year is on account of death or Retirement.
The Plan Administrator shall establish an Account for each Participant under the Plan as of the first Plan Year that he or she becomes a Participant.

 

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2.3   Non-Elective Deferral. As of December 31 of each Plan Year, a non-elective deferral shall be credited to the Account of a Participant who, for that Plan Year, meets the eligibility rules described in Section 2.2. The credit shall equal the sum of:
(a)   1.5% of the amount of the Participant’s otherwise Eligible Earnings for the Plan Year that Participant has deferred under the Deferred Compensation Plan; and
(b)   1.5% of the amount of compensation Participant receives during the Plan Year, to the extent such compensation would have been Eligible Earnings under the 401(k) Plan but for the fact that such compensation was in excess of the compensation limit under Code section 401(a)(17) for that year.
Any compensation that is used as the basis for a credit under paragraph (a) shall not be used as the basis for a credit under paragraph (b).
ARTICLE 3
Deferred Compensation Account
3.1   Account Credits.
(a)   The Plan Administrator shall establish and maintain an Account for each Participant. The Plan Administrator shall credit to the Participant’s Account any non-elective deferrals in accordance with Section 2.3. Such credit shall be made effective as of January 1 of the year following the Plan Year to which the non-elective deferral is attributable.
(b)   The Plan Administrator shall also credit to the Participant’s Account any hypothetical income on the deferred compensation. The credit for hypothetical income shall be as provided in Section 3.3.
3.2   Account Balance. The balance of each Participant’s Account shall include non-elective deferred compensation credited to the Participant under this Plan and any related hypothetical income. The Plan Administrator shall determine each Participant’s Account balance as of each Valuation Date. The Plan Administrator shall provide each Participant an Account statement at least annually, and such statement may be delivered electronically.
3.3   Hypothetical Investment of Account.
(a)   A Participant’s Account shall be treated as invested in the hypothetical investment described in Section 3.3(b). The Plan Administrator shall credit to the Participant’s Account hypothetical income based on the performance of the applicable hypothetical investment. The Plan Administrator shall have authority to adopt, and from time to time change, the rules and procedures for crediting hypothetical income, provided that hypothetical income shall be credited no less than once each month.
(b)   The hypothetical investment under the Plan shall be a rate of return equal to the interest rate under the 401(k) Plan’s Fixed Income Fund, or a successor fund that provides a positive rate of return determined in advance. The Corporate Committee shall determine the applicable hypothetical investment if there is no such successor fund.

 

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(c)   If a Change of Control occurs:
  (1)   For a three-year period beginning on the effective date of a Change of Control, the Company (and any successor) shall neither terminate the Plan nor stop or reduce the rate of non-elective deferrals described in Section 2.3; and
  (2)   The hypothetical investment rate of return under Section 3.3 shall be no less than the greater of (A) the rate described in Section 3.3(b) or (B) the Ten-year Constant Treasury Maturity Yield as reported by the Federal Reserve Board, based upon the November averages for the preceding year, plus 50 basis points.
3.4   Vesting. A Participant shall be vested in his or her Account balance to the extent he or she is vested in his or her account under the 401(k) Plan.
ARTICLE 4
Payment of Benefits
4.1   Time and Form of Payment.
(a)   Vested amounts credited to Participant’s Account balance under Section 3.1 shall be paid to the Participant in three installment payments made annually in July beginning in July of the year following the Participant’s Separation from Service.
(b)   However, if a Participant’s Account balance on the date of Separation from Service is $100,000 or less, payment shall be made in a single lump sum in July of the year following the Participant’s Separation from Service.
4.2   Payments of a Deceased Participant’s Account.
(a)   Upon the death of a Participant, the Plan Administrator shall pay any remaining portion of Participant’s vested Account balance in a single lump sum payment to Participant’s Beneficiary.
(b)   The Plan Administrator shall make any payments described in Section 4.2(a) during the 90-day period beginning January 1 of the year following the year the Participant dies. This Section 4.2 shall only serve to accelerate, and in no event shall delay, the payment of any remaining portion of a Participant’s Account upon that Participant’s death.

 

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4.3   Domestic Relations Orders. A person shall not qualify for a benefit under this Plan solely because he or she is entitled to a benefit under the 401(k) Plan by reason of a “qualified domestic relations order” (as defined in ERISA Section 206). Notwithstanding Section 5.2, the Plan Administrator shall comply with the terms of a qualified domestic relations order (within the meaning of Code Section 414(p)) that specifically assigns to another person all or part of a Participant’s or a Beneficiary’s rights to benefits under this Plan.
ARTICLE 5
General Provisions
5.1   Participant’s Rights Unsecured. The right of a Participant (or Beneficiary) to receive payments under the Plan represents an unsecured claim against the general assets of the Company that employs the Participant at the time that the compensation deferred otherwise would have been paid, or against the general assets of any successor company that assumes (or in case Participant transfers to employment with a different Company, is assigned) the liabilities of that Company. No Company guarantees or is liable for payments to any Participant employed by any other Company. Participant’s Account represents a mere promise by a Company to make payments in the future. The Plan at all times shall be considered entirely unfunded for both tax purposes and for purposes of Title I of ERISA.
 
5.2   Assignability. Except as otherwise permitted by applicable law, no right to receive Plan payments shall be transferable or assignable by a Participant or Beneficiary or subject in any manner to anticipation, sale, alienation, pledge, encumbrance, attachment or garnishment by creditors of a Participant or Beneficiary, and any such attempt shall be void and of no force or effect.
 
5.3   Administration. The Chair of the Corporate Committee shall appoint the Plan Administrator. Except as otherwise provided by the Plan, the Plan Administrator shall administer the Plan and shall have authority to adopt administrative rules and regulations. The Plan Administrator may, by contract, designation or other arrangement, provide for others to perform ministerial duties and record keeping.
 
5.4   Administrative Discretion. The Plan Administrator and Corporate Committee shall, as to the responsibilities allocated to them separately under the Plan, have the sole and absolute discretion to interpret, construe and implement the provisions of the Plan, including any disputed or ambiguous terms; to make determinations relating to eligibility and benefits; and to make findings of fact. Their determinations shall be final and binding on all parties. If the Plan Administrator is also a Participant, the Chair of the Corporate Committee (and not the Plan Administrator) shall make determinations under the Plan related to the Plan Administrator as Participant.
 
5.5   Amendment. The Plan may be amended, restated, modified, or terminated by the Board of Directors or the Board Committee. No amendment, restatement, modification, or termination shall reduce the balance of a Participant’s Account as of the Valuation Date immediately preceding such action.

 

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5.6   Tax Withholding. The Company or other payor may withhold from a benefit payment under the Plan or a Participant’s wages in order to meet any federal, state, or local withholding obligations with respect to a payment or accrual under the Plan. The Company may also accelerate and pay a portion of a Participant’s benefits in a lump sum equal to the Federal Insurance Contributions Act (“FICA”) tax imposed and the income tax withholding related to such FICA amounts.
 
5.7   Corporate Reorganization. If a company that employs a Participant ceases to be a Subsidiary and retains liabilities and responsibility for a Participant’s Account, then the Corporate Committee and Plan Administrator shall have no further liability or responsibility for that Account or any legal obligation toward Participant after the company ceases to be a Subsidiary. That company shall designate a governing committee and plan Plan Administrator, as appropriate, to assume liability and responsibility for administration of the Account as of the date the company ceases to be a Subsidiary.
 
5.8   Section 409A Compliance. It is intended that the Plan comply with the requirements of Code Section 409A, and the Plan shall be so administered and interpreted.
 
5.9   Interpretation. All statutory or regulatory references in this Plan shall include successor provisions.
 
5.10   Claims Procedure.
(a)   Filing a Claim for Benefits . This paragraph 5.10(a) shall apply to any claim for a benefit under the Plan. A Participant or Beneficiary or an authorized representative of a Participant or Beneficiary (“Claimant”) shall notify the Plan Administrator or its delegate of a claim for benefits under the Plan. Such request may be in any form adequate to give reasonable notice to the Plan Administrator or its delegate and shall set forth the basis of such claim and shall authorize the Plan Administrator or its delegate to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Claimant may be entitled under the Plan. The Plan Administrator shall make all determinations as to the right of any person to a benefit under the Plan.
 
    If the Plan Administrator requires more than 90 days to process a claim because of special circumstances, an extension may be obtained by notifying the Claimant within 90 days of the date the claim was submitted that a decision on the claim will be delayed, what circumstances have caused the delay, and when a decision can be expected. The extension period shall not exceed an additional 90 days; provided, however, that in the event the Claimant fails to submit information necessary to decide a claim, such period shall be tolled from the date on which the extension notice is sent to the Claimant until the date on which the Claimant responds to the request for additional information.

 

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(b)   Denial of Claim . If the Plan Administrator denies in whole or in part any claim for benefits under the Plan by any Claimant, the Plan Administrator shall, within a reasonable period, furnish the Claimant with written or electronic notice of the denial. The notice of the denial shall set forth, in a manner calculated to be understood by the Claimant:
  (1)   The specific reason or reasons for the denial;
  (2)   Specific reference to the pertinent Plan provisions on which the denial is based;
  (3)   A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and
  (4)   A description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
(c)   Appeals Procedure . This paragraph 5.10(c) shall apply to all appeals of denied claims under the Plan. A Claimant may request a review of a denied claim. Such request shall be made in writing and shall be presented to the Plan Administrator not more than 60 days after receipt by the Claimant of written or electronic notice of the denial of the claim. The Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits. The Claimant shall also have the opportunity to submit comments, documents, records, and other information relating to the claim for benefits, and the Plan Administrator shall take into account all such information submitted without regard to whether such information was submitted or considered in the initial benefit determination. The Plan Administrator shall make its decision on review not later than 60 days after receipt of the Claimant’s request for review, unless special circumstances require an extension of time, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review; provided, however, in the event the Claimant fails to submit information necessary to make a benefit determination on review, such period shall be tolled from the date on which the extension notice is sent to the Claimant until the date on which the Claimant responds to the request for additional information. The decision on review shall be written or electronic and, in the case of an adverse determination, shall include specific reasons for the decision, in a manner calculated to be understood by the Claimant, and specific references to the pertinent Plan provisions on which the decision is based. The decision on review shall also include (i) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, or other information relevant to the Claimant’s claim for benefits; and (ii) a statement describing any voluntary appeal procedures offered by the Plan, and a statement of the Claimant’s right to bring an action under ERISA Section 502(a).
(d)   The Plan’s claims procedure shall be administered in accordance with the applicable regulations of the U.S. Department of Labor.
(e)   A Claimant shall have no right to bring any action in any court regarding a claim for benefits under the Plan prior to the Claimant filing a claim for benefits and exhausting the Claimant’s rights to review under this Section 5.10 in accordance with the time frames set forth herein.
5.11 Controlling Law. This Plan shall be construed and enforced according to the laws of the Commonwealth of Pennsylvania, without regard to Pennsylvania conflict of laws rules, to the extent not preempted by federal law, which shall otherwise control.

 

9

Exhibit 10.18
Description of CIGNA Corporation
Financial Services Program
The CIGNA Financial Services Program (“Program”) is designed to maximize the value of CIGNA’s compensation and benefits program by providing support to key employees in their financial and estate planning. Under the Program, key employees are provided an allowance, related to the employee’s career band, that may be applied to the cost of financial planning and used for reimbursement of expenses for tax return preparation and legal services related to estate or financial planning. The allowance for the chief executive officer and certain employees who report to him covers the full amount of such costs and expenses.

 

 

Exhibit 10.24
John M. Murabito, Executive Vice President Human Resources and Services
         
 
      (LOGO)
 
       
[Insert Grant Date]
      1601 Chestnut Street
Philadelphia, PA 19192
[Insert Employee Name]
      Telephone 215-761-6176
[Insert Employee Location]
       
CIGNA Long-Term Incentive Plan: Restricted Stock Grant
Congratulations, CIGNA Corporation (CIGNA) has awarded you, [Insert Employee Name] (ID: [Insert Emp ID), Restricted Stock under the CIGNA Long-Term Incentive Plan (Plan) as follows:
     
Date of Grant
 
Number of Shares
[Insert Grant Date]   [Insert # Shares] Shares
You have the right to vote these Shares. If you remain continuously employed by a CIGNA company from the date of grant, restrictions on these shares will end [Insert Vesting Schedule] [Insert Vesting Date].
This award is subject to the provisions of the Plan and the Attachment. The Attachment contains, among other provisions:
    a non-competition paragraph;
 
    customer and employee non-solicitation paragraphs; and
 
    a requirement that you must notify CIGNA’s Shareholder Services Department immediately in writing if you do not accept the grant. If you do not notify CIGNA, you will be agreeing to all the terms and conditions of the grant.
    The Attachment and Key Contacts and Reference Materials document are enclosed. The Key Contacts and Reference Materials document contains information on how to get important stock award information (such as the Plan document, Plan Prospectus, Tax Considerations and CIGNA’s Securities Transactions and Insider Trading Policy) and whom to contact if you have questions.
 
    Please be aware that the CIGNA Securities Transactions and Insider Trading Policy places restrictions on your transactions in CIGNA securities and requires certain CIGNA employees to obtain advance permission from the Corporate Secretary before executing transactions in CIGNA securities.
 
    For more information about your award, please visit Your CIGNA Life >Returns>Incentive Pay>Stock Program. If you still have questions after reviewing the website, please call the CIGNA Shareholder Services Department at 215.761.3516.
         
  CIGNA CORPORATION
 
 
  By:   /s/ John M. Murabito    
    John M. Murabito   
Enclosures

 

 


 

ATTACHMENT TO [Insert Grant MONTH, YEAR] GRANTS
OF RESTRICTED STOCK
This Attachment is part of your [Insert Grant Date] grant of Restricted Stock from CIGNA. The terms of your Restricted Stock grant are in (a) the grant letter, (b) this Attachment and (c) the applicable Plan provisions. Certain words used in this Attachment with first letters capitalized are defined in the grant letter, this Attachment or Article 2 of the Plan. This grant is void if you are not an employee of CIGNA or a Subsidiary (a CIGNA company) on [Insert Grant Date].
1. Restricted Stock; Restrictions
Shares of Restricted Stock (Shares) are regular shares of CIGNA Common Stock, but they are subject to certain Restrictions during a Restricted Period. The Restrictions are: (a) you cannot sell or transfer the Shares to anyone during the Restricted Period; and (b) unless an exception applies, you will forfeit (lose your right to) the Shares if you have a Termination of Employment during the Restricted Period. The part of the Plan titled Restricted Stock Grants describes these Restrictions in more detail.
In addition to these Restrictions, you must also comply with all the terms and conditions of this grant, including those contained in this Attachment.
2. Restricted Period; Vesting
The Restricted Period starts on [Insert Grant Date] and ends on the Vesting Date. The Restrictions on the Shares will end (your Shares will vest) on the Vesting Date only if you have remained continuously employed by a CIGNA company since the grant date and have complied, in all respects, with the terms and conditions of this grant, including those contained in this Attachment.
The Shares will vest [Insert Vesting Schedule] [Insert Vesting Date]. Your Vesting Date may be earlier as described in paragraph 3 below.
3. Early Vesting
In certain situations your Vesting Date may be earlier than the Vesting Dates listed under paragraph 2 above. The Shares will vest upon your Termination of Employment if it is Upon a Change of Control (of CIGNA Corporation) or due to your death or Disability. The Shares may vest upon your Termination of Employment if it is due to your Early Retirement or Retirement and if the Committee or its designee (including CIGNA’s senior human resources officer) approves the early vesting before your Termination of Employment. If you want to be considered for early vesting when you retire, you must ask your manager or human resources representative far enough in advance of your retirement so there is time to process your request.
4. Your Rights during the Restricted Period
You have the right to vote the Shares and receive dividends. CIGNA will pay you any Share dividends during the Restricted Period at least annually during each year until the Share vests (the Restricted Period ends) or is forfeited. The amount of the dividend for each Share in any year will be equal to the amount of any dividend declared and paid on one share of CIGNA Common Stock in that year, provided the dividend record date occurs before the Share vests (the Restricted Period ends) or you forfeit the Share. Dividend payments are usually included in your regular paycheck or by direct deposit. If you forfeit the Shares, you will also forfeit the right to vote the Shares and the right to future dividend payments.
Once the Share vests, your right to dividends, and the method of payment, will be the same as for any other CIGNA shareholder.
5. Taxes at Vesting
When the Shares vest, you must satisfy any required tax withholding obligation; CIGNA reserves the right to withhold enough newly-vested Shares to cover all or part of any applicable tax withholding. However, if section 83(b) of the U.S. Internal Revenue Code of 1986, as amended, applies to you and you make a timely election under that provision, you must make an immediate cash payment to satisfy any required tax withholding obligation.

 

 


 

6.  Book-Entry Shares; Sale of Shares
CIGNA (or a custodian appointed by CIGNA) will hold your Shares before and after vesting in book-entry form in your Stock Account. A certificate for vested Shares will be issued to you if you ask for one, unless a Restitution Event has occurred. Your right to sell the Shares after they vest may be limited by CIGNA. The right is subject to the terms of CIGNA’s Securities Transactions and Insider Trading Policy, and CIGNA reserves the right, for any reason at any time, to suspend or delay action on any request you make to sell the Shares.
7. Conditions of Grant
(a)   You agree not to engage in any conduct that constitutes a Restitution Event. You understand and agree that your agreement not to engage in any conduct that would constitute a Restitution Event is a material part of the inducement for, and a condition precedent to, (1) CIGNA granting you the Shares and (2) your eligibility to exercise the rights associated with the Shares and retain any benefit from the vesting of the Shares.
(b)   A “Restitution Event” will occur if, directly or indirectly, you do any of the things listed below:
  (1)   Have a Termination of Employment initiated by a CIGNA company because of your misconduct, as that term is defined in CIGNA’s Standards of Conduct or other employment policies;
  (2)   If, for a period of twelve months after your Termination of Employment and subject to paragraph 7(c), you own or operate a business (or accept a job as an employee or independent contractor with a business) that provides or offers products or services that compete with any CIGNA company (“CIGNA Competitor”);
  (3)   If, during your employment or for a period of twelve months after your Termination of Employment, you entice, encourage, persuade, or solicit, or attempt to entice, encourage, persuade or solicit, any employee of any CIGNA company to terminate his/her employment with, or otherwise cease his/her relationship, contractual or otherwise, with that CIGNA company. This paragraph 7(b)(3) shall not apply to applications for employment submitted voluntarily by CIGNA employees, in response to general advertisements or otherwise; provided in both cases that such employees have not been enticed, encouraged, persuaded, or solicited by you, or anyone acting on your behalf or in response to information provided by you, to leave CIGNA;
  (4)   If, during your employment or for a period of twelve months after your Termination of Employment, you entice, encourage, persuade, or solicit, or attempt to entice, encourage, persuade or solicit, any customer of any CIGNA company to (i) end an existing relationship, contractual or otherwise, with that CIGNA company or (ii) enter into any business arrangements with you or any business which you may become employed by, or affiliated in any way with, after leaving any CIGNA company, if such business arrangements would compete in any way with any business that CIGNA has conducted, or has been planning to conduct, during the 12-month period ending on the date of the Restitution Event;
  (5)   Disclose to any third-party at any time, without the prior written consent of CIGNA (except to the extent required by an order of a court having competent jurisdiction or pursuant to a properly issued subpoena), whether during or after your employment, any trade secrets, confidential information, or proprietary materials (collectively, “Confidential Information”), which include, but are not limited to, customer lists, financial records, marketing plans, sales plans, etc., unless such Confidential Information has been previously disclosed publicly by CIGNA or has become public knowledge other than by your breach of the conditions of this Restricted Stock grant;
  (6)   Do anything else while an employee of any CIGNA company that is not discovered by a CIGNA company until after your Termination of Employment that would, if you were an employee of a CIGNA company at the time of the occurrence’s discovery, be reason for your Termination of Employment for misconduct, as that term is defined in CIGNA’s Standards of Conduct or other employment policies at such time; or
  (7)   Fail at any time following your Termination of Employment to cooperate with CIGNA in all investigations of any kind, in assisting and cooperating in the preparation and review of documents and meeting with CIGNA attorneys, and in providing truthful testimony as a witness or a declarant in connection with any present or future court, administrative, agency, or arbitration proceeding involving CIGNA and with respect to which you have relevant information. CIGNA agrees that it will reimburse you, upon production of appropriate receipts and in accordance with CIGNA’s then existing Business Travel Reimbursement Policy, the reasonable business expenses (including air transportation, hotel, and similar expenses) incurred by you in connection with such assistance.

 

 


 

(c)   (1) 7(b)(2) shall not apply to you if your Termination of Employment is initiated by a CIGNA company for reasons other than your misconduct, as that term is defined in CIGNA’s Standards of Conduct or other employment policies.
  (2)   Paragraph 7(b)(2) shall apply to you only if at the time of, or within six months before, your Termination of Employment you were employed:
  (A)   In a position at or above Career Band 6, in which case the geographic scope of the non-competition restriction shall be global; or
  (B)   In a position other than a Career Band 6 or above job and you will be performing work for the CIGNA Competitor that is similar to the work you performed at CIGNA at the time of, or within six months before, your Termination of Employment, in which case the geographic scope of the non-competition restriction shall be the geographic area covered by you, or the geographic area in which you worked or with respect to which you had responsibility, at the time of, or within six months before, your Termination of Employment.
  (3)   Paragraph 7(c)(2)(B) shall be interpreted so that, for example, if you were a CIGNA sales employee and your sales territory at the time of, or within six months before, your Termination of Employment was Pennsylvania, New Jersey, and New York, Paragraph 7(b)(2) shall apply to you only if you work in a sales position for a CIGNA Competitor and only to the extent your territory is Pennsylvania, New Jersey, and/or New York. Similarly, if you were a CIGNA underwriter with nationwide responsibilities on the date of, or within six months before, your Termination of Employment, and you accept a job with a CIGNA Competitor as an underwriter, paragraph 7(b)(2) shall be nationwide in scope.
  (4)   You acknowledge and agree that CIGNA’s business competes on a global basis, that CIGNA’s sales and marketing plans are for continued expansion throughout the United States of America and globally, and that the global nature of this non-compete restriction and the time limitations set forth in paragraph 7(b) are reasonable and necessary for the protection of CIGNA’s business and its Confidential Information.
(d)   (1) If you were an Executive Officer at any time between the Vesting Date and the date of the Restitution Event, the Committee shall determine whether you have a Restitution Event and shall have the sole discretion to waive your obligation to make all or any part of a Restitution Payment and to impose conditions on any waiver.
  (2)   With respect to all other individuals, CIGNA’s Senior Human Resources Officer, or his or her designee, shall determine whether you have a Restitution Event, and shall have the sole discretion to waive your obligation to make all or any part of a Restitution Payment and to impose conditions on any waiver.
  (3)   Determinations of the Committee, CIGNA’s Senior Human Resources Officer, or his or her designee, shall be final and binding on all parties.
8. Consequences of a Restitution Event
(a)   You will be immediately required to make a Restitution Payment to CIGNA under paragraph 8(d) below if any Shares vested within the 12-month period before the Restitution Event and either:
  (1)   You have a Restitution Event described in paragraph 7(b)(2), (3) or (4) either before your Termination of Employment or within 12 months after your Termination of Employment; or
  (2)   You have a Restitution Event described in paragraph 7(b)(1), (5), (6) or (7) at any time.
(b)   If, at any time, you have a Restitution Event, all unvested Shares shall be forfeited.

 

 


 

(c)   “Restitution Payment” means an amount equal to:
  (1)   the number of Shares that vested within the 12-month period ending on the date of the Restitution Event; multiplied by
 
  (2)   the Fair Market Value of those Shares on the applicable Vesting Date; plus
  (3)   the total amount of all dividends, if any, paid on those Shares from the date of grant through the date of the Restitution Payment.
(d)   CIGNA will recover the Restitution Payment by any or all of the following methods, at the sole discretion of CIGNA management.
  (1)   When a Restitution Event occurs, if you have any Shares in your Stock Account or in any other account in book-entry form, you will relinquish the whole number of Shares that has a Fair Market Value (as of the date of the Restitution Event) up to, but not more than, the Restitution Payment.
  (2)   After recovery of Shares described in paragraph 8(d)(1), CIGNA will, to the extent permitted by applicable law, reduce by any remaining Restitution Payment the amount of any payments owed to you by CIGNA or any Subsidiary, including without limitation any payments due you under any nonqualified retirement, deferred compensation or other plan or arrangement. This reduction will not occur, however, until the date a future payment to you is due.
  (3)   You will be obligated to repay to CIGNA, within 30 days after you receive a written notice and demand for payment from CIGNA, any Restitution Payment remaining after taking into account the recovery of Shares under paragraph 8(d)(1) and the reduction of payments to you under paragraph 8(d)(2).
9. Acceptance
Your acceptance, as described below, of this grant constitutes your acceptance of the terms and conditions set forth in this Attachment. If you disagree with any of the terms and conditions of this Attachment, including the restitution provisions in paragraphs 7 and 8, notify CIGNA’s Shareholder Services Department immediately in writing upon receipt of the grant that you are not accepting the grant. If you fail to notify CIGNA’s Shareholders Services Department, you will be (i) agreeing to all the terms and conditions of the grant, including the restitution provisions, as conditions precedent to your eligibility to receive the grant and the right to benefit from the grant; (ii) warranting and representing to CIGNA that you are, and will remain, in full compliance with the terms of the Restricted Stock grant; and (iii) authorizing the recovery by CIGNA of the Restitution Payment if you have a Restitution Event. Acceptance means:
(a)   Failing to notify CIGNA immediately upon receipt of the grant that you are not accepting the Restricted Stock grant;
 
(b)   Accepting any dividend payments on the Shares;
 
(c)   Voting the Shares at any CIGNA shareholders meeting, in person or by proxy;
 
(d)   Vesting of the Shares;
 
(e)   Selling any vested Shares; or
 
(f)   Using any of the Shares to pay the exercise price on any options for shares of CIGNA stock.
10. Injunctive Relief
You agree that CIGNA shall, in addition to any other relief available at law or equity, be entitled to injunctive relief and/or to have the restrictive covenants contained in paragraph 7(b) specifically enforced by a court of competent jurisdiction (without the requirement to post a bond), it being agreed that any breach or threatened breach of the restrictive covenants set forth in paragraph 7(b) would cause irreparable injury to CIGNA and that monetary damages alone would not provide an adequate remedy. The remedies contained herein are cumulative and are in addition to any other rights and remedies CIGNA may have at law or in equity.

 

 


 

11. Agreeing to Assume Risks
CIGNA and its transfer agent will try to process your stock transaction requests in a timely manner; however, CIGNA makes no promises or guarantees to you relating to the market price of the Shares or to the time it may take to act on your request to sell the Shares or deliver stock certificates. By accepting this Restricted Stock grant:
(a)   You acknowledge that the action you request may not be completed until several days (or in the case of delivery of stock certificates, several weeks) after your request.
(b)   You agree to assume the risks, including the risk that the market price of the Shares may change, related to delays described in paragraph 11(a):
  (1)   Between the time you ask for any Shares to be sold and the time your Shares are actually sold.
  (2)   Between the time you ask for stock certificates to be delivered to you or your broker and the time the certificates are delivered.
12. Applicable Law; Arbitration
(a)   You understand and agree that the terms and conditions of this Restricted Stock grant, including any Restitution Event, the consequences of any Restitution Event, and all determinations made pursuant to the Restricted Stock grant letter, the Plan, and this Attachment shall be construed under the laws of the Commonwealth of Pennsylvania, without regard to its conflict of laws rule.
(b)   You agree that any dispute regarding the terms and conditions under which this Restricted Stock grant has been awarded will be resolved exclusively pursuant to the CIGNA Employment Dispute Arbitration Policy and its Rules and Procedures as may be in effect at the time such dispute arises. You agree and understand that you are waiving your right to have such a dispute decided by a judge or jury in a court of law, and instead you are agreeing to submit such disputes exclusively to mandatory and binding final arbitration; however, you and/or CIGNA may seek emergency or temporary injunctive relief from a court in accordance with applicable law. After a court has issued a decision regarding emergency or temporary injunctive relief, you and CIGNA shall submit the dispute to final and binding arbitration pursuant to the CIGNA Employment Dispute Arbitration Policy.
13. Miscellaneous
(a)   If any provision of this Attachment is determined by a court of competent jurisdiction to be unenforceable as written, such provision shall be enforceable to the maximum extent permitted by law and shall be reformed by such court to make such provision enforceable in accordance with the intent of the parties and applicable law.
(b)   The failure of any party hereto to enforce any of the provisions of this Restricted Stock grant shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions in the future.
[Insert Grant Date] RSG Attachment

 

 

Exhibit 12
CIGNA CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
                                         
Year Ended December 31,   2009     2008     2007     2006     2005  
 
                                       
Income from continuing operations before income taxes
  $ 1,898     $ 382     $ 1,634     $ 1,731     $ 1,794  
 
                                       
Adjustments:
                                       
Loss (income) from equity investee
    (17 )     (12 )     (5 )     1       1  
 
                                       
Loss (income) attributable to noncontrolling interest
    (3 )     (2 )     (3 )           (1 )
 
                             
 
                                       
Income before income taxes, as adjusted
  $ 1,878     $ 368     $ 1,626     $ 1,732     $ 1,794  
 
                             
 
                                       
Fixed charges included in income:
                                       
 
                                       
Interest expense
  $ 166     $ 146     $ 122     $ 104     $ 105  
Interest portion of rental expense
    47       45       34       34       36  
 
                             
 
                                       
 
    213       191       156       138       141  
 
                                       
Interest credited to contractholders
    3       6       7             1  
 
                             
 
                                       
 
  $ 216     $ 197     $ 163     $ 138     $ 142  
 
                             
 
                                       
Income available for fixed charges (including interest credited to contractholders)
  $ 2,094     $ 565     $ 1,789     $ 1,870     $ 1,936  
 
                             
 
                                       
Income available for fixed charges (excluding interest credited to contractholders)
  $ 2,091     $ 559     $ 1,782     $ 1,870     $ 1,935  
 
                             
 
                                       
RATIO OF EARNINGS TO FIXED CHARGES:
                                       
 
                                       
Including interest credited to contractholders
    9.7       2.9       11.0       13.6       13.6  
 
                             
 
                                       
SUPPLEMENTAL RATIO:
                                       
 
                                       
Excluding interest credited to contractholders
    9.8       2.9       11.4       13.6       13.7  
 
                             

 

 

Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Listed below are subsidiaries of CIGNA Corporation as of December 31, 2009 with their jurisdictions of organization shown in parentheses. Those subsidiaries not listed would not, in the aggregate, constitute a “significant subsidiary” of CIGNA Corporation, as that term is defined in Rule 1-02(w) of Regulation S-X.
CIGNA Holdings, Inc. (Delaware)
I.   Connecticut General Corporation (Connecticut)
  A.   Benefits Management Corporation (Montana)
  (1)   Allegiance Life & Health Insurance Company, Inc. (Montana)
 
  (2)   Allegiance Re, Inc. (Montana)
  B.   CIGNA Arbor Life Insurance Company (Connecticut)
 
  C.   CIGNA Behavioral Health, Inc. (Minnesota)
  (1)   CIGNA Behavioral Health of California, Inc. (California)
 
  (2)   CIGNA Behavioral Health of Texas, Inc. (Texas)
 
  (3)   MCC Independent Practice Association of New York, Inc. (New York)
  D.   CIGNA Dental Health, Inc. (Florida)
  (1)   CIGNA Dental Health of California, Inc. (California)
 
  (2)   CIGNA Dental Health of Colorado, Inc. (Colorado)
 
  (3)   CIGNA Dental Health of Delaware, Inc. (Delaware)
 
  (4)   CIGNA Dental Health of Florida, Inc. (Florida)
 
  (5)   CIGNA Dental Health of Illinois, Inc. (Illinois)
 
  (6)   CIGNA Dental Health of Kansas, Inc. (Kansas)
 
  (7)   CIGNA Dental Health of Kentucky, Inc. (Kentucky)
 
  (8)   CIGNA Dental Health of Maryland, Inc. (Maryland)
 
  (9)   CIGNA Dental Health of Missouri, Inc. (Missouri)
 
  (10)   CIGNA Dental Health of New Jersey, Inc. (New Jersey)
 
  (11)   CIGNA Dental Health of North Carolina, Inc. (North Carolina)
 
  (12)   CIGNA Dental Health of Ohio, Inc. (Ohio)
 
  (13)   CIGNA Dental Health of Pennsylvania, Inc. (Pennsylvania)
 
  (14)   CIGNA Dental Health of Texas, Inc. (Texas)
 
  (15)   CIGNA Dental Health of Virginia, Inc. (Virginia)
 
  (16)   CIGNA Dental Health Plan of Arizona, Inc. (Arizona)
  E.   CIGNA Health Corporation (Delaware)
  (1)   Healthsource, Inc.(New Hampshire)
  (a)   CIGNA HealthCare of Arizona, Inc. (Arizona)
 
  (b)   CIGNA HealthCare of California, Inc. (California)
 
  (c)   CIGNA HealthCare of Colorado, Inc. (Colorado)
 
  (d)   CIGNA HealthCare of Connecticut, Inc. (Connecticut)
 
  (e)   CIGNA HealthCare of Delaware, Inc. (Delaware)
 
  (f)   CIGNA HealthCare of Florida, Inc. (Florida)
 
  (g)   CIGNA HealthCare of Georgia, Inc. (Georgia)
 
  (h)   CIGNA HealthCare of Illinois, Inc. (Illinois) (99.60% with balance owned by non-affiliate)
 
  (i)   CIGNA HealthCare of Indiana, Inc. (Indiana)
 
  (j)   CIGNA HealthCare of Maine, Inc. (Maine)
 
  (k)   CIGNA HealthCare of Massachusetts, Inc. (Massachusetts)
 
  (l)   CIGNA HealthCare Mid-Atlantic, Inc. (Maryland)
 
  (m)   CIGNA HealthCare of New Hampshire, Inc. (New Hampshire)
 
  (n)   CIGNA HealthCare of New Jersey, Inc. (New Jersey)
 
  (o)   CIGNA HealthCare of New York, Inc. (New York)
 
  (p)   CIGNA HealthCare of North Carolina, Inc. (North Carolina)
 
  (q)   CIGNA HealthCare of Ohio, Inc. (Ohio)

 


 

  (r)   CIGNA HealthCare of Pennsylvania, Inc. (Pennsylvania)
 
  (s)   CIGNA HealthCare of South Carolina, Inc. (South Carolina)
 
  (t)   CIGNA HealthCare of St. Louis, Inc. (Missouri)
 
  (u)   CIGNA HealthCare of Tennessee, Inc. (Tennessee)
 
  (v)   CIGNA HealthCare of Texas, Inc. (Texas)
 
  (w)   CIGNA HealthCare of Utah, Inc. (Utah)
 
  (x)   CIGNA Insurance Group, Inc. (New Hampshire)
 
  (y)   Temple Insurance Company Limited (Bermuda)
  F.   CIGNA HealthCare Holdings, Inc. (Colorado)
  (1)   CIGNA HealthCare — Centennial State, Inc. (Colorado)
 
  (2)   CIGNA HealthCare — Pacific, Inc. (California)
 
  (3)   Great-West HealthCare of Illinois, Inc. (Illinois)
  G.   CIGNA Life Insurance Company of Canada (Canada)
 
  H.   CIGNA Life Insurance Company of New York (New York)
 
  I.   Connecticut General Life Insurance Company (Connecticut)
  (1)   Alta Health & Life Insurance Company(Indiana)
  J.   Life Insurance Company of North America (Pennsylvania)
  (1)   CIGNA & CMC Life Insurance Company Limited (China) (50% with balance owned by non-affiliate)
 
  (2)   LINA Life Insurance Company of Korea (Korea)
II.   CIGNA Global Holdings, Inc.(Delaware)
  A.   CIGNA Global Reinsurance Company, Ltd. (Bermuda)
  (1)   CIGNA Holdings Overseas, Inc. (Delaware)
  (a)   CIGNA Apac Holdings Limited (New Zealand)
  (i)   CIGNA Hong Kong Holdings Company Limited (Hong Kong)
  (a)   CIGNA Data Services (Shanghai) Company Limited (China)
 
  (b)   CIGNA Worldwide General Insurance Company Limited (Hong Kong)
 
  (c)   CIGNA Worldwide Life Insurance Company Limited (Hong Kong)
  (ii)   CIGNA Life Insurance New Zealand Limited (New Zealand)
 
  (iii)   CIGNA Taiwan Life Insurance Company Limited (New Zealand)
  (b)   CIGNA Europe Insurance Company S.A.-N.V. (Belgium) (99.99% with balance owned by an affiliate)
 
  (c)   CIGNA European Services (UK) Limited (United Kingdom)
 
  (d)   CIGNA Global Insurance Company Limited (Guernsey, C.I.) (99.99% with balance owned by affiliate)
 
  (e)   CIGNA Life Insurance Company of Europe S.A.- N.V. (Belgium) (99.99% with balance owned by an affiliate)
 
  (f)   RHP Thailand Limited (Thailand)
  (i)   CIGNA Brokerage Services (Thailand) Limited (Thailand) (75% with balance owned by affiliates and non-affiliates)
 
  (ii)   CIGNA Non-Life Insurance Brokerage (Thailand) Limited (Thailand) (75% with balance owned by affiliates and non-affiliates)
 
  (iii)   KDM (Thailand) Limited (Thailand)
  (a)   CIGNA Insurance Public Company Limited (Thailand) (75% with balance owned by affiliates and non-affiliates)
  (2)   CIGNA Worldwide Insurance Company (Delaware)
  (a)   PT. Asuransi CIGNA (Indonesia) (80% with balance owned by non-affiliate)
  B.   CIGNA International Corporation (Delaware)

 

Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-161227) and Form S-8 (No. 333-163899, No. 33-51791, No. 33-60053, No. 333-22391, No. 333-31903, No. 333-64207, No. 333-90785, No. 333-107839, No. 333-129395 and No. 333-147994) of CIGNA Corporation of our reports dated February 25, 2010 relating to the financial statements, the financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
     
/s/ Pricewaterhouse Coopers LLP
 
   
Philadelphia, Pennsylvania
   
February 25, 2010
   

 

 

Exhibit 31.1
CERTIFICATION
I, DAVID M. CORDANI, certify that:
1. I have reviewed this Annual Report on Form 10-K of CIGNA Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: February 25, 2010  /s/ David M. Cordani    
  Chief Executive Officer   

 

 

Exhibit 31.2
CERTIFICATION
I, ANNMARIE T. HAGAN, certify that:
1. I have reviewed this Annual Report on Form 10-K of CIGNA Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: February 25, 2010  /s/ Annmarie T. Hagan    
  Chief Financial Officer   

 

 

Exhibit 32.1
Certification of Chief Executive Officer of
CIGNA Corporation pursuant to 18 U.S.C. Section 1350
I certify that, to the best of my knowledge and belief, the Annual Report on Form 10-K of CIGNA Corporation for the fiscal period ending December 31, 2009 (the “Report”):
(1)   complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIGNA Corporation.
         
  /s/ David M. Cordani    
  David M. Cordani   
  Chief Executive Officer 
February 25, 2010 
 
 

 

 

Exhibit 32.2
Certification of Chief Financial Officer of
CIGNA Corporation pursuant to 18 U.S.C. Section 1350
I certify that, to the best of my knowledge and belief, the Annual Report on Form 10-K of CIGNA Corporation for the fiscal period ending December 31, 2009 (the “Report”):
(1)   complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIGNA Corporation.
         
  /s/ Annmarie T. Hagan   
  Annmarie T. Hagan   
  Chief Financial Officer 
February 25, 2010