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.  CIGNA Corporation had consolidated shareholders’ equity of $4.7 billion and assets of $40.1 billion as of December 31, 2007, and revenues of $17.6 billion for the year then ended.  CIGNA’s major insurance subsidiary, Connecticut General Life Insurance Company (“CG Life”), traces its origins to 1865.  CIGNA Corporation was incorporated in the State of Delaware in 1981.

As used in this document, “CIGNA” and the “Company” may refer to CIGNA Corporation itself, one or more of its subsidiaries, or CIGNA Corporation and its consolidated subsidiaries.  CIGNA Corporation is a holding company and is not an insurance company.  Its subsidiaries conduct various businesses, which are described in this Form 10-K.

CIGNA’s revenues are derived principally from premiums, fees, mail order pharmacy, other revenues and investment income as described on page 41 and 42.  The financial results of CIGNA’s businesses are reported in the following segments:

·	Health Care;

·	Disability and Life;

·	International;

·	Other Operations; and

·	Run-off Reinsurance.

Available Information

CIGNA’s Internet address is http://www.cigna.com.  CIGNA’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available through CIGNA’s website as soon as reasonably practicable after the filing or furnishing of such material with the Securities and Exchange Commission.  See “Code of Ethics and Other Corporate Governance Disclosures” in Part III, Item 10 on page 106 of this Form 10-K for additional available information.  

B .      Financial Information about Business Segments

The financial information included in the tables that follow is presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated.  Certain reclassifications have been made to prior years’ financial information to conform to the 2007 presentation.  Industry rankings and percentages set forth below are for the year ended December 31, 2006, unless otherwise indicated.  Unless otherwise noted, statements set forth in this document concerning CIGNA’s rank or position in an industry or particular line of business have been developed internally, based on publicly available information.

Financial data for each of CIGNA’s business segments is set forth in Note 19 to the Financial Statements on page 96 of this Form 10-K.

C .    Health Care

 

Principal Products and Services and Funding Arrangements

With the exception of HMO and Medicare Part D 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 customer.  Accordingly, the revenue table included in Management’s Discussion and Analysis (MD&A) on page 49 reflects both the product type and funding arrangement.

Medical

CIGNA HealthCare provides a wide array of products and services to meet the needs of employers and other sponsors of health benefit plans and the employees and dependents participating in these plans, including:

·

Health Maintenance Organizations "(HMOs") .   HMOs are required by law to provide coverage for all basic health services.  They use various tools to facilitate the appropriate use of health care services 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 point of service (“POS”) HMO plans that also provide a lesser level of insurance coverage for out-of-network care from non-participating providers.

 

·

Network, Point of Service ("POS") and Open Access Plus Plans .   CIGNA HealthCare offers a product line of non-HMO managed care benefit plans.  All benefit plans in the managed care product line 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” product covers only those services provided by CIGNA HealthCare participating providers and emergency services provided by non-participating providers.  POS and Open Access Plus plans cover health care services provided by participating, (“in-network”), and non-participating (“out-of-network”) health care providers.

 

·

Preferred Provider ("PPO") 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, but with lesser benefit incentives to encourage the use of participating providers.

·	Voluntary Plans .  CIGNA HealthCare's voluntary medical products are offered to employers with 51 or more eligible employees and are designed to meet the needs of the working uninsured (such as hourly or part-time employees) by offering more limited and

more affordable coverage than traditional major medical plans.   CIGNA HealthCare strengthened its presence in the voluntary benefits marketplace in 2006 with the acquisition of the Star HRG SM voluntary health insurance business and the introduction of the Fundamental Care SM product that provides higher coverage levels than other limited benefit plans.

·

CIGNA Choice Fund ® , Health Reimbursement Arrangement ("HRAs"), Health Savings Accounts ("HSAs") and Flexible Spending Accounts ("FSAs") .   In connection with many of the products described above, CIGNA offers the CIGNA Choice Fund ® suite of consumer-directed products, including HRA, HSA and FSA options.  An HRA allows employers to choose from a variety of benefit plan designs (such as HMO or PPO) and for employees to fund unreimbursed health care expenses with reimbursement account funds that can be rolled over from year to year.  HSA plans allow employers 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 for other eligible tax-deductible medical expenses.  In connection with its consumer-directed products, CIGNA offers Custom Benefit Builder SM , a tool that allows members to customize plan options including copayments and deductible levels, to create a personalized benefit design that meets their individual needs.  In 2007, CIGNA expanded the availability of its HRA plans to smaller businesses with 51-200 employees and also began offering an integrated HSA product to this segment.  The HRA and HSA products for employers with 51-200 employees are now available in 49 states as well as in Puerto Rico and the U.S. Virgin Islands.

·	Stop-Loss Coverage .   CIGNA HealthCare offers stop-loss insurance coverage to both experience-rated and self-insured plans.  This stop-loss coverage reimburses the plan for claims in excess of some predetermined amount, for either specific individuals, the entire group in aggregate, or both.

·

Shared Administration Services .   CIGNA HealthCare makes available to self-insured Taft-Hartley trusts shared administration products.  CIGNA HealthCare provides these self-insured plans access to its national provider network and provides claim re-pricing and other services (e.g. utilization management).

Specialty

Health Advocacy and CareAllies SM .  Through its CareAllies SM brand, CIGNA offers medical management, disease management, and health advocacy services to employers and other plan sponsors.  CareAllies SM services are not only offered to members covered under CIGNA HealthCare administered plans but also to those employees who have elected coverage under a plan offered through their employer by competing insurers/third party administrators.  CareAllies SM offers a consistent set of services to address the clinical and administrative inconsistencies that are inherent in the multi-vendor approach.  Through its health advocacy programs, CIGNA HealthCare works to: 

·	help healthy people stay healthy;

·	help people change behaviors that are putting their health at risk;

·	help people with existing health care issues access quality care and practice healthy self-care; and

In addition, CIGNA HealthCare   offers a wide array of programs and services to help individuals improve the health of the mind and body, including:

·	Early intervention by CIGNA's network of over 2,500 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 consumers with access to a personal health coach to help them reach their health and wellness goals.

·	CIGNA's Well Informed program (first available in January 2008), 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 to communicate the gaps to the member and the member’s doctor.

·	Online coaching capabilities provided by United Kingdom (U.K.)-based vielife, which CIGNA acquired in 2006.

Behavioral Health .   CIGNA Behavioral Health provides behavioral health care benefit products, behavioral health care management, employee assistance programs, and work/life programs to employer sponsored benefit plans, HMOs, governmental entities and disability insurers.  CIGNA Behavioral Health focuses on integrating its programs and services to facilitate customized, holistic care.

As of December 31, 2007, CIGNA Behavioral Health’s national network had approximately 61,500 access points to independent psychiatrists, psychologists and clinical social workers and approximately 5,200 facilities and clinics that are reimbursed on a contracted fee-for-service basis.

In 2008, CIGNA plans to integrate the CIGNA Behavioral Health, vielife and CareAllies SM brands and operations into a unified Health Solutions unit that will support CIGNA's health advocacy strategy and manage the delivery of the Company’s health and wellness programs, including: condition and disease management, maternity management, case management, lifestyle management, health coaching (including online), employee assistance, work/life balance, mental health and substance abuse, health assessment, oncology support, transplant network/management, 24-hour health information line, wellness consulting, and the Healthy Rewards ® discount program.

Dental .  CIGNA Dental Health offers a variety of dental care products including managed care, dental preferred provider organization (“DPPO”), dental exclusive provider organization (“DEPO”) and traditional indemnity products.  Customers can purchase CIGNA Dental Health products as stand-alone products or integrated with CIGNA HealthCare’s medical products.  As of December 31, 2007, CIGNA Dental Health members totaled approximately 11 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 to provide dental services to members.

CIGNA Dental members access care from one of the largest dental HMO and dental PPO networks in the U.S., with approximately 107,000 DPPO-contracted access points (approximately 53,000 unique providers) and approximately 38,000 dental HMO-contracted access points (approximately 10,000 unique providers). 

 

Pharmacy .   CIGNA HealthCare offers prescription drug plans to its insured and self-funded customers both in conjunction with its medical products and on a stand-alone basis.  CIGNA HealthCare has a nationwide network of approximately 57,000 contracted pharmacies that it uses in connection with its HMO, Network, POS, PPO and Choice Fund ® products.  In addition, CIGNA HealthCare provides managed pharmacy benefit programs in connection with its HMO and POS products as well as Pharmacy Outcome Improvement programs that take a holistic approach to helping improve outcomes for members and managing medical costs for customers.

CIGNA HealthCare's pharmacy products and services are a part of the Company’s efforts to integrate clinical programs and case management across medical, behavioral and pharmacy, and implement effective cost-management programs.  Programs that reflect this integration of medical, behavioral and pharmacy offerings include:

·	a prescription drug price comparison tool that gives members price comparisons on branded and generic drugs from pharmacy retailers and mail order, showing out-of-pocket as well as total anticipated costs, of the prescription;

·	DrugCompare TM and Medication Library where members can obtain detailed information and comparisons of medications;

·	Prescription Claim History Tool, which enables consumers to see their combined retail and home delivery prescription history to help plan for and track out-of-pocket expenses; and

·	CIGNA HealthCare’s Step Therapy Program, which gradually encourages members to use generic drugs

for anti-ulcer, hypertension, high cholesterol and allergic rhinitis medications through communications with the consumer and the consumer’s physician.

CIGNA Tel-Drug ® .   CIGNA HealthCare also offers cost-effective mail order, telephone and on-line pharmaceutical fulfillment services through its CIGNA Tel-Drug ® operation .   CIGNA Tel-Drug Home Delivery Pharmacy provides a member-focused, efficient home delivery pharmacy with high standards of quality, accuracy and member care relating to maintenance and specialty medications.  Orders may be submitted through the mail, via phone or through the internet at myCIGNA.com.  Refill reminders, generic conversion programs and 24-hour access to licensed pharmacists support CIGNA's goals of low net cost, medication adherence and member service, resulting in a positive Return on Health   SM .

Medicare Part D .  CIGNA's Medicare Part D prescription drug program, CIGNA Medicare Rx SM , provides a number of plan options as well as service and information support to medicare-eligible members aged 65 and over.  CIGNA Medicare Rx SM is available in all 50 states and the District of Columbia.

Retail Pharmacies .   CIGNA operates 18 retail pharmacies, including on-site retail pharmacies for customers to serve the needs of CIGNA HealthCare members.

Funding Arrangements

The segment’s health care products and services are offered through the following funding arrangements:

·	guaranteed cost;

·	retrospectively experience-rated (including minimum premium funding arrangements); and

 

Guaranteed Cost .  Under guaranteed cost funding arrangements, group policyholders pay a fixed premium and CIGNA bears the risk for claims and costs that exceed the premium.  The HMO product is offered only on a guaranteed cost basis.

Retrospectively Experience-rated (Including Minimum Premium) .  Under retrospectively experience-rated funding arrangements, a premium that typically includes a margin to partially protect against adverse claim fluctuations is determined at the beginning of the policy period.  CIGNA generally bears the risk if claims and expenses exceed premiums, but has the potential to recover these deficits from margins in future years if coverage is renewed.  For additional discussion, see “Pricing, Reserves and Reinsurance” on page 7.

Under minimum premium funding arrangements, instead of simply 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.  The policyholder pays a monthly residual premium while the policy is in effect and a supplemental premium (to cover reserves for run-out claims and 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 amount, and CIGNA bears the risk for claim costs incurred in excess of that amount.  CIGNA has the potential to recover this deficit from margins in future years if the policy is renewed.  Accordingly, minimum premium funding arrangements have a risk profile similar to retrospectively experience-rated insurance arrangements.

Service .  Under the service funding arrangement, CIGNA HealthCare contracts with employers on an administrative services only (“ASO”) basis to administer claims.  CIGNA HealthCare collects administrative service fees in exchange for providing ASO plans with access to CIGNA HealthCare's applicable participating provider network and for providing other services and programs, including: quality management, utilization management; cost containment; health advocacy; 24-hour help line; case management; disease management; pharmacy benefit management; behavioral health care management services (through its provider networks); or a combination of the above.  The employer/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 some predetermined amount, for either individuals, the entire group in aggregate, or both.

Financial information regarding premiums and fees is presented on page 48 in the MD&A section of this Form 10-K.  Other financial information about the Health Care segment is presented elsewhere in the MD&A section and

Note 19 to CIGNA's 2007 Financial Statements on page 96 of this Form 10-K.

Service and Quality

CIGNA HealthCare operates eight service centers that together processed approximately 107 million medical claims in 2007.  Satisfying customers and members is a primary business objective and critical to the Company’s success.  To address a variety of member issues, CIGNA HealthCare offers members access to its grievance and appeals processes.  CIGNA operates six member service centers that members can call toll-free to address requests for information and complaints and grievances.  CIGNA HealthCare customer service represe ntatives are empowered to immediately resolve a wide range of issues to help members obtain the most from their benefit plan.  In many cases, a customer service representative can resolve the 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 medical necessity based coverage determinations and other benefits/coverage determinations.  CIGNA HealthCare’s formal appeals process meets National Committee for Quality Assurance (NCQA), Employee Retirement Income Security Act (ERISA), Utilization Review Accreditation Commission (URAC) and/or applicable state regulatory requirements.

 

Participating Provider Network .  CIGNA has an extensive national network of participating health care providers, which as of December 31, 2007 consisted of  approximately 5,100 hospitals and approximately 542,000 providers as well as other facilities, pharmacies and vendors of health care services and supplies.  As of December 31, 2006, CIGNA's national network of participating health care providers consisted of approximately 5,000 hospitals and approximately 519,000 providers.

In most instances, CIGNA contracts directly with the participating provider to provide covered services to members at agreed-upon rates of reimbursement.  In some instances, however, CIGNA companies contract with third parties for access to their provider networks.  In addition, CIGNA has entered into strategic alliances with several regional managed care organizations (Tufts Health Plan, HealthPartners, Inc., Health Alliance Plan, and MVP Health Plan) to gain access to their market leading provider networks and discounts.

CIGNA Care Network ® .   CIGNA Care Network ® is a benefit design option available for CIGNA HealthCare administered plans in 58 service areas across the country.  CIGNA Care Network ® is a subset of participating physicians in certain specialties who are designated as CIGNA Care Network ® providers based on specific quality and cost-efficiency selection criteria.  Members pay reduced co-payments or co-insurance when they receive care from a specialist designated as a CIGNA Care Network ® provider.  CIGNA participating specialists are evaluated annually for the CIGNA Care Network ® designation.

Provider Credentialing .   CIGNA HealthCare credentials physicians, hospitals and other health care providers in its participating provider networks using quality criteria which meets or exceeds the standards of external accreditation or state regulatory agencies, or both.  Typically, most providers are recredentialed every three years.

Health Plan Credentialing .   Each of CIGNA’s 23 HMO and POS plans that have undergone an accreditation review have earned the highest rating possible – Excellent – from the NCQA and have earned Distinction for NCQA's Quality Plus Member Connections and Physician and Hospital Quality standards.  The Member Connections standards assess a plan's web-based and telephonic consumer decision support tools.  The Physician and Hospital Quality standards assess how well a plan provides members with information about physicians and hospitals in its network to help consumers make informed health care decisions.  In early 2008, CIGNA received “Full” accreditation (the highest rating possible) from NCQA for its PPO plans and for CIGNA’s Open Access Plus plans nationwide.  The case management and utilization management programs provided to CIGNA members have been awarded full accreditation by URAC.

HEDIS ® Measures .   In addition, CIGNA participates in NCQA’s Health Plan Employer Data and Information Set (“HEDIS ® ”) Quality Compass Report.  HEDIS ® Effectiveness of Care measures are a standard set of metrics to evaluate the effectiveness of managed care organization clinical programs.  CIGNA’s national results compare favorably to industry averages.

Technology .   CIGNA HealthCare understands the critical importance of information technology to the level of service the Company is able to provide to its customers and to the continued growth of the 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 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 consumer 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 which allows prospective members to compare plan coverage and pricing options, before enrolling, based on a variety of factors.  The application gives consumers information on the total health care cost to them and their employer;

 

·	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

·	Health Risk Assessment, an online interactive tool through which consumers can identify potential health risks and monitor their health status.

In addition, a special website designed for seniors was launched in 2007 to offer 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 guaranteed for one year.  Premium rates are established either on a guaranteed cost basis or on a retrospectively experience-rated basis.

Charges to customers established on a guaranteed cost basis at the beginning of the policy period cannot be adjusted to reflect actual claim experience during the policy period.  A guaranteed cost pricing methodology reflects assumptions about future claims, health care inflation (unit cost, location of delivery of care and utilization), the adequacy of fees charged for administration and risk assumption, 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 impact of the reimbursement rates in the provider contracts on future claims.  Premium rates may vary among accounts to reflect the anticipated contract mix, family size, industry, renewal date, and other cost-predictive factors.  In some states, premium rates must be approved by the state insurance departments, and state laws may restrict or limit the use of rating methods.

Premiums established for retrospectively experience-rated business may be adjusted for the actual claim and, 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 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 provides performance guarantees related to its administrative function.  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 credits interest on experience refund balances to retrospectively experience-rated policyholders through rates that are set at CIGNA HealthCare’s discretion taking investment performance and market rates into consideration.  Generally, for interest-crediting rates set at CIGNA HealthCare’s discretion, higher rates are credited to funds with longer terms reflecting the fact that higher yields are generally available on investments with longer maturities.  For 2007, the rates of interest credited ranged from 3.25% to 4.30%, with a weighted average rate of 3.70%.

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.

Markets and Distribution

CIGNA HealthCare targets the following markets for its products:

·	national accounts, which are multi-site employers with more than 5,000 employees;

·	regional accounts, which are generally defined as multi-site employers with more than 200 but fewer than 5,000 employees, and single-site employees with more than 200 employees;

·	small business and individual, which includes employers with 2 - 200 employees and 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; and

·	voluntary, which focuses on employers with working uninsured employees.

To date, the national and regional account markets have comprised a significant amount of CIGNA HealthCare's business.

CIGNA HealthCare employs group 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, 2007, the field sales force for the products and services of this segment consisted of approximately 840 sales representatives in approximately 100 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 or small number of competitors dominates the health care market, CIGNA expects a continuing trend of consolidation in the industry with the emergence of consumer engagement intensifying this trend.

In certain geographic locations some health care companies may have significant market share positions.  A large number of health care companies and other entities compete in offering similar products.  Competition in the health care market exists both for 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.

 

The principal competitive factors are: quality of service; scope; cost-effectiveness and quality of provider networks; effectiveness of medical care management; product responsiveness to the needs of customers and their employees; cost-containment services; technology; price; and effectiveness of marketing and sales.  In addition, financial strength of the insurer, as indicated by ratings issued by nationally recognized rating agencies, is also a competitive factor.  For more information concerning insurance ratings, see “Ratings” in Section J beginning on page 25.  CIGNA HealthCare believes that its national scope, integrated approach to consumer engagement, breadth of product and funding offerings, clinical care and medical management capabilities and funding options are strategic competitive advantages.  These advantages allow CIGNA to respond to the diverse needs of its customer base in each market in which it operates.  CIGNA also believes that its focus on helping to improve the health, well-being and security of its members will allow it to distinguish itself from its competitors.

The 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 and access to enhanced medical quality data.  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 believes they will be competitive differentiators.  CIGNA believes that it has the capabilities and appropriate strategy to allow it to compete against both traditional and new competitors.

 

Industry Developments and Strategic Overview

Both state and federal lawmakers have supported a broad range of health care reform efforts due to the recent demand for changes to the health care industry.  The proposal and/or passing of any reform initiatives would affect the health care industry in general and CIGNA, specifically. CIGNA advocates creating a value-based healthcare system that makes access to care universal, fosters and rewards quality, and makes care more affordable by educating consumers to the true costs and quality of care and supporting better decision making.  CIGNA envisions such a system as a partnership between private and public sectors, taking the best of what the private and public sector programs offer and creating a system that addresses the needs of all.  CIGNA is intensely involved in developing workable solutions for reforming America's healthcare system.

 

As part of its business strategy, CIGNA continually evaluates potential acquisitions and other transactions that could enhance the Company’s competitive capabilities and provide a basis for membership growth and/or improved medical costs.  In 2007 CIGNA   entered into a definitive agreement to acquire the assets of Great-West Healthcare, the healthcare division of Great-West Life & Annuity and   acquired Sagamore Health Network, Inc., an Indiana-based health care provider network vendor.

Also, in connection with CIGNA's long-term business strategy, the Company intends to continue to focus on  the fundamentals of its health care business in order to provide consistent, reliable service to customers at a competitive cost;  differentiating the health care business from its competitors by facilitating consumer engagement to realize improvement in the individual’s health and well-being; and  segment expansion, particularly in the voluntary, individual, small employer (fewer than 200 employees) and seniors markets, in which CIGNA HealthCare expects high-growth opportunities that complement its core business.

D .    Disability and Life

Principal Products and Services

CIGNA's Disability and Life operations provide the following insurance products and their related services:  group life insurance, long-term and short-term disability insurance, workers’ compensation and disability case management, and accident and specialty insurance.  These products and services are provided by subsidiaries of CIGNA Corporation.

Disability Insurance

CIGNA markets group long-term and short-term disability insurance products and services in all states and statutorily required disability insurance plans in certain states.  These products and services generally provide a fixed level of income to replace a portion of wages lost because of disability. They also provide assistance to the employee in returning to work and assistance to the employer in managing the cost of employee disability.  Group disability coverage is typically employer-paid or a combination of employer and employee-paid.

CIGNA also provides case management and related services to workers’ compensation insurers and employers who self-fund workers’ compensation and disability benefits.

CIGNA’s disability insurance products may be integrated with behavioral programs, workers’ compensation, medical programs, social security advocacy, and the Family and Medical Leave Act and leave of absence administration.  CIGNA believes this integration provides customers with increased efficiency and effectiveness in disability claims management, enhances productivity and reduces overall costs to employers.  Combining CIGNA disability and medical programs provides enhanced opportunities to influence outcomes, reduces the cost of both medical and disability events and improves the return to work rate.  CIGNA has formalized an integrated approach to health and wellness through the  Disability and Healthcare Connect Program.  This program uses information from the CIGNA HealthCare and Disability 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 clients.

CIGNA is a 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.  Employees also report a high degree of satisfaction with the support CIGNA provides them to manage their disabilities and return them back to work.  Data from a 2006 customer satisfaction survey showed that 9 out of 10 of CIGNA's short-term and long-term disability claimants were satisfied or very satisfied with how their claims were handled.

Approximately 5,600 disability policies covering approximately 4.3 million lives were outstanding as of December 31, 2007.

 

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 or employee-paid supplemental life insurance.

CIGNA no longer actively markets group universal life insurance, but continues to administer the product for existing contractholders.  Group universal life insurance is a voluntary life insurance product in which the owner may accumulate cash value.  The cash value earns interest at rates declared from time to time, subject to a minimum guaranteed rate, and may be borrowed, withdrawn, or used to fund future life insurance coverage.  With group variable universal life insurance, the cash value varies directly with the performance of the underlying investments and neither the return nor the principal is guaranteed.

Other

CIGNA offers personal accident insurance coverage, which consists primarily of accidental death and dismemberment and travel accident insurance to employers.  Group accident insurance may be employer-paid or employee-paid.

CIGNA also offers specialty insurance services that consist primarily of life, accident and disability insurance to professional associations, financial institutions, schools and participant organizations.

Voluntary benefits are those principally paid by the employee and are offered at the employer’s worksite.

 

 

 

 

CIGNA plans provide, among other services, flexible enrollment options, list billing, medical underwriting, and individual record keeping. CIGNA 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.

Markets and Distribution

CIGNA markets the group insurance products and services described above to employers, employees, professional and other associations and groups.  In marketing these products, CIGNA targets customers with 50 or more employees and employs group sales representatives to distribute the products and services of this segment through insurance brokers and consultants.  As of December 31, 2007, the field sales force for the products and services of this segment consisted of approximately 200 sales professionals in 27 field locations.

Pricing, Reserves and Reinsurance

Premiums and fees charged for disability and life insurance products are generally established in advance of the policy period and are generally guaranteed for one to three years, but contracts may be subject to early termination.

Premium rates reflect assumptions about future claims, expenses, credit risk, investment returns and profit margins. Claim and expense assumptions may be based in whole or in part on prior experience of the account or on a pool of accounts, depending on the group size and the statistical credibility of the experience.

Fees for universal life insurance products consist of mortality, administrative and surrender charges assessed against the 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.

In addition to paying current benefits and expenses, CIGNA 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 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 assumption used in determining reserves for most of the long-term disability insurance business is 4.75% for claims that were incurred in 2007 and 2006.  For universal life insurance, CIGNA establishes reserves for deposits received and interest credited to the contractholder, less mortality and administrative charges assessed against the contractholder’s fund balance.

The profitability of this segment’s products depends on the adequacy of premiums charged relative to claims and expenses.  Effectiveness of return to work programs as well as adequate return on invested assets impact the profitability of disability insurance products.  For life insurance products, the degree to which future experience deviates from mortality, morbidity and expense assumptions also affect profitability.

Competition

The principal competitive factors that affect the products of the Disability and Life segment are underwriting and pricing, the quality and effectiveness of claims management, relative operating efficiency, distribution methodologies and producer relations, the variety of products and services offered, and the quality of customer service.  The Company believes that CIGNA's claims management capabilities 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 J beginning on page 25.

The principal competitors of CIGNA’s group disability, life and accident businesses are other large and regional insurance companies that market and distribute these types of products.

As of December 31, 2007, CIGNA is one of the top providers of group disability, life and accident insurance, based on premiums.

 

 

 

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 reevaluate 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 are also expressing a growing interest in employee wellness, absence management and productivity and recognizing a strong link between   health, productivity and their profitability.  As a result, employers are looking to offer programs that promote a healthy lifestyle, offer assistance in returning to work and integrate healthcare 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 prevent disability and mitigate its impact on health, productivity and the employers’ profitability.

E .     International

CIGNA’s international operations offer life, accident and supplemental health insurance products and international health care products and services.  These products and services are provided by subsidiaries of CIGNA Corporation, including foreign operating entities.

Principal Products and Markets

Life, Accident and Supplemental Health Insurance

CIGNA International’s life, accident and supplemental health insurance products generally provide simple, affordable coverage of risks for the health and financial security of individuals.  These products are marketed primarily through distribution partners with whom the individual has an affinity relationship.  Supplemental health products provide a specified payment for a variety of health risks and include personal accident, accidental death, critical illness, hospitalization, cancer and other dread disease coverages.  Variable universal life insurance products are also included in the product portfolio.  CIGNA International’s life, accident and supplemental health insurance operations are located in South Korea, Taiwan, Hong Kong, Indonesia, New Zealand, People’s Republic of China, Thailand, and the European Union.  In the third quarter of 2007, CIGNA sold its Chilean insurance operations.  In the third quarter of 2006, CIGNA entered into negotiations to sell its Brazilian life insurance business which is in run-off. The sale, which is subject to regulatory approval, is expected to close in 2008.

International Health Care Benefits

CIGNA International’s health care operations 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 customers of CIGNA International’s expatriate benefits business are multinational companies and international organizations headquartered in the United States, Canada, Europe, the Middle East and other international locations.  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 C on page 5.

In addition, CIGNA International’s health care operations include medical products, which are provided through group benefits programs in the United Kingdom and Spain. These products are primarily medical indemnity insurance coverage, with some offerings having managed care or administrative service aspects.  These products generally provide an alternative or supplement to government programs.  In the fourth quarter of 2007, CIGNA sold its Guatemalan health insurance operations.

Distribution

CIGNA International’s life, accident and supplemental health insurance products are distributed primarily through direct marketing channels, such as outbound telemarketing, in-branch bancassurance and direct response television.  Marketing campaigns are conducted through these channels under a variety of arrangements with affinity partners.  These affinity partners primarily include banks, credit card companies and other financial institutions.

CIGNA International’s health care products are distributed through independent brokers and consultants, select partners as well as CIGNA International’s own sales personnel.

 

Fees for variable universal life insurance products consist of mortality, administrative, asset management and surrender charges assessed against the contractholder’s fund balance.  Mortality charges on variable universal life may be adjusted prospectively to reflect expected mortality experience.

Premiums and fees for CIGNA International’s health care products reflect assumptions about future claims, expenses, investment returns, and profit margins.  For products using networks of contracted providers, premiums reflect assumptions about the impact of provider contracts and utilization management on future claims.  Most of the premium volume for the medical indemnity business is on a guaranteed cost basis.  Other

 

 

 

premiums are established on an experience-rated basis.  Most contracts permit rate changes at least annually.

The profitability of health care products is dependent upon the accuracy of projections for health care inflation (unit cost, location of delivery of care and utilization), the adequacy of fees charged for administration and risk assumption and, in the case of managed care products, effective medical cost management.

In addition to paying current benefits and expenses, CIGNA International establishes reserves in amounts estimated to be sufficient to settle reported claims not yet paid, as well as claims incurred but not yet reported. Additionally, for some individual life insurance and supplemental health insurance products, CIGNA International establishes policy reserves which reflect the present value of expected future obligations less the present value of expected future premiums net of costs and profits.  CIGNA International defers acquisition 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, the timing of 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.

Competition

Competitive factors in CIGNA International’s life, accident and supplemental health operations include product innovation and differentiation, efficient management of direct marketing processes, commission levels paid to distribution partners, and quality of claims and policyholder services.

The principal competitive factors that affect CIGNA International’s health care operations are underwriting and pricing, relative operating efficiency, relative effectiveness in medical cost management, product innovation and differentiation, producer relations, and the quality of claims and 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, locally based competitors are primarily locally based insurance companies, including insurance subsidiaries of banks.  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.

For the expatriate benefits business, CIGNA International is a market leader in the U.S., whose primary competitors include U.S.-based and European health insurance companies with global expatriate benefits operations.  For the health care operations in the UK 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 healthcare market.

South Korea represents the single largest geographic market for CIGNA International’s businesses.  In 2007, South Korea generated 31% of CIGNA International’s revenues and 41% 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” on page 53 of this Form 10-K.

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.  For the international health care benefits business, trade liberalization and rapid economic growth in emerging markets is leading to multi-national companies expanding foreign operations.

F .     Other Operations

Other Operations consists of:

The products and services related to these operations are or were offered by subsidiaries of CIGNA Corporation.

Corporate-owned Life Insurance (“COLI”)

Principal Products and Markets

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 corporate-owned life insurance segment 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.  The principal markets for COLI products are mid to large sized corporations, including banks.

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.  Variable universal life products do not have a guaranteed minimum crediting rate.

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.

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.

Distribution

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.

Industry Developments and Strategic Initiatives

The legislative environment surrounding COLI has evolved considerably over the past decade.  Most recently, 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 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. Effective as of December 14, 2007, the purchaser placed 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.  As of December 31, 2007, the assets in the trust had a value of approximately $4.5 billion.

CIGNA's sale of its retirement 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.

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. As of December 31, 2007, assets totaling $4.0 billion remained in the Ceded Business Trust.

Settlement Annuity Business

CIGNA's settlement annuity business is a run-off block of contracts.  These contracts are primarily liability settlements with approximately half of the payments guaranteed and not contingent on survivorship. 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.

G .    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, Other Operations, and Run-off Reinsurance 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”).

Net investment income and realized investment gains (losses) are not reported separately in the investment operations.  However, net investment income is included as a component of earnings for each of CIGNA's operating segments (Health Care, Disability and Life, Other Operations, Run-off Reinsurance and International), net of the expenses attributable to the investment operations.

Assets Under Management

CIGNA’s Invested Assets under management at December 31, 2007 totaled $17.5 billion.  See Schedule I to CIGNA's 2007 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, 2007, CIGNA's separate account funds consisted of:

·

$1.5 billion in separate account assets that are managed by the buyer of the retirement benefits business pursuant to reinsurance arrangements described in "Sale of Individual Life Insurance & Annuity and Retirement Benefits Businesses" on page 16 of this Form 10-K;

·

$1.7 billion in separate account assets which constitute a portion of the assets of the CIGNA Pension Plan; and

·

$3.8 billion in funds 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.  In connection with CIGNA's investment strategy to enhance investment yields by selling senior participations of commercial mortgage loans, as of December 31, 2007, commercial mortgage loans includes $77 million of commercial mortgage loans originated with the intent to sell.  These commercial mortgage loans held for sale are carried at the lower of cost or market with any resulting valuation allowance reported in realized investment gains and losses.

For the International Portfolios, CIGNA invests primarily in publicly traded fixed maturities, short-term investments and time deposits denominated in the currency of the relevant liabilities and surplus.

Fixed Maturities

CIGNA invests primarily in investment grade fixed maturities rated by rating agencies (for public investments) and by CIGNA (for private investments).  For information about below investment grade holdings, see “Investment Assets” on page 60 of this Form 10-K.

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 as of December 31, 2007 was approximately 62%.

CIGNA enters into joint ventures with local partners to develop, lease and 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.  CIGNA also acquires real estate through foreclosure of 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.  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 did not sell any foreclosed properties in 2007.

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.  For information about CIGNA’s use of derivative financial instruments, see Note 10(F) to CIGNA’s 2007 Financial   Statements on page 88 of this Form 10-K.

See also “Investment Assets” on page 60, and Notes 2, 10, and 11 to the Financial Statements on pages 71, 86 and 91 of this Form 10-K for additional information about CIGNA’s investments.

Domestic Portfolios – Investment Strategy

As of December 31, 2007 the Domestic Portfolios had $16.1 billion in Invested Assets, allocated among fixed maturity investments (67%); commercial mortgage loan investments (20%); and policy loans, real estate investments and mezzanine and private equity partnership investments (13%).  CIGNA realized gains of $32 million from sales of equity real estate investments in 2007.

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, 2007, 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, 18%; fully guaranteed annuity, 32%; and interest-sensitive life insurance, 50%.

While the businesses and products supported are described elsewhere in this Form 10-K, the Invested Assets supporting CIGNA's insurance and contractholder liabilities related to each of its segments are as follows:
 

·

The Invested Assets supporting CIGNA's Disability and Life operating segment are also structured to emphasize investment income, and provide necessary liquidity to meet cash flow requirements. 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.

·

The Invested 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 that generally match the aggregate duration of the investment portfolio with that of the related benefit cash flows.  As of December 31, 2007, the duration of assets that supported these liabilities was approximately 12.4 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.

·

The Invested Assets supporting the Run-off Reinsurance segment with respect to guaranteed minimum death benefit annuities and guaranteed minimum income benefit annuities 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 20(B) to CIGNA’s 2007 Financial   Statements on pages 81 and 99 of this Form 10-K.

 

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, 2007 the International portfolios had $1.4 billion in Invested Assets.  The International portfolios are primarily managed by external managers with whom CIGNA's subsidiaries contract.

The characteristics of these assets are generally managed to reflect the underlying characteristics of related insurance and contractholder liabilities, as well as regulatory and tax considerations in the countries where CIGNA's subsidiaries operate.  Assets are generally invested in the currency of related liabilities, typically the currency in which the subsidiaries operate.  CIGNA's investment policy allows the investment of subsidiary assets in U.S. dollars to the extent permitted by regulation.  CIGNA's international Invested Assets as of December 31, 2007 were held in support of statutory surplus and liabilities associated with the types of insurance products described below.

Accident and health insurance consists of various individual group and individual life, accident and health products.  Interest sensitive products primarily consist of “return of premium” products in which the nominal amount of premiums paid for a multi-year accident and health policy are paid back to the policyholder at the end of the contract period.  Invested Assets supporting these products are fixed income investments that generally match the aggregate duration of the investment portfolio with that of the related benefit cash flows.

H .    Run-off Reinsurance

Principal Products and Markets

Until 2000, CIGNA offered reinsurance coverage for part or all of the risks written by other insurance companies (or “cedents”) under life and annuity policies (both group and individual); accident policies (personal accident, catastrophe and workers' compensation coverages); and health policies.  These products were sold principally in North America and Europe through a small sales force and through intermediaries.

In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance businesses.  CIGNA placed its remaining reinsurance businesses (including its accident, domestic health, international life and health, and annuity reinsurance businesses) into run-off as of June 1, 2000 and stopped underwriting new reinsurance business.

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 guaranteed minimum income benefit contracts discussed below, as Other Assets.

CIGNA’s exposures stem primarily from its annuity reinsurance business, including its reinsurance of guaranteed minimum death benefit and guaranteed minimum income benefit contracts, and its reinsurance of workers' compensation and other personal accident risks.

Guaranteed Minimum Death Benefit Contracts

CIGNA’s reinsurance operations reinsured guaranteed minimum death benefits under certain variable annuities issued by other insurance companies.  These variable annuities are essentially investments in mutual funds combined with a death benefit.  CIGNA has equity and other market exposures as a result of this product.

For additional information about guaranteed minimum death benefit contracts, see “Guaranteed Minimum Death Benefits” under “Run-off Reinsurance” on page 53 and Note 7 to CIGNA's 2007 Financial Statements on page 80 of this Form 10-K.

Guaranteed Minimum Income Benefit Contracts

In certain circumstances where CIGNA's reinsurance operations reinsured the guaranteed minimum death benefit, CIGNA also reinsured guaranteed minimum income benefits 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.  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 guaranteed minimum income benefit contracts, see “Guaranteed Minimum Income Benefits” under “Run-off Reinsurance” on page 54, and Note 20(B) to CIGNA's 2007 Financial Statements on page 99 of this Form 10-K.

Workers' Compensation and Personal Accident

CIGNA reinsured workers' compensation and other personal accident risks in the London market and in the United States.  CIGNA purchased retrocessional coverage in these markets to substantially reduce the risk of loss on these contracts.  Disputes involving a number of these reinsurance and retrocessional contracts have been substantially resolved and some of the disputed contracts have been commuted.  For more information see “Legal Proceedings” in Item 3 on pages 35 and 36.

I .      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;

·	risk sharing arrangements with providers; and

·	operation of consumer-directed plans (including health savings accounts, health reimbursement accounts, flexible spending accounts and debit cards).

CIGNA also complies 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.

Other types of regulatory oversight 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.

Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds

Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies.  In the United States, these associations levy assessments on member insurers licensed in a particular state to pay such claims.

 

Several states also require HMOs to participate in guaranty funds, special risk pools and administrative funds.  For additional information about guaranty fund and other assessments, see Note 20(D) to CIGNA’s 2007 Financial Statements on page 100 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 2007, CIGNA’s HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, were compliant with applicable RBC and non-U.S. surplus rules.

 

The NAIC is considering changing statutory reserving rules for variable annuities.  Any changes would apply to CIGNA's reinsurance contracts covering guaranteed minimum death benefits and guaranteed minimum income benefits, and would impact CIGNA's overall surplus level.

Holding Company Laws

CIGNA's domestic insurance companies and certain of its HMOs are subject to state laws regulating subsidiaries of insurance holding companies.  Under such laws, certain dividends, distributions and other transactions between an insurance or HMO subsidiary and its affiliates may require notification to, or approval by, one or more state insurance commissioners.

Oversight of Marketing, Advertising and Broker Compensation

State and/or federal regulatory scrutiny of life and health insurance company and HMO marketing and advertising practices, including the adequacy of disclosure regarding products and their administration, may result in increased regulation. Products offering limited benefits, such as those issued in connection with the Star HRG business acquired in July 2006, may attract increased regulatory scrutiny.  States have responded to concerns about the marketing, advertising and administration of insurance and HMO products and administrative practices by increasing the number and frequency of market conduct examinations and imposing larger penalties for violations of applicable laws and regulations.

In recent years, perceived abuses in broker compensation practices have been the focus of greatly heightened regulatory scrutiny.  This increased regulatory focus may lead to legislative or regulatory changes that would affect the manner in which CIGNA and its competitors compensate brokers.  For more information regarding general governmental inquiries relating to CIGNA companies, see “Legal Proceedings” in Item 3 on pages 35 and 36.

Licensing Requirements

Pharmacy Licensure Laws

Certain CIGNA companies 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.

Claim Administration, Utilization Review and Related Services  

 

CIGNA subsidiaries contract for the provision of claim administration, utilization management and other related services with respect to the administration of self-insured benefit plans. These CIGNA subsidiaries are subject to state licensing requirements and regulation.

Federal Regulations

Employment Retirement Income Security Act

 

CIGNA sells most of its products and services to sponsors of employee benefit plans that are governed by the Federal Employment Retirement Income Security Act (“ERISA”).  CIGNA companies may be subject to requirements imposed by ERISA on plan fiduciaries and parties in interest, including regulations affecting claim and appeals procedures for health, dental, disability, life and accident plans.

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.

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 the programs (which may occur in years subsequent to provision by CIGNA of the relevant services under audit).  These risks may include reimbursement claims as well as potential fines and penalties.  For example, the federal government requires Medicare and Medicaid providers to file detailed cost reports for health care services provided.  These reports may be audited in subsequent years.  CIGNA HMOs that contract to provide community-rated coverage to participants in the federal Employees Health Benefit Plan may be required to reimburse the federal government if, following an audit, it is determined that a federal employee group did not receive the benefit of a discount offered by a CIGNA HMO to one of the two groups closest in size to the federal employee group.  See “Health Care” in Section C beginning on page 2 for additional information about CIGNA’s participation in government health-related programs.

Privacy and Information Disclosure and Portability Regulations

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes requirements for guaranteed issuance (for groups with 50 or fewer lives), electronic data security standards, and renewal and portability, on health care insurers and HMOs.  In addition, HIPAA regulations required the assignment of a unique national identifier for providers by May, 2007.  The federal government and states (as well as most non-U.S. jurisdictions) impose requirements regarding the use and disclosure of identifiable information about individuals and, in an effort to deal with the growing threat of identity theft, the handling of privacy and security breaches.

 

Antitrust Regulations

CIGNA companies are also engaged in activities that may be scrutinized under federal and state antitrust laws and regulations.  These activities include the administration of strategic alliances with competitors, information sharing with competitors and provider contracting.

Anti-Money Laundering Regulations

Certain CIGNA lines of business are subject to United States Department of the Treasury anti-money laundering regulations.  Those lines of business have implemented anti-money laundering policies designed to insure their affected products comply with the regulations.

Investment-Related Regulations

Depending upon their nature, CIGNA's investment management activities are subject to U.S. federal securities laws, ERISA, and other federal and state laws governing investment related activities.  In many cases, the investment management activities and investments of individual insurance companies are subject to regulation by multiple jurisdictions.

Regulatory Developments

The business of administering and insuring employee benefit programs, particularly health care programs, is heavily regulated by federal and state laws and administrative agencies, such as state departments of insurance and the federal Departments of Labor and Justice, as well as the courts.  In the growing area of consumer-driven plans, health savings accounts and health reimbursement accounts are also regulated by the United States Department of the Treasury and the Internal Revenue Service.  For information on Regulatory and Industry Developments, see page 56 in the MD&A section and Note 20(D) to CIGNA's 2007 Financial Statements on page 100 of this Form 10-K.

Federal regulation and legislation may affect CIGNA’s operations in a variety of ways.  In addition to proposals discussed above related to increased regulation of the health care industry, other proposed federal measures that may significantly affect CIGNA’s operations include calls for universal health care coverage, market reforms achieved through state and federal legislation, modifications of the Medicare program,   and employee benefit regulation including modification to the tax treatment of employee benefits.

The economic and competitive effects of the legislative and regulatory proposals discussed above on CIGNA’s business operations will depend upon the final form of any such legislation or regulation.

J .    Ratings

CIGNA and certain of its insurance subsidiaries are rated by nationally recognized rating agencies.  The significance of individual ratings varies from agency to agency.  However, companies assigned ratings at the top end of the range have, in the opinion of the rating agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest capacity.

Insurance ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. The principal agencies that rate CIGNA’s insurance subsidiaries characterize their insurance rating scales as follows:

•

A.M. Best Company, Inc. (“A.M. Best”), A++ to S (“Superior” to “Suspended”);

•

Moody’s Investors Service (“Moody’s”), Aaa to C (“Exceptional” to “Lowest”);

•

Standard & Poor’s Corp. (“S&P”), AAA to R (“Extremely Strong” to “Regulatory Action”); and

•

Fitch, Inc. (“Fitch”), AAA to D (“Exceptionally Strong” to “Order of Liquidation”).

As of February 27, 2008, the insurance financial strength ratings for CIGNA subsidiaries, Connecticut General Life Insurance Company (CG Life) and Life Insurance Company of North America (LINA) were as follows:

(1)	Includes the rating assigned, the agency’s characterization of the rating and the position of the rating in the agency’s rating scale (e.g., CG Life’s rating by A.M. Best is the 3rd highest rating awarded in its scale of 16).

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”).

 

 

 

 

(1)	Includes the rating assigned, the agency’s characterization of the rating and the position of the rating in the applicable agency’s rating scale.

 

---

 

In February 2007, Moody’s upgraded CIGNA Corporation’s senior debt rating to “Baa2” from “Baa3” and upgraded the financial strength ratings of CG Life and LINA to “A2” from “A3.”  At the same time, Moody’s upgraded the commercial paper rating to “P2” from “P3”.  In March 2007, S&P upgraded CIGNA Corporation’s senior debt rating to “BBB+” from “BBB” and upgraded the financial strength ratings of CG Life to “A” from “A-.”  At the same time, Fitch upgraded CIGNA Corporation’s senior debt rating to “BBB+” from “BBB” and upgraded the financial strength ratings of CG Life and LINA to “A+” from “A.”  CIGNA is committed to maintaining appropriate levels of capital in its subsidiaries to support finacial 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 CG Life could adversely affect new sales and retention of current business.

K .      Miscellaneous

Portions of CIGNA’s insurance business are seasonal in nature. Reported claims under group health products are generally higher in the first quarter.

CIGNA and its principal subsidiaries are not dependent on business from one or a few customers. No customer accounted for 10% or more of CIGNA’s consolidated revenues in 2007. 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 26,600, 27,100, and 28,000 employees as of December 31, 2007, 2006 and 2005, respectively.