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CIGNA CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 27, 2014

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Index Overview 31 Consolidated Results of Operations 35 Liquidity and Capital Resources 36 Critical Accounting Estimates 40 Segment Reporting 43 Global Health Care 44 Global Supplemental Benefits 47 Group Disability and Life 49 Run-off Reinsurance 50 Other Operations 52 Corporate 53 Investment Assets 54 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and the "Risk Factors" contained in Part I Item 1A of this Annual Report on Form 10-K. Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's significant accounting policies. We measure the financial results of our segments using "segment earnings (loss)", defined as shareholders' net income (loss) before after-tax realized investment results. In this MD&A, we also present information using adjusted income from operations. Adjusted income (loss) from operations is another measure of profitability used by our management because it presents the underlying results of operations of our businesses and permits analysis of trends in underlying revenue, expenses and shareholders' net income. Adjusted income (loss) from operations is defined as segment earnings (loss) excluding special items (described in the table on page 35 of this Form 10-K) and results of the GMIB business. This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure that is shareholders' net income. We exclude special items because management does not believe they are representative of our underlying results of operations. We also exclude the results of the GMIB business because, prior to February 4, 2013, the changes in the fair value of GMIB assets and liabilities were volatile and unpredictable.



Overview

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We are a global health services organization with a mission to help our customers improve their health, well-being and sense of security. Our insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations). We also offer Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets. In addition to our ongoing operations described above, we also have certain run-off operations, including a Run-off Reinsurance segment.



Our Strategy

To execute on our mission, we have focused our efforts over the past several years on serving the emerging needs of our customers around the world through our "Go Deep, Go Global, Go Individual" strategy, as follows:





GO DEEP: We seek to increase our presence and brand strength in key "go deep" geographic areas, grow in targeted segments or capabilities, and deepen our relationships with current customers through cross-selling.



GO GLOBAL: We seek to deliver a range of differentiated products and superior service to meet the distinct needs of a growing global middle class and a globally mobile workforce through expansion in existing international markets and extension of our business model to new geographic areas.





GO INDIVIDUAL: We strive to establish a deep understanding of our customers' unique needs and to be a highly customer-centric organization. To do this, we are seeking to further simplify the buying process by providing choice, transparency of information, and a personalized customer experience. Our goal is to build CIGNA CORPORATION - 2013 Form 10-K 31



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PART II ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations



long-term relationships with each of our customers and meet their needs throughout each stage of their lives regardless of the customer's plan type: employer-based, government-sponsored, or individual coverage.

As part of this strategy, we have focused our efforts on delivering innovative health and wellness solutions tailored to our employer and government customers, enhancing collaboration with physicians and hospitals to offer affordable, value-based high quality care to individuals and building deeper relationships with individual customers through the world. Through these efforts, we believe we can achieve better health outcomes for our global customers and improve employee productivity, all while lowering the costs of health care for all parties.



As of December 31, 2013, our consolidated shareholders' equity was $10.6 billion, assets were $54.3 billion and we reported revenues of $32.4 billion for the year then ended. Our revenues are derived principally from premiums on insured products, fees from self-insured products and services, mail-order pharmacy sales, and investment income.

Our Segments

We report the financial results of our businesses in five segments, the following three of which are the most significant:

Segment % of revenues Description Global Health 78% Aggregates the Commercial and Government Care operating segments: Commercial Encompasses both our U.S. commercial and certain international health care businesses. Serves employers and their employees, including globally mobile individuals, and other groups (e.g. governmental and non-governmental organizations, unions and associations). In addition, our U.S. commercial health care business also serves individuals. Offers our insured and self-insured customers medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated as part of a comprehensive global health care benefit program. Government Offers Medicare Advantage, Medicare Part D and Medicaid plans. Global 8% This segment offers supplemental health, Supplemental life and accident insurance products in Benefits selected international markets and the U.S. Group 12% This segment provides group long-term and Disability and short-term disability, group life, accident Life and specialty insurance products and related services.



We also report in two other segments: Run-off Reinsurance and Other Operations, including Corporate-owned Life Insurance.

Recent Key Transactions

Over the past two years, we have entered into a number of transactions that have helped us to achieve our strategic goals by: (1) repositioning the portfolio for growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving our strategic and financial flexibility; and (3) pursuing additional opportunities in high growth markets with particular focus on individuals.



In 2013, we completed the following transactions:



Run-off Operations. Prior to February 4, 2013, our Run-off Reinsurance segment had significant exposures, primarily from our guaranteed minimum death benefits ("GMDB" also known as "VADBe") and guaranteed minimum income benefits ("GMIB") business. Effective February 4, 2013, we entered into an agreement with Berkshire to reinsure future exposures for this business, net of existing retrocessional arrangements, up to a specified limit, for a payment of $2.2 billion. See Note 7 to the Consolidated Financial Statements and the Run-off Reinsurance section of this MD&A for additional information. As a result of this transaction, we recorded an after-tax charge of $507 million in the first quarter of 2013 that is reported as a special item.





Pharmacy Benefit Management ("PBM") Services Agreement. In June 2013, we entered into a ten-year pharmacy benefit management services agreement with Catamaran Corporation ("Catamaran"). Under this agreement, we will utilize their technology and service platforms, prescription drug procurement and inventory management capabilities, and order fulfillment services to lower costs and enhance our home-delivery pharmacy, retail network contracting and claims processing services. In the second quarter of 2013, we recorded one-time transaction costs of $37 million pre-tax, primarily for advisory fees associated with this



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ITEM 7 Management's Discussion and Analysis of Financial Condition and Results

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agreement, resulting in an after-tax charge of $24 million that is reported as a special item. This agreement had an immaterial impact to adjusted income from operations in 2013, and is expected to produce a positive contribution to earnings beginning in 2014 through improved clinical management, purchasing and administrative efficiencies.



In 2012, we completed three significant transactions targeting the seniors, individual and global supplemental benefits markets:



HealthSpring, Inc. We acquired HealthSpring, a Medicare Advantage provider, to assist us in serving individuals across their life stages and deepen our presence in a number of geographic markets. This acquisition brought us industry-leading physician partnership capabilities, deepened our existing client and customer relationships, and facilitated a broader deployment of our range of health and wellness capabilities and product offerings.





Great American Supplemental Benefits. We acquired Great American Supplemental Benefits to both strengthen our capabilities in the individual market and facilitate our expansion into the Medicare supplemental business.



Finans-Emeklilik. We entered into a joint venture with Finansbank to expand our global footprint in Turkey.

Organizational Efficiency Plans

We are constantly evaluating ways to deliver our products and services more efficiently and at a lower cost. During 2013 and 2012, we adopted specific plans to increase our organizational efficiency as follows.

2013 plan. During the fourth quarter of 2013, we committed to a plan to increase our organizational efficiency and reduce costs through a series of actions that includes employee headcount reductions. As a result, we recognized charges in other operating expenses of $60 million pre-tax ($40 million after-tax) in the fourth quarter of 2013, consisting mostly of severance costs. The Global Health Care segment reported $47 million pre-tax ($31 million after-tax). The remainder was reported as follows: $11 million pre-tax ($8 million after-tax) in the Global Supplemental Benefits segment and $2 million pre-tax ($1 million after-tax) in Group Disability and Life. We expect most of the severance to be paid by the end of 2015. We expect to realize annualized after-tax savings of approximately $45 million. A substantial portion of these savings will be realized in 2014. 2012 plan. During the third quarter of 2012, we committed to a series of actions to further improve our organizational alignment, operational effectiveness, and efficiency. As a result, we recognized charges in other operating expenses of $77 million pre-tax ($50 million after-tax) in the third quarter of 2012 consisting primarily of severance costs that are expected to be mostly paid by the end of the first quarter of 2014. We realized annualized after-tax savings of approximately $60 million, the majority of which was reinvested in the business to enhance our ability to provide superior service and affordable products to our customers. Our Results During the past three years, we have generated significant increases in revenues, adjusted income from operations and medical customers. This growth is largely due to the continued execution on our strategy, including the acquisition of HealthSpring, and continued business growth in targeted markets of all of our ongoing segments. Shareholders' net income declined 9% in 2013 compared with 2012 due primarily to the $507 million after-tax charge associated with the February 4, 2013 reinsurance agreement with Berkshire. However, shareholders' net income in 2013 increased 17% over 2011 including the 2013 charge. The reinsurance transaction in 2013 aligned with our strategy of increasing financial flexibility by accomplishing an effective exit from the run-off GMDB and GMIB businesses. Cash flows from operating activities in 2013 declined by $1.6 billion compared with 2012 primarily due to payments totaling $2.2 billion made in 2013 to Berkshire in connection with the reinsurance transaction. See the Liquidity and Capital Resources section of this MD&A for additional information. During 2013, our unfunded pension liability decreased by approximately $1.0 billion to $611 million, largely due to an increase of 100 basis points in the assumed discount rate, strong asset performance and Company contributions of $195 million. See Note 9 to the Consolidated Financial Statements for additional information. In 2013, we repurchased 13.6 million shares for $1.0 billion. From January 1, 2014 through February 26, 2014 we repurchased 5.0 million shares for $411 million. On February 26, 2014, the Company's Board of Directors increased share repurchase authority by $500 million. Accordingly, the total remaining share repurchase authorization as of February 26, 2014 was $901 million. Shareholders' equity increased in 2013, reflecting strong shareholders' net income in 2013 and the favorable effects of the pension plan, partially offset by the effects of share repurchase and unrealized losses on fixed maturities driven by rising interest rates.



Our consolidated results of operations are discussed in detail on page 35 of this Form 10-K.

Industry Developments Sequestration On March 31, 2013, a sequestration order under the Budget Control Act of 2011 was issued that requires reductions in payments to Medicare Advantage ("MA") and Prescription Drug Program ("PDP") carriers. Effective April 1, 2013, payments to MA and PDP carriers were reduced by 2%, with the reduction scheduled to remain in place through 2023. The lower rates began impacting our revenue in the second quarter of 2013 and are expected to continue to reduce revenue into 2014 and beyond. The earnings impact is mitigated somewhat by reductions to medical cost reimbursements to health care professionals. Sequestration will continue to lower segment earnings in 2014 in the Global Health Care segment; however, the overall effect will depend on our ability to reduce medical cost reimbursements to health care professionals. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



Medicare Advantage Reimbursement Rates

On April 1, 2013, the Centers for Medicare and Medicaid Services (CMS) issued the final Announcement of Calendar Year 2014 Medicare Advantage Benchmark Rates and Payment Policies. We submitted bids to CMS in the second quarter of 2013 that incorporated the 2014 rates and that continue to provide programs with attractive benefits to seniors. We expect 2014 earnings in our Government operating segment to be lower than prior years. The magnitude of this earnings impact will depend largely on our ability to manage medical costs. On February 21, 2014, CMS issued its Advance Notice for Calendar Year 2015 (the "Notice"). The final terms are expected to be published on April 7, 2014. While the terms contained within the Notice are within the range of our expectations, there remain numerous open issues and substantial uncertainties regarding the final terms of the Notice. We expect that CMS will receive a significant number of comments from interested parties (including Cigna) prior to issuance of the final terms; however, there can be no assurance that CMS will amend its current positions. Given the uncertainty regarding the final terms of the Notice, we cannot reliably estimate the impact on our business, revenues or results of operations in 2015 and beyond; under certain circumstances, it is possible that the impact could be materially adverse. In addition, we expect to adjust our programs and services in response to the proposed 2015 terms.



Health Care Reform

For additional information regarding the specific provisions of Health Care Reform affecting us, see the "Regulation" section of this Form 10-K. Outlined below are the reported and expected future financial effects of various provisions of Health Care Reform.

Commercial minimum medical loss ratio ("MLR"). We record our rebate accrual based on estimated medical loss ratios calculated as prescribed by the U.S. Department of Health and Human Services ("HHS") using full-year premium and claim information by state and market segment for each legal entity that issues comprehensive medical coverage. In 2013, we accrued an estimated rebate of $12 million pre-tax ($8 million after-tax), compared with an accrual of $37 million pre-tax ($24 million after-tax) in 2012. We paid $15 million in 2013, lower than the estimated rebate accrual of $37 million, primarily due to refinements to the MLR rebate calculation, that also contributed to the lower 2013 rebate accrual when compared to 2012. Health insurance industry fee. This fee, totaling $8 billion for the industry in 2014 and increasing to $13.9 billion by 2017, will not be tax deductible. Our effective tax rate is expected to increase beginning in 2014 as a result of this fee. Our share of this industry fee will be determined based on our proportion of premiums to the industry total. The amount of this fee is expected to be approximately $230 million in 2014: $130 million related to our commercial business and $100 million related to our Medicare business. For our commercial business, we anticipate recovering most of the industry fee through rate increases, resulting in an immaterial effect on shareholders' net income. For our Medicare business, although we expect to partially mitigate the effect of the fee through benefit changes and prices, we anticipate that the earnings impact will be more significant than it will be for our commercial business. Reinsurance fee. Beginning in 2014, this fee will be a fixed dollar per customer levy on all commercial business, including ASO, and is tax deductible. It will be used to fund the reinsurance program for non-grandfathered individual business sold either on or off the public exchanges beginning in 2014. The amount of this fee is expected to be approximately $110 million in 2014. Because we anticipate recovering most of it through rate increases, the impact of this fee on shareholders' net income is not expected to be material. Medicare Advantage and Medicare Part D requirements beginning in 2014. Under the rules proposed by HHS, if the MLR for a Medicare Advantage or Medicare Part D contract is less than the required 85% minimum, the contractor is required to pay a penalty to CMS and could be subject to additional sanctions if the MLR continues to be less than 85% for successive years. We currently expect that our Medicare Advantage and Medicare Part D plan offerings will meet these MLR requirements. Public Health Exchanges. Beginning in 2014, we are offering coverage on five public health insurance exchanges (Arizona, Colorado, Florida, Tennessee, and Texas). The enrollment process began on October 1, 2013. Based on our preliminary enrollment data from the exchanges and the effect of the reinsurance, risk corridor and risk adjustment programs (see the "Regulation" section of this Form 10-K for additional information) we do not expect public exchange-based enrollments to have a material effect on our medical customer base, revenues, operating cash flows or results of operations in 2014.



Disability Claims Regulatory Matter

During the second quarter of 2013, we finalized an agreement with the Departments of Insurance for Maine, Massachusetts, Pennsylvania, Connecticut and California (together, the "monitoring states") related to our long-term disability claims handling practices. In connection with the terms of the agreement, the Company recorded a charge of $77 million before-tax ($51 million after-tax) in the first quarter of 2013. The charge is comprised of two elements: (1) $48 million of benefit costs and reserves from reassessed claims expected to be reopened, including $925,000 in fines, $750,000 in regulatory surcharges and $9.5 million in claims handling expenses; and (2) $29 million in additional costs for open claims as a result of the claims handling changes being implemented. This charge is reported in the Group Disability and Life segment. We will be subject to re-examination 24 months after the execution date of the agreement. If the monitoring states find material non-compliance with the terms of the agreement upon re-examination, we may be subject to additional fines or penalties. In addition to the monitoring states, most other jurisdictions have joined the agreement as participating, non-monitoring states.



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

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Operations

Consolidated Results of Operations

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Summarized below are our results of operations on a GAAP basis.

For the Years Ended December 31, Increase /(Decrease) Increase /(Decrease) Financial Summary (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Premiums and fees $ 28,976$ 26,187$ 18,966$ 2,789 11% $ 7,221 38% Net investment income 1,164 1,144 1,146 20 2 (2) - Mail order pharmacy revenues 1,827 1,623 1,447 204 13 176 12 Other revenues 200 121 244 79 65 (123) (50) Realized investment gains 213 44 62 169 384 (18) (29) Total revenues 32,380 29,119 21,865 3,261 11 7,254 33 Benefits and expenses 30,204 26,642 19,989 3,562 13 6,653 33 Income before income taxes 2,176 2,477 1,876 (301) (12) 601 32 Income taxes 698 853 615 (155) (18) 238 39 Net income 1,478 1,624 1,261 (146) (9) 363 29 Less: net income attributable to noncontrolling interests 2 1 1 1 100 - - Shareholders' net income $ 1,476$ 1,623$ 1,260$ (147) (9)% $ 363 29%



A reconciliation of shareholders' net income to adjusted income from operations follows:

For the Years Ended December 31,

Increase/(Decrease) Increase/(Decrease) Financial Summary (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Shareholders' net income $ 1,476$ 1,623$ 1,260$ (147) (9)% $ 363 29% Less: realized investment gains, net of taxes 141 31 41 110 355 (10) (24) Segment earnings 1,335 1,592 1,219 (257) (16) 373 31 Less: GMIB and special items (after-tax): Results of GMIB business 25 29 (135) (4) 164 Costs associated with PBM services agreement (24) - - (24) - Charge related to reinsurance transaction (See Note 7 to the Consolidated Financial Statements) (507) - - (507) - Charge for disability claims regulatory matter (See Note 23 to the Consolidated Financial Statements) (51) - - (51) - Charges for organizational efficiency plans (See Note 6 to the Consolidated Financial Statements) (40) (50) - 10 (50) Charges associated with litigation matters (See Note 23 to the Consolidated Financial Statements) - (81) - 81 (81) Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements) - (40) (31) 40 (9) Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) - - 24 - (24) ADJUSTED INCOME FROM OPERATIONS $ 1,932$ 1,734$ 1,361$ 198 11% $ 373 27% Other Key Consolidated Financial Data Global medical customers (in thousands) 14,217 14,045 12,680 172 1% 1,365 11% Effective tax rate 32.1% 34.4% 32.8% (2.3)% 1.6% CIGNA CORPORATION - 2013 Form 10-K 35



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



Consolidated Results of Operations: 2013 Compared to 2012 and 2012 Compared to 2011



Revenues: The components of the revenue increases are discussed further below:



Premiums and Fees. The increase in 2013 compared with 2012 reflected continued customer growth in targeted markets of all of the ongoing segments, and, to a lesser extent, acquisitions in late 2012 in the Global Supplemental Benefits segment. In 2012, the increase over 2011 was largely due to contributions from the 2012 HealthSpring acquisition. Continued customer growth in the targeted market segments also contributed to the strong premium growth in 2012.





Net Investment Income. The increase in 2013, compared with 2012, primarily reflected higher yields driven in part by higher partnership income, partially offset by lower average investment assets primarily due to sales of assets to fund the reinsurance transaction with Berkshire. In 2012, net investment income remained flat compared with 2011, primarily reflecting higher average investment assets and improved results from partnership investments offset by lower reinvestment yields.





Mail Order Pharmacy Revenues. Increases in each of 2013 and 2012 compared with the prior year, primarily reflected higher prescription volume for specialty medications (injectibles). Other Revenues. Prior to the February 4, 2013 reinsurance transaction with Berkshire, other revenues included the results of a hedge program in the Run-off Reinsurance segment related to the GMDB and GMIB businesses. Other revenues included pre-tax losses of $39 million in 2013, $119 million in 2012 and $4 million in 2011 associated with the hedge program. Excluding the impact of the hedge program, other revenues were flat in 2013, compared with 2012, and decreased 3% in 2012 compared with 2011.





Realized Investment Results. The significant increase in 2013, compared with 2012, primarily resulted from gains on the sales of real estate joint ventures and higher gains on sales of fixed maturities largely to fund the February 4, 2013 reinsurance transaction. In 2012 realized investment results were lower than in 2011, primarily due to the absence of gains on sales of real estate held in joint ventures reported in 2011. See Note 14 to the Consolidated Financial Statements for additional information





Benefits and expenses. The increase in 2013 compared with 2012 reflected continued business growth in the ongoing segments and the charge associated with the reinsurance transaction. In 2012, the increase compared with 2011 reflected the acquisition of HealthSpring and continued business growth in the ongoing segments. Shareholders' net income. The decrease in 2013, compared with 2012 primarily reflects the $507 million after-tax charge associated with the February 4, 2013 reinsurance agreement with Berkshire, partially offset by an increase in adjusted income from operations. In 2012, the increase in shareholders' net income compared with 2011, resulted primarily from substantially higher adjusted income from operations. Adjusted income from operations. The increase in 2013 compared with 2012 was largely attributable to earnings growth in all of our ongoing business segments (Global Health Care, Global Supplemental Benefits, and Group Disability and Life). See the segment discussions later in this MD&A for further information. In 2012, adjusted income from operations increased 27% compared with 2011, largely attributable to earnings contributions from HealthSpring, as well as overall revenue growth in the other ongoing operating segments and lower charges related to the GMDB business.





The consolidated effective tax rate decreased in 2013 compared with 2012, primarily driven by the favorable effect of the completion of the 2009-2010 tax audits in 2013 and recognizing tax benefits in certain foreign operations. In 2012, the effective tax rate increased reflecting the acquisition of HealthSpring and the absence of the favorable impact of the completion of 2007-2008 tax audits in 2011.





Global medical customers increased in 2013 compared with 2012 and in 2012 compared with 2011 primarily driven by continued growth in the regional, select, individual, and government market segments. In 2012, the HealthSpring acquisition contributed to the increase.

Liquidity and Capital Resources

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Financial Summary (In millions) 2013 2012 2011 Short-term investments $ 631$ 154$ 225 Cash and cash equivalents $ 2,795$ 2,978$ 4,690 Short-term debt $ 233$ 201$ 104 Long-term debt $ 5,014$ 4,986$ 4,990 Shareholders' equity $ 10,567$ 9,769$ 7,994 The increase in short-term investments in 2013 compared with 2012 was driven by investment of increased cash levels in liquid commercial paper and United States Government obligations. Liquidity



We maintain liquidity at two levels: the subsidiary level and the parent company level.

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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.

Our 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 the parent company.

Liquidity requirements at the parent company level generally consist of:



debt service and dividend payments to shareholders; and



pension plan funding.

The parent company 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) 2013 2012



2011

Net cash provided by operating activities $ 719$ 2,350



$ 1,491

Net cash provided by (used in) investing activities $ 15$ (3,857)

$ (1,270)

Net cash provided by (used in) financing activities $ (930)$ (228)

$ 2,867

Cash flows from operating activities consist of cash receipts and disbursements for premiums and fees, mail order pharmacy, other revenues, investment income, taxes, benefits and expenses, and, prior to February 4, 2013, gains and losses recognized in connection with our GMDB and GMIB equity hedge programs. Because certain income and expense transactions do not generate cash, and because cash transactions related to revenues and expenses may occur in periods different from when those revenues and expenses are recognized in shareholders' net income, cash flows from operating activities can be significantly different from shareholders' net income.



Cash flows from investing activities generally consist of net investment purchases or sales and net purchases of property and equipment including 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 company level, proceeds on the issuance of common stock resulting from stock option exercises, and stock repurchases. In addition, the subsidiaries report net deposits and withdrawals to and from investment contract liabilities (that include universal life insurance liabilities) because such liabilities are considered financing activities with policyholders. Operating activities Cash provided by operating activities declined by $1.6 billion in 2013 compared with 2012 primarily due to payments totaling $2.2 billion made in 2013 to Berkshire in connection with the reinsurance transaction. Cash provided by operating activities in 2012 increased by $0.9 billion compared with 2011, primarily as a result of strong earnings growth in our ongoing business segments and the absence of claim run-out from the Medicare IPFFS business exited in 2011. Investing activities Cash flows from investing activities increased by $3.9 billion in 2013 compared with 2012 primarily driven by the absence of the 2012 payment to acquire HealthSpring. Excluding that acquisition, cash flows from investing activities in 2012 increased by $0.6 billion compared with 2011 primarily due to lower net purchases of fixed maturity investments.



Financing activities

Cash used in financing activities in 2013 increased by $0.7 billion compared with 2012 primarily due to higher repurchases of common stock. Cash provided by financing activities in 2011 was $2.9 billion, primarily consisting of net proceeds from long-term debt that was issued to finance the 2012 HealthSpring acquisition. Share repurchase We maintain a share repurchase program that was authorized by our Board of Directors. The decision to repurchase shares depends on market conditions and alternate uses of capital. We have, 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. We suspend activity under this program from time to time and also remove such suspensions, generally without public announcement. In 2013 we repurchased 13.6 million shares for $1.0 billion. From January 1, 2014 through February 26, 2014 we repurchased 5.0 million shares for $411 million. On February 26, 2014, the Company's Board of Directors increased share repurchase authority by $500 million. Accordingly, the total remaining share repurchase authorization as of February 26, 2014 was $901 million. In 2012 the Company repurchased 4.4 million shares for $208 million and in 2011 repurchased 5.3 million shares for $225 million. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Interest Expense Interest expense on long-term debt, short-term debt and capital leases was as follows: (In millions) 2013 2012 2011 Interest expense $ 270$ 268$ 202



The increase in interest expense in 2012 was primarily due to the issuance of $2.1 billion of long-term debt in the fourth quarter of 2011 to fund the acquisition of HealthSpring, partially offset by a lower weighted average interest rate reflecting the more favorable rates of this debt issued. The weighted average interest rate for outstanding short-term debt (primarily commercial paper) was 0.41% at December 31, 2013 and .47% at 2012.

Liquidity and Capital Resources Outlook

At December 31, 2013, there was approximately $760 million in cash and short-term investments available at the parent company level. In 2014, the parent company's combined cash obligations are expected to be approximately $480 million for commercial paper maturities, interest and pension contributions.

We expect, based on the parent company's current cash position, current projections for subsidiary dividends, and the ability to refinance its commercial paper borrowing, to have sufficient liquidity to meet the obligations discussed above.

However, our cash projections may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings, or we experience material adverse effects from one or more risks or uncertainties described more fully in the Risk Factors section of this Form 10-K. In those cases, we expect 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 $1.2 billion from its insurance subsidiaries without prior state approval. As of December 31, 2013, the parent company had no net intercompany loan balance with its insurance subsidiaries. Alternatively, to satisfy parent company liquidity requirements we may use short-term borrowings, such as the commercial paper program, the committed revolving credit and letter of credit agreement of up to $1.5 billion subject to the maximum debt leverage covenant in its line of credit agreement. As of December 31, 2013, we had $1.5 billion of borrowing capacity under the credit agreement. Within the maximum debt leverage covenant in the line of credit agreement, we have an additional $6.0 billion of borrowing capacity in addition to the $5.2 billion of debt outstanding.



Though we believe we have adequate sources of liquidity, continued significant disruption or volatility in the capital and credit markets could affect our ability to access those markets for additional borrowings or increase costs associated with borrowing funds.

We maintain a capital management strategy to indefinitely reinvest the earnings of certain of our foreign operations overseas. Indefinitely reinvested earnings are generally deployed in these countries, and other foreign jurisdictions in support of the liquidity and capital needs of our foreign operations, where possible. As of December 31, 2013 indefinitely reinvested earnings were approximately $1.1 billion. Approximately $176 million of cash and cash equivalents held in these countries would, if repatriated, be subject to a charge representing the difference between the U.S. and foreign tax rates. This strategy does not materially limit our ability to meet our liquidity and capital needs in the United States. Cash and cash equivalents in foreign operations are held primarily to meet local liquidity and surplus needs with excess funds generally invested in longer duration high quality securities. Unfunded Pension Plan Liability. As of December 31, 2013, our unfunded pension liability was $611 million, a decrease of approximately $1.0 billion from December 31, 2012, reflecting an increase in the assumed discount rate of 100 basis points, strong asset returns, and pension contributions of $195 million in 2013. We expect to make pension contributions in 2014 required under the Pension Protection Act of 2006 of approximately $100 million. As a result of the improved funding position, we do not expect to make voluntary contributions in 2014. In addition, during 2013, we increased our asset allocation to fixed income investments and reduced our allocation to domestic stocks in order to reduce the investment risk in the pension plan. Solvency II. Our businesses in the European Union will be subject to the directive on insurance regulation, solvency and governance requirements known as Solvency II. This directive will impose economic risk-based solvency and governance requirements and supervisory rules and becomes effective in 2016, although certain EU country regulators are requiring companies to demonstrate technical capability and comply with increased capital levels in advance of their effective date. Our European insurance companies are capitalized at levels consistent with projected Solvency II requirements and in compliance with anticipated governance and technical capability requirements.



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



Guarantees and Contractual Obligations

We are contingently liable for various contractual obligations entered into in the ordinary course of business. The maturities of our primary contractual cash obligations, as of December 31, 2013, are estimated to be as follows: (In millions, on an undiscounted Less than 1-3 4-5 After 5 basis) Total 1 year years years years On-Balance Sheet: Insurance liabilities: Contractholder deposit funds $ 7,080$ 713$ 971$ 802$ 4,594 Future policy benefits 11,815 364 917 1,013 9,521 Global Health Care medical claims payable 2,064 1,995 26 11 32 Unpaid claims and claims expenses 4,745 1,448 914 624 1,759 Short-term debt 234 234 - - - Long-term debt 8,732 263 1,192 852 6,425 Other long-term liabilities 831 275 120 87 349 Off-Balance Sheet: Purchase obligations 878 525 218 97 38 Operating leases 641 131 232 134 144 TOTAL $ 37,020$ 5,948$ 4,590$ 3,620$ 22,862 The expected future cash flows for GMDB and GMIB contracts included in the table above (within future policy benefits and other long-term liabilities) do not consider any of the related reinsurance arrangements. 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 $19 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. We manage our 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, as well as the reinsured workers' compensation, personal accident and supplemental benefits businesses, are excluded from the table above as net cash flows associated with them are not expected to impact us. The total amount of these reinsured reserves excluded is approximately $6 billion.





Short-term debt represents commercial paper, current maturities of long-term debt, 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 IT network storage, servers and equipment. Other long-term liabilities. These items are presented in accounts payable, accrued expenses and other liabilities in our 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 $82 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. Our best estimate is that contributions to the qualified domestic pension plans during 2014 will be approximately $100 million. We expect to make payments subsequent to 2014 for these obligations, however subsequent payments have been excluded from the table as their timing is based on plan assumptions that may materially differ from actual activities. See Note 9 to the Consolidated Financial Statements for further information on pension and other postretirement benefit obligations.



The above table also does not contain $17 million of liabilities for uncertain tax positions because we 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, 2013 for further information.

CIGNA CORPORATION - 2013 Form 10-K 39



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet: Purchase obligations. As of December 31, 2013, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows: (In millions) Fixed maturities $ 56 Commercial mortgage loans 7 Real estate 3 Limited liability entities (other long-term investments) 643 Total investment commitments 709 Future service commitments 169 TOTAL PURCHASE OBLIGATIONS $ 878



We had commitments to invest in limited liability entities that hold real estate, loans to real estate entities or securities. See Note 11(D) to the Consolidated Financial Statements for additional information.

Our estimated future service commitments primarily represent contracts for certain outsourced business processes and IT maintenance and support. We generally have the ability to terminate these agreements, but do not anticipate doing so at this time. Purchase obligations exclude contracts that are cancelable without penalty and 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 We are 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.



Critical Accounting Estimates

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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 our consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of our 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 our Consolidated Financial Statements, including estimates of liabilities for future policy benefits, as well as estimates with respect to 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 our Consolidated Financial Statements are appropriate. However, if actual experience differs from the assumptions used in estimating amounts reflected in our Consolidated Financial Statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our liquidity and financial condition.



See Note 2 to the Consolidated Financial Statements for further information on significant accounting policies.

40 CIGNA CORPORATION - 2013 Form 10-K

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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

of



Operations

Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used Goodwill If we do not achieve our earnings At the acquisition date, goodwill objectives or the cost of



capital

represents the excess of the cost of rises significantly, the assumptions businesses acquired over the fair

and estimates underlying these value of their net assets. impairment evaluations could be We completed our annual evaluations of adversely affected and result in goodwill for impairment during the future impairment charges that would third quarter of 2013. These negatively impact our operating evaluations were performed at the results. reporting unit level, based on The fair value estimate of our



discounted cash flow analyses. The Government reporting unit could evaluations indicated that no

decrease by approximately 30%



before

impairment was required. an indication of impairment of Consistent with prior years, fair goodwill occurs. Future changes in the value of a reporting unit was funding for our Medicare programs by estimated using models and assumptions the federal government could that we believe a hypothetical market substantially reduce participant would use to determine a Cigna-HealthSpring's revenues and current transaction price. The profitability and have a



significant

significant assumptions and estimates impact on the fair value of the used in determining fair value include Government operating segment. the discount rate and future cash

The fair value estimates of our



flows. A range of discount rates was remaining reporting units could used, corresponding with the reporting decrease by approximately 25% to 85% unit's weighted average cost of

before an indication of impairment of capital, consistent with that used for goodwill occurs. These outcomes were investment decisions considering the derived by determining the magnitude specific and detailed operating plans of changes to certain assumptions and and strategies within the reporting estimates necessary for the estimated units. Projections of future cash fair value of reporting units



to

flows were consistent with our annual approach their carrying values. planning process for revenues, claims, operating expenses, taxes, capital levels and long-term growth rates. Our Cigna-HealthSpring business (reported in the Government operating segment that is also the reporting unit) contracts with CMS and various state governmental agencies to provide managed health care services, including Medicare Advantage plans and Medicare-approved prescription drug plans. Estimated future cash flows for this business incorporated the potential effects of sequestration and the Medicare Advantage reimbursement rates for 2014 and beyond as discussed in the "Overview" section of this MD&A. Revenues from the Medicare programs are dependent, in whole or in part, upon annual funding from the federal government through CMS. Funding for these programs is dependent on many factors including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal level and general political issues and priorities. Goodwill as of December 31 was as follows (in millions): 2013 - $6,029 2012 - $6,001 See Notes 2(H) and 8 to the Consolidated Financial Statements for additional discussion of our goodwill. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions



Used

Accounts payable, accrued expenses and Using past experience, we expect that other liabilities - pension it is reasonably possible that a liabilities favorable or unfavorable change in These liabilities are estimates of the assumptions for the discount rate or present value of the qualified and expected return on plan assets of 50 nonqualified pension benefits to be basis points could occur. An paid (attributed to employee service unfavorable change is a decrease in to date) net of the fair value of plan these key assumptions with resulting assets. The accrued pension benefit impacts as discussed below. liability as of December 31 was as If discount rates for the qualified follows (in millions): and nonqualified pension plans decreased by 50 basis points: 2013 - $611 the accrued pension benefit liability 2012 - $1,602 would increase by approximately See Note 9 to the Consolidated $185 million as of December 31,



2013

Financial Statements for assumptions resulting in an after-tax decrease to and methods used to estimate pension shareholders' equity of approximately liabilities. $120 million as of December 31, 2013. annual pension costs for 2014 would decrease by approximately $5 million, after-tax; and If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2014 would increase by approximately $10 million after-tax. If we used the market value of assets to measure pension costs as opposed to the market-related value, annual pension cost for 2013 would decrease by approximately $20 million after-tax. If the December 31, 2013 fair values of domestic qualified plan assets decreased by 10%, the accrued pension benefit liability would increase by approximately $405 million as of December 31, 2013 resulting in an after-tax decrease to shareholders' equity of approximately $265 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. Global Health Care medical claims In 2013, actual experience



differed

payable from our key assumptions as of



Medical claims payable for the Global December 31, 2012, resulting in Health Care segment include both

$182 million of favorable



incurred

reported claims and estimates for claims related to prior years'



medical

losses incurred but not yet reported. claims payable or 1.3% of the current Liabilities for medical claims payable year incurred claims as reported in as of December 31 were as follows (in 2012. In 2012, actual experience millions): differed from our key assumptions as of December 31, 2011, resulting in 2013 - gross $2,050; net $1,856$200 million of favorable



incurred

claims related to prior years' medical 2012 - gross $1,856; net $1,614 claims, or 2.2% of the current



year

These liabilities are presented above incurred claims reported in 2011. both gross and net of reinsurance and Specifically, the favorable impact is other recoverables and generally due to faster than expected



completion

exclude amounts for administrative factors and lower than expected services only business.

medical cost trends, both of



which

See Notes 2 and 5 to the Consolidated included an assumption for moderately Financial Statements for additional adverse experience. information regarding assumptions and The impact of this favorable prior methods used to estimate this year development was an increase to liability. shareholders' net income of $77 million after-tax ($119 million pre-tax) in 2013. 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 as explained in Note 5 to the Consolidated Financial Statements.



42 CIGNA CORPORATION - 2013 Form 10-K

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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

of



Operations

Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used Valuation of fixed maturity Typically, the most significant input investments in the measurement of fair value is Most fixed maturities are classified the market interest rate used to as available for sale and are carried discount the estimated future cash at fair value with changes in fair flows from the instrument. Such market value recorded in accumulated other rates are derived by calculating the comprehensive income (loss) within appropriate spreads over comparable shareholders' equity. U.S. Treasury securities, based on the Fair value is defined as the price at credit quality, industry and structure which an asset could be exchanged in of the asset. an orderly transaction between market If the spreads used to calculate fair participants at the balance sheet value increased by 100 basis



points,

date. the fair value of the total



fixed

Determining fair value for a financial maturity portfolio of $16.5 billion instrument requires management

would decrease by approximately judgment. The degree of judgment $900 million. involved generally correlates to the level of pricing readily observable in the markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select, based on an understanding of the issuer, the structure of the security and overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. Approximately two-thirds of our fixed maturities are public securities, and one-third are private placement securities. See Note 10 to the Consolidated Financial Statements for a discussion of our fair value measurements and the procedures performed by management to determine that the amounts represent appropriate estimates.



Assessment of "other-than-temporary" For all fixed maturities with cost in impairments of fixed maturities

excess of their fair value, if



this

To determine whether a fixed excess was determined to be



maturity's decline in fair value below other-than-temporary, shareholders' its amortized cost is other than

net income for the year ended temporary, we must evaluate the December 31, 2013 would have



decreased

expected recovery in value and its by approximately $65 million intent to sell or the likelihood of a after-tax. required sale of the fixed maturity prior to an expected recovery. To make this determination, we consider a number of general and specific factors including the regulatory, economic and market environments, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer. See Notes 2 (C) and 11 to the Consolidated Financial Statements for additional discussion of our review of declines in fair value, including information regarding our accounting policies for fixed maturities.



Segment Reporting

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The following section of this MD&A discusses the results of each of our reporting segments. We measure the financial results of our segments using "segment earnings (loss)", defined as shareholders' net income (loss) before after-tax realized investment results. In the following segment discussions, we also present information using "adjusted income (loss) from operations", defined as segment earnings (loss) excluding special items and results of the GMIB business. Adjusted income (loss) from operations is another measure of profitability used by our management because it presents the underlying results of operations of our 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 that is shareholders' net income. We exclude special items because management does not believe they are representative of our underlying results of operations. We also exclude CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations the results of the GMIB business because, prior to the reinsurance transaction with Berkshire on February 4, 2013, the changes in the fair value of GMIB assets and liabilities were volatile and unpredictable.



The tables presented below summarize results from operations by segment.

For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) Shareholders' Net Income (In millions) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Segment earnings (loss) Global Health Care $ 1,517$ 1,418$ 1,105$ 99 7% $ 313 28% Global Supplemental Benefits 175 142 97 33 23 45 46 Group Disability and Life 259 279 295 (20) (7) (16) (5) Run-off Reinsurance (488) - (183) (488) - 183 100 Other Operations 94 82 89 12 15 (7) (8) Corporate (222) (329) (184) 107 33 (145) (79) Total 1,335 1,592 1,219 (257) (16) 373 31 Net realized investment gains, net of taxes 141 31 41 110 355 (10) (24) Shareholders' net income $ 1,476$ 1,623$ 1,260$ (147) (9)% $ 363 29% For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) Adjusted Income (Loss) From Operations (In millions) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Global Health Care $ 1,572$ 1,480$ 1,104$ 92 6% $ 376 34% Global Supplemental Benefits 183 148 100 35 24 48 48 Group Disability and Life 311 281 290 30 11 (9) (3) Run-off Reinsurance (6) (29) (48) 23 79 19 40 Other Operations 94 82 85 12 15 (3) (4) Corporate (222) (228) (170) 6 3 (58) (34) Total $ 1,932$ 1,734$ 1,361$ 198 11% $ 373 27% Global Health Care Segment



We measure the operating effectiveness of the Global Health Care segment using the following key factors:



segment earnings and adjusted income from operations;

customer growth;



sales of specialty products;



operating expense as a percentage of segment revenues (operating expense ratio); and



medical expense as a percentage of premiums (medical care ratio or "MCR") in the guaranteed cost and Medicare businesses.

44 CIGNA CORPORATION - 2013 Form 10-K

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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations For the Years Ended December 31,



Increase/(Decrease) Increase/(Decrease)

Financial Summary (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011



Premiums and fees $ 22,933$ 20,973$ 14,443$ 1,960 9% $ 6,530 45% Net investment income

325 259 263 66 25 (4) (2) Mail order pharmacy revenues 1,827 1,623 1,447 204 13 176 12 Other revenues 211 225 236 (14) (6) (11) (5) Segment revenues 25,296 23,080 16,389 2,216 10 6,691 41 Mail order pharmacy cost of goods sold 1,509 1,328 1,203 181 14 125 10 Benefits and other expenses 21,448 19,541 13,465 1,907 10 6,076 45



Benefits and expenses 22,957 20,869 14,668 2,088 10 6,201 42

Income before taxes 2,339 2,211 1,721 128 6 490 28 Income taxes 822 793 616 29 4 177 29 SEGMENT EARNINGS 1,517 1,418 1,105 99 7 313 28

Less: special items (after-tax) included in segment earnings: - Charge for organizational efficiency plan (See Note 6 to the Consolidated Financial Statements) (31) (42) - 11 (42) Costs associated with PBM services agreement (24) - - (24) - Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements) - (7) - 7 (7) Charge related to litigation matter (See Note 23 to the Consolidated Financial Statements) - (13) - 13 (13) Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) - - 1 - (1) ADJUSTED INCOME FROM OPERATIONS $ 1,572$ 1,480$ 1,104 $



92 6% $ 376 34%

Realized investment gains, net of taxes $ 73 $ 9 $ 23 $



64 -% $ (14) (61)%

Effective tax rate 35.1% 35.9% 35.8% (0.8)% 0.1%



Earnings Discussion: 2013 compared to 2012

The increase in Global Health Care's segment earnings and adjusted income from operations in 2013, as compared with 2012, reflected revenue growth from a higher customer base and rate increases consistent with underlying medical cost trends. In 2013, both measures also benefited from increased specialty contributions and higher net investment income. These favorable effects were partially offset by a higher MCR in Medicare Advantage in 2013 driven by lower per member government reimbursements and higher inpatient and outpatient medical costs. In 2013, results also included higher operating expenses associated with customer growth and enhancements to our capabilities, partially offset by operating cost efficiencies.



Earnings Discussion: 2012 compared to 2011

Global Health Care's segment earnings and adjusted income from operations increased significantly in 2012, as compared with 2011. This increase reflected the timing of the HealthSpring acquisition in 2012 and Commercial revenue growth driven by a higher ASO customer base. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues



The table below shows premiums and fees for the Global Health Care segment:

(In millions) 2013 2012 2011 Medical: Guaranteed cost $ 4,463$ 4,256$ 4,176 Experience-rated 2,292 2,022 1,934 Stop loss 1,907 1,672 1,451 International health care 1,752 1,648 1,344 Dental 1,139 1,005 894 Medicare 5,639 4,969 489 Medicaid 317 207 - Medicare Part D 1,387 1,421 685 Other 730 677 600 Total medical 19,626 17,877 11,573 Fees 3,307 3,096 2,870 TOTAL PREMIUMS AND FEES $ 22,933$ 20,973$ 14,443 Premiums and fees increased in 2013, compared with 2012, in U.S. Commercial due to customer growth and rate increases consistent with underlying medical cost trends. In addition, Medicare Advantage premiums were higher due to timing of the HealthSpring acquisition and customer growth. Premiums and fees increased in 2012 compared with 2011, primarily reflecting the HealthSpring acquisition. U.S. Commercial growth was driven by rate increases consistent with underlying medical cost trends, and ASO customer growth. International health care premiums increased primarily due to the conversion of Vanbreda business from service to risk. Net investment income increased in 2013, compared with 2012, reflecting higher assets and higher income from partnership investments. In 2012, net investment income decreased compared with 2011 reflecting lower yields, partially offset by the impact of the HealthSpring acquisition and higher income from partnership investments. Mail order pharmacy revenues increased in each of 2013 and 2012, compared with each prior year, primarily reflecting higher prescription volume for specialty medications (injectibles). Benefits and Expenses



Global Health Care segment benefits and expenses consist of the following:

(In millions) 2013 2012



2011

Mail order pharmacy cost of goods sold $ 1,509$ 1,328



$ 1,203

Medical claims expense 15,867 14,228



9,125

Operating expenses, excluding special items 5,497 5,217



4,340

Special items 84 96



-

Total benefits and other expenses 21,448 19,541



13,465

TOTAL BENEFITS AND EXPENSES $ 22,957$ 20,869



$ 14,668

Selected ratios

Guaranteed cost medical care ratio 81.5% 80.2%



79.7%

Medicare Advantage medical care ratio 84.8% 80.9%



89.6%

Medicare Part D medical care ratio 82.3% 81.2%



83.4%

Operating expense ratio - including special items 22.1% 23.0%

26.5%

Operating expense ratio - excluding special items 21.7% 22.6%

26.5%

46 CIGNA CORPORATION - 2013 Form 10-K

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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

of



Operations

Medical claims expense increased 12% in 2013 compared with 2012, primarily due to medical cost inflation, the timing of the HealthSpring acquisition, and customer growth. Higher Medicare Advantage inpatient and outpatient medical costs also contributed to the increase.

Medical claims expense increased 56% in 2012 compared with 2011, primarily reflecting the acquisition of HealthSpring, conversion of Vanbreda business from service to risk, and medical cost inflation.

Operating expenses increased 5% in 2013 compared with 2012, primarily reflecting customer growth, increased investments, including costs associated with our new PBM arrangement, and the timing of the HealthSpring acquisition, partially offset by operating cost efficiencies. Operating expenses increased in 2012 compared with 2011 driven by the acquisition of HealthSpring.



The operating expense ratio, calculated as total operating expenses divided by segment revenues, is one measure of the segment's overall operating efficiency.

The operating expense ratio decreased in both 2013 and in 2012, compared with the prior year. These decreases were primarily driven by revenue growth and operating cost efficiencies partially offset by higher investments, including 2013 costs associated with our new PBM arrangement. The 2012 operating expense ratio, compared with 2011, benefited from additional HealthSpring business. Because the HealthSpring business is fully insured, it has a substantially lower operating expense ratio compared to our commercial business as approximately 80% of our commercial medical customers are in ASO arrangements.



Effective tax rate. The slight decline in the effective tax rate in 2013 compared with 2012 primarily reflected the recognition of tax benefits in certain of the segment's foreign operations. In 2012, the segment's effective tax rate was essentially flat compared with 2011.

Other Items Affecting Health Care Results

Global Health Care Medical Claims Payable

Medical claims payable increased 10% in 2013 compared with 2012, primarily driven by growth in the stop loss and HealthSpring books of business. Medical claims payable increased 42% in 2012 compared with 2011, primarily reflecting the acquisition of HealthSpring.



Medical Customers

A medical customer is defined as a person meeting any one of the following criteria:



is covered under an insurance policy or service agreement issued by the Company;



has access to the Company's provider network for covered services under their medical plan; or



has medical claims that are administered by the Company.

As of December 31, estimated medical customers were as follows:

(In thousands) 2013 2012 2011 Commercial Risk: U.S. Guaranteed cost 1,099 1,135 1,091 U.S. Experience-rated 794 786 798 International health care - Risk 742 744 582 Total commercial risk 2,635 2,665 2,471 Medicare 467 426 44 Medicaid 25 23 - Total government 492 449 44 Total risk 3,127 3,114 2,515 Service, including international health care 11,090



10,931 10,165

TOTAL MEDICAL CUSTOMERS 14,217 14,045 12,680 Less: voluntary / limited benefits customers 139



189 213

Total medical customers excluding voluntary / limited benefits customers 14,078 13,856 12,467



Medical customers increased 1% in 2013 compared to 2012, primarily reflecting continued ASO customer growth due to strong retention and sales in targeted market segments.

Medical customers increased 11% in 2012 compared to 2011, primarily reflecting ASO customer growth driven by strong retention and sales in targeted market segments, the impact of the HealthSpring acquisition, and growth in the international health care business.

Global Supplemental Benefits Segment

Segment Description

The key factors affecting segment earnings and adjusted income from operations for this segment are:



premium growth, including new business and customer retention;

CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



benefits expense as a percentage of earned premium (loss ratio);



operating expense as a percentage of earned premium (expense ratio); and



the impact of foreign currency movements.

Throughout this discussion, prior period currency adjusted income from operations, revenues, and benefits and expenses are being calculated by applying the current period's exchange rates to reported results in the prior period. A strengthening U.S. Dollar against foreign currencies will decrease segment earnings, while a weakening U.S. Dollar produces the opposite effect. As described in Note 3 to the Consolidated Financial Statements, the Global Supplemental Benefits segment acquired two businesses during the second half of 2012: Great American Supplemental Benefits and Finans Emeklilik (also referred to as the "Turkey JV"). Collectively, throughout this discussion these two transactions are referred to as "the acquisitions". Results of Operations Financial For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) Summary (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Premiums and fees $ 2,513$ 1,984$ 1,528$ 529 27% $ 456 30% Net investment income 100 90 83 10 11 7 8 Other revenues 26 21 15 5 24 6 40 Segment revenues 2,639 2,095 1,626 544 26 469 29 Benefits and expenses 2,412 1,916 1,492 496 26 424 28 Income before taxes 227 179 134 48 27 45 34 Income taxes 50 36 36 14 39 - - Income attributable to redeemable noncontrolling interest 2 1 - 1 100 1 Income attributable to other noncontrolling interest - - 1 - (1) (100) SEGMENT EARNINGS 175 142 97 33 23 45 46 Less: special items (after-tax) included in segment earnings: Charges for organizational efficiency plans (See Note 6 to the Consolidated Financial Statements) (8) (6) - (2) (6) Costs associated with acquisitions (See Note 3 to the Consolidated Financial Statements) - - (3) - 3 ADJUSTED INCOME FROM OPERATIONS $ 183$ 148$ 100$ 35 24% $ 48 48% Adjusted income from operations, using actual 2013 currency exchange rates $ 183$ 152$ 101$ 31 20% $ 51 50% Realized investment gains, net of taxes $ 5 $ 1$ 1$ 4 400% $ - -% Effective tax rate 22.0% 20.1% 26.9% 1.9%

(6.8)%



Earnings Discussion: 2013 compared to 2012

The increase in segment earnings (as well as the increase in adjusted income from operations) was primarily driven by business growth, primarily in South Korea, lower acquisition costs in Europe reflecting a decision to cease selling activities in certain markets, and earnings of the acquisitions during the second half of 2012, partially offset by higher acquisition and benefits expenses.



Earnings Discussion: 2012 compared to 2011

The increase in segment earnings (as well as the increase in adjusted income from operations) was primarily driven by strong revenue growth, primarily in South Korea and, to a lesser extent, margin improvement largely attributable to disciplined management of solicitation spending.



Revenues

Premiums and fees increased in both 2013 and 2012 compared with the comparable prior year. When applying actual 2013 currency exchange rates to 2012 and 2011 results, premiums and fees increased by 25% in 2013 and 32% in 2012. These increases are primarily attributable to the acquisitions, and to a lesser extent, strong persistency, and new sales growth, particularly in South Korea.



Net investment income increased in 2013 compared with 2012, primarily due to the acquisitions in the second half of 2012. In 2012, net investment income increased compared with 2011, primarily due to asset growth in South Korea.

Benefits and Expenses

Benefits and expenses increased in each of 2013 and 2012, compared with the comparable prior year. Excluding the organizational efficiency plan charges from 2013 and 2012 and applying actual 2013 currency exchange rates to 2012 results, benefits and expenses increased by 25%. These increases were primarily due to the acquisitions and business growth. Excluding the special items in the table above and applying actual 2013 currency exchange rates to results, benefits and expenses increased 30% in 2012, compared with 2011, primarily due to the acquisitions and business growth.



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

of



Operations

Loss ratios increased in 2013 and 2012 compared with each prior year, reflecting the inherently higher loss ratios of the acquisitions.

Policy acquisition expenses increased in 2013 and 2012, compared with the prior year, reflecting the acquisitions and business growth, partially offset by lower acquisition costs in Europe reflecting a decision to cease selling activities in certain markets during 2012. Excluding the realignment and efficiency charges from 2013 and 2012, expense ratios decreased in 2013 compared with 2012. The decrease was primarily driven by the impact of the lower expense ratios associated with the Great American Supplemental Benefits business, partially offset by strategically planned investment spending to support future business growth. Excluding special items, expense ratios increased in 2012 compared with 2011 primarily driven by the impact of higher expense ratios associated with FirstAssist. The increase in the effective tax rate in 2013 compared with 2012 and the decrease in 2012 compared with 2011 are largely due to implementing a capital management strategy in 2013 and 2012. Excluding those effects, the Global Supplemental Benefits segment's effective tax rate was 24.0% in 2013, 24.6% in 2012, and 27.3% in 2011. The continued decline in these rates reflects the favorable effects of our capital management strategy.



Other Items Affecting Global Supplemental Benefits Results

For our Global Supplemental Benefits segment, South Korea is the single largest geographic market, generating 51% of segment revenues and 87% of the segment earnings in 2013. Due to the concentration of business in South Korea, the Global Supplemental Benefits segment is exposed to potential losses resulting from economic, regulatory and geopolitical developments in that country, as well as foreign currency movements affecting the South Korean currency, that could have a significant impact on the segment's results and our consolidated financial results. In 2013, our operations in South Korea represented 4% of Cigna's total consolidated revenues and 10% of shareholders' net income.



Group Disability and Life Segment

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 Financial For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) Summary (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Premiums and fees $ 3,425$ 3,109$ 2,857$ 316 10% $ 252 9% Net investment income 321 300 291 21 7 9 3 Other revenues 1 - - 1 - - - Segment revenues 3,747 3,409 3,148 338 10 261 8 Benefits and expenses 3,387 3,014 2,740 373 12 274 10 Income before taxes 360 395 408 (35) (9) (13) (3) Income taxes 101 116 113 (15) (13) 3 3 SEGMENT EARNINGS 259 279 295 (20) (7) (16) (5) Less: special items (after-tax) included in segment earnings: Charge for disability claims regulatory matter (See Note 23 to the Consolidated Financial Statements) (51) - - (51) - Charge for organizational efficiency plans (See Note 6 to the Consolidated Financial Statements) (1) (2) - 1 (2) Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) - - 5 - (5) ADJUSTED INCOME FROM OPERATIONS $ 311$ 281$ 290 $ 30 11% $ (9) (3)% Realized investment gains, net of taxes $ 40$ 18$ 7$ 22 122% $ 11 157% Effective tax rate 28.1% 29.4% 27.7% (1.3)% 1.7%



Earnings Discussion: 2013 compared to 2012

The decrease in segment earnings was primarily due to a charge associated with a disability claims regulatory matter discussed further in the Overview section of this MD&A. Adjusted income from operations increased in 2013, reflecting a lower disability loss ratio, higher net investment income and a lower expense ratio, partially offset by a higher life loss ratio. Results in 2013 include the favorable after-tax effect of reserve reviews of $60 million. Results in 2013 also include the $29 million favorable after-tax effect of a higher discount rate on claims incurred during 2013 as a result of reallocating higher yielding assets to the disability and life portfolio. Results in 2012 include the $43 million after-tax favorable impact of reserve reviews. The favorable impact of the reserve reviews continues to reflect strong operational performance by the disability claims management operation as well as reserve assumptions consistent with current business and economic conditions. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



Earnings Discussion: 2012 compared to 2011

Segment earnings and adjusted income from operations decreased, primarily attributable to a higher disability loss ratio and higher expense ratio, partially offset by a lower life loss ratio and higher net investment income. Results in 2012 include the $43 million after-tax favorable impact of reserve reviews. Results in 2011 include the $39 million after-tax favorable impact of reserve reviews offset by a $7 million after-tax litigation accrual.



Revenues

Premiums and fees. The increases in both 2013 and in 2012 reflect strong disability and life new sales, in-force growth and continued strong persistency.

Net investment income. The increases in both 2013 and in 2012 are primarily due to higher assets and higher partnership investment income.

Benefits and Expenses

The increase in 2013, compared with 2012, resulted from the $77 million before-tax impact of the disability claims regulatory matter, premium growth in the disability and life business and a higher loss ratio in the life business, partially offset by a lower disability loss ratio and lower operating expense ratio. The higher life loss ratio reflected higher new claim sizes. The lower disability loss ratio is driven by reserve reviews and discount rate changes. The lower expense ratio was driven by lower overhead. Benefits and expenses in 2013 included the before-tax favorable impact of reserve reviews of $84 million compared with $60 million in 2012. Benefits and expenses in 2013 also included the before-tax favorable effect of $40 million related to an increase in the discount rate for 2013 incurred claims as a result of the reallocation of higher yielding assets to the disability and life portfolio. The 2012 increase, compared with 2011, resulted from premium growth in the disability and life business, a higher loss ratio in the disability business and a higher operating expense ratio, partially offset by a lower loss ratio in the life business. The higher disability loss ratio reflected less favorable claim experience primarily as a result of higher new claims. The higher operating expense ratio was driven by higher commissions and strategic information technology and claim office investments. The lower life loss ratio primarily reflected lower new claims. Benefits and expenses included the favorable impact of reserve studies of $60 million in 2012 as compared with the $59 million favorable impact of reserve studies offset by a $10 million litigation accrual in 2011. Effective Tax Rate In this segment, the effective tax rate is generally lower than the federal tax rate of 35%, primarily due to tax-exempt interest income on bonds. The decline in the effective tax rate in 2013 compared with 2012 is due to the tax benefit reported in 2013 related to the completion of the 2009-2010 tax audits. The increase in the effective tax rate in 2012 compared with 2011 reflects the absence of the tax benefit reported in 2011 related to the completion of the 2007-2008 tax audits. Run-off Reinsurance Segment Segment Description



Our reinsurance operations are an inactive business in run-off mode.

On February 4, 2013, we effectively exited our Run-off GMDB and GMIB business by entering into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire") to reinsure 100% of our future exposures for these businesses, net of existing retrocession arrangements, up to a specified limit. See Note 7 to the Consolidated Financial Statements and the Introduction section of this MD&A for additional information. We exclude the results of the GMIB business from adjusted income (loss) from operations because the fair value of GMIB assets and liabilities is recalculated each quarter using updated capital market assumptions. Prior to the reinsurance transaction with Berkshire, the resulting changes in fair value that were reported in shareholders' net income were volatile and unpredictable. Beginning on February 4, 2013, changes in GMIB fair value due to non-performance risk are reflected in realized investment gains or losses. Other net changes in GMIB fair values are expected to be minimal.



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Financial Summary For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Premiums and fees $ 1 $ 21$ 24$ (20) (95)% $ (3) (13)% Net investment income 19 102 103 (83) (81) (1) (1) Other revenues (39) (119) (4) 80 67 (115) - Segment revenues (19) 4 123 (23) - (119) (97) Benefits and expenses 731 4 405 727 - (401) (99) Loss before income tax benefits (750) - (282) (750) - 282 100 Income tax benefits (262) - (99) (262) - 99 100 Segment loss (488) - (183) (488) - 183 100 Less: results of GMIB business 25 29 (135) (4) (14) 164 121 Less: special items (after-tax) included in segment earnings: Charge related to reinsurance transaction (507) - - (507) - Adjusted loss from operations $ (6)$ (29)$ (48)$ 23 79% $ 19 40% Realized investment gains, net of taxes $ 12$ 1$ 4$ 11 -% $ (3) (75)% Effective tax rate 34.9% - % 35.1% 34.9% (35.1)% Segment results for 2013 were significantly lower than 2012, primarily due to the after-tax charge of $507 million related to the reinsurance transaction with Berkshire. See Note 7 to the Consolidated Financial Statements for further information around the loss on reinsurance.



Segment results improved in 2012 compared to 2011 due to significantly more favorable results for the GMIB business and lower reserve strengthening for GMDB.

See the Benefits and Expenses section for further discussion of the results of the GMIB and GMDB business, including the impact of the February 4, 2013 reinsurance transaction.

Net Investment Income



Net investment income decreased substantially in 2013 compared with 2012, primarily attributable to selling or reallocating investment assets as a result of the reinsurance transaction with Berkshire.

Other Revenues

Other revenues consisted of gains and (losses) from futures and swap contracts used in the GMDB and GMIB equity and interest rate hedge programs that were discontinued beginning February 4, 2013. The components were as follows:

(In millions) 2013 2012 2011 GMDB - Equity Hedge Program $ (28)$ (110)$ (45) GMDB - Growth Interest Rate Hedge Program (4) 5 31 GMIB - Equity Hedge Program (6) (16) 4 GMIB - Growth Interest Rate Hedge Program (1) 2 6 Total Other Revenues $ (39)$ (119)$ (4) These hedging programs generally produced losses when equity markets and interest rates were rising and gains when equity markets and interest rates were falling. Amounts reflecting related changes in liabilities for GMDB contracts were included in benefits and expenses consistent with GAAP for a premium deficient book of business, resulting in no effect on shareholders' net income (see below "Other Benefits and Expenses"). Changes in liabilities for GMIB contracts, including the portion covered by the hedges, were recorded in GMIB fair value (gain) loss. Benefits and Expenses



Benefits and expenses were comprised of the following:

(In millions) 2013 2012 2011 GMIB fair value (gain) loss $ - $ (41)$ 234 Other benefits and expenses 731 45 171 Benefits and expenses $ 731$ 4$ 405



GMIB fair value (gain) loss. GMIB fair value results in 2013 reflected gains through February 4, 2013 from increases in underlying account values and interest rates fully offset by the charge related to the February 4, 2013 reinsurance transaction.

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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



GMIB fair value gains of $41 million for 2012 were primarily due to the effect of increases in underlying account values, updates in the claim exposure calculation, and a reduction in annuitization rates, partially offset by a reduction in lapse rates and general declines in interest rates.

GMIB fair value losses of $234 million for 2011 were primarily due to a decline in both the interest rate used for projecting claim exposure (7-year Treasury rates) and the rate used for projecting market returns and discounting (LIBOR swap curve).



Other Benefits and Expenses are comprised of the following:

(In millions) 2013



2012 2011

Results of GMDB equity and growth interest rate hedging programs

$ (32)$ (105)$ (14) GMDB reserve strengthening 727 43 70 Other GMDB, primarily accretion of discount 4



79 82

GMDB benefit expense 699 17 138 Other, including operating expenses 32 28 33 Other benefits and expenses $ 731$ 45$ 171 Results of GMDB hedging programs. Results in 2013 and 2012 reflected favorable equity market performance. The result in 2011 was due to turbulent conditions in an overall declining equity market. Results for 2013 are limited to market activity prior to the hedge program's discontinuance resulting from the reinsurance transaction with Berkshire. As explained in Other revenues above, these changes did not affect shareholders' net income because they were offset by gains or losses on futures contracts used to hedge equity market and interest rate performance.



Reserve strengthening. The following highlights the impacts of GMDB reserve strengthening:

The 2013 reserve strengthening was driven by the reinsurance transaction of February 4, 2013.

The 2012 reserve strengthening was driven primarily by reductions to the lapse rate assumptions, an update to management's consideration of the anticipated impact of continued low short-term interest rates, and to a lesser extent, an increase to the volatility and correlation assumptions, partially offset by favorable equity market conditions. The 2011 reserve strengthening was driven primarily by volatility-related impacts due to turbulent equity market conditions, an update to management's consideration of the anticipated impact of the continued low level of short-term interest rates, and the adverse impacts of overall market declines, including an increase in the provision for future partial surrenders and declines in the value of contractholders' non-equity investments such as bond funds, neither of which are included in the hedge program. Other, including operating expenses increased in 2013 primarily due to expenses associated with the reinsurance transaction of February 4, 2013. The decrease in 2012 compared with 2011 was due to the favorable impact of reserve studies and lower operating expenses. Other Operations Segment Segment Description



Cigna's Other Operations segment includes the results of the following businesses:



corporate-owned life insurance ("COLI");



deferred gains recognized from the sale of the retirement benefits and individual life insurance and annuity businesses; and



run-off settlement annuity business.

COLI contributes the majority of earnings in Other Operations. The COLI regulatory environment continues to evolve, with various federal budget related proposals recommending changes in policyholder tax treatment. Although regulatory and legislative activity could adversely impact our business and policyholders, management does not expect the impact to materially affect our results of operations, financial condition or liquidity.



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Financial Summary For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Premiums and fees $ 104$ 100$ 114 $ 4 4% $ (14) (12)% Net investment income 389 388 400 1 - (12) (3) Other revenues 48 55 55 (7) (13) - - Segment revenues 541 543 569 (2) - (26) (5) Benefits and expenses 422 418 451 4 1 (33) (7) Income before taxes 119 125 118 (6) (5) 7 6 Income taxes 25 43 29 (18) (42) 14 48 SEGMENT EARNINGS 94 82 89 12 15 (7) (8) Less: special items (after-tax) included in segment earnings: Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) - - 4 - (4) ADJUSTED INCOME FROM OPERATIONS $ 94$ 82$ 85 $ 12 15% $ (3) (4)% Realized investment gains, net of taxes $ 11$ 2$ 6 $ 9 450% $ (4) (67)% Effective tax rate 21.0% 34.4% 24.6% (13.4)% 9.8% The increase in segment earnings and adjusted income from operations in 2013, compared with 2012, primarily resulted from a lower effective tax rate due to the $14 million favorable impact of completing the 2009-2010 IRS examinations during the third quarter of 2013. See Note 19 to the Consolidated Financial Statements for additional information on the IRS examinations. Segment earnings decreased in 2012 compared with 2011, primarily reflecting lower COLI interest margins and mortality gains and the continued decline in deferred gain amortization associated with the sold businesses. The effective tax rate in 2011 reflected the favorable effect of completing the 2007-2008 IRS examinations in 2011. Premiums and fees reflect revenue primarily on universal and whole life insurance policies in the COLI business. Premiums and fees increased in 2013, compared with 2012, primarily due to strong persistency, lower policyholder mortality credits and higher transaction fees. Premiums and fees decreased in 2012, compared with 2011 due to lower policyholder death benefit exposures. Net investment income was essentially flat in 2013 compared with 2012. In 2012, net investment income decreased compared with 2011, primarily reflecting lower average yields.



Other revenues decreased in 2013, compared with 2012 primarily due to lower deferred gain amortization related to the sold retirement benefits and individual life insurance and annuity businesses. Other revenues were flat in 2012 compared with 2011.

Benefits and expenses increased in 2013 compared with 2012, primarily due to scheduled lump sum annuity payments and the expense to settle a tax sharing agreement with the buyer of the retirement benefit business as a result of completing of the 2009 and 2010 IRS examinations. Also contributing to the increase was higher amortization of deferred acquisition costs and higher claims experience in COLI. Benefits and expenses decreased in 2012 compared with 2011 primarily due to favorable COLI claims experience and lower policyholder death benefit coverage and the absence of a charge recorded in the first quarter of 2011 to reimburse the buyer of the retirement benefits business with a portion of the tax benefits resulting from the completion of the 2007 and 2008 IRS examination as required under a tax sharing agreement. Corporate Description



Corporate reflects amounts not allocated to operating 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,

CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations



intersegment eliminations, compensation cost for stock options, expense associated with our frozen pension plans and certain overhead and project costs.

Financial

Summary For the Years Ended December 31, Increase/(Decrease) Increase/(Decrease) (In millions) 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Segment loss $ (222)$ (329)$ (184)$ 107 33% $ (145) (79)% Less: special items (after-tax) included in segment loss: Cost associated with HealthSpring acquisition (See Note 3 to the Consolidated Financial Statements) (33) (28) 33 (5) Charges related to litigation matters (See Note 23 to the Consolidated Financial Statements) (68) 68 (68) Completion of IRS examination (See Note 19 to the Consolidated Financial Statements) 14 - (14) ADJUSTED LOSS FROM OPERATIONS $ (222)$ (228)$ (170)$ 6 3% $ (58) (34)%



The decrease in Corporate's segment loss in 2013, compared with 2012, is primarily attributable to the absence of special item costs associated with both litigation matters and the HealthSpring acquisition in 2012.

In 2012, segment loss for Corporate was significantly higher than in 2011, primarily reflecting higher interest expense due to the $2.1 billion of long-term debt issued in the fourth quarter of 2011 to fund the HealthSpring acquisition, and costs associated with litigation matters.

Investment Assets

The following table presents our invested asset portfolio as of December 31, 2013 and 2012. Overall invested assets have declined during the year, reflecting the funding of the Berkshire reinsurance transaction and the impact of increased market yields on asset valuations. These investments do not include separate account assets. (In millions) 2013 2012 Fixed maturities $ 16,486$ 17,705 Equity securities 141 111 Commercial mortgage loans 2,252 2,851 Policy loans 1,485 1,501 Real estate 97 83 Other long-term investments 1,273 1,255 Short-term investments 631 154 TOTAL $ 22,365$ 23,660 Additional information regarding our investment assets and related accounting policies is included in Notes 2, 10, 11, 12, 13, 14 and 17 to the Consolidated Financial Statements. Fixed Maturities Investments in fixed maturities include publicly traded and privately placed debt securities, mortgage and other asset-backed securities, preferred stocks redeemable by the investor and hybrid and trading securities. These investments are generally classified as available for sale and are carried at fair value on our balance sheet. Additional information regarding valuation methodologies, key inputs and controls is included in Note 10 of the Consolidated Financial Statements.



The following table reflects our fixed maturity portfolio by type of issuer as of December 31, 2013 and 2012.

(In millions) 2013 2012 Federal government and agency $ 880$ 902 State and local government 2,144 2,437 Foreign government 1,444 1,322 Corporate 10,981 11,896 Federal agency mortgage-backed 76 122 Other mortgage-backed 77 89 Other asset-backed 884 937 TOTAL $ 16,486$ 17,705



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PART II

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results

of



Operations

The fixed maturity portfolio decreased approximately $1.2 billion during 2013 driven by lower valuations due to an increase in market yields and sales activity supporting the funding of the Berkshire reinsurance agreement. Although overall asset values are well in excess of amortized cost, there are specific securities with amortized cost in excess of fair value by $99 million in aggregate as of December 31, 2013. See Note 11 to the Consolidated Financial Statements for further information. As of December 31, 2013, $14.6 billion, or 88%, of the fixed maturities in our investment portfolio were investment grade (Baa and above, or equivalent), and the remaining $1.9 billion were below investment grade. The majority of the bonds that are below investment grade are rated at the higher end of the non-investment grade spectrum. These quality characteristics have not materially changed during the year. Corporate fixed maturities include private placement investments of $4.5 billion that are generally less marketable than publicly-traded bonds. However, yields on these investments tend to be higher than yields on publicly-traded bonds with comparable credit risk. We perform a credit analysis of each issuer, diversify investments by industry and issuer and require financial and other covenants that allow us to monitor issuers for deteriorating financial strength and pursue remedial actions, if warranted. At December 31, 2013, corporate fixed maturities include $383 million of investments in companies that are domiciled or have significant business interests in European countries with significant political or economic concerns (Portugal, Italy, Ireland, Greece and Spain). These investments have an average quality rating of Baa3 and are diversified by industry sector, including approximately 2% invested in financial institutions. We invest in high quality foreign government obligations, with an average quality rating of Aa as of December 31, 2013. These investments are primarily concentrated in Asia consistent with the geographic distribution of the international business operations. Foreign government obligations also include $178 million of investments in European sovereign debt, none of which are in countries with significant political or economic concerns. Our investment in state and local government securities is diversified by issuer and geography with no single exposure greater than $32 million. We assess each issuer's credit quality based on a fundamental analysis of underlying financial information and do not rely solely on statistical rating organizations or monoline insurer guarantees. As of December 31, 2013, 97% of our investments in these securities were rated A3 or better excluding guarantees by monoline bond insurers, consistent with the prior year. As of December 31, 2013, approximately 63% or $1,340 million of our total investments in state and local government securities were guaranteed by monoline bond insurers, providing additional credit quality support. The quality ratings of these investments with and without this guaranteed support as of December 31, 2013 were as follows: As of December 31, 2013 Fair Value With Without (In millions) Quality Rating Guarantee Guarantee

State and local governments Aaa $ 142$ 142 Aa1-Aa3 863 844 A1-A3 321 310 Baa1-Baa3 14 19 Ba1-Ba3 - 25 Not available - - Total state and local governments $ 1,340$ 1,340 As of December 31, 2013, our investments in other asset and mortgage-backed securities totaling $1,037 million included $463 million of private placement securities with an average quality rating of Baa3 that are guaranteed by monoline bond insurers. Quality ratings without considering the guarantees for these other asset-backed securities were not available. As of December 31, 2013, we had no direct investments in monoline bond insurers. Guarantees provided by various monoline bond insurers for certain of our investments in state and local governments and other asset-backed securities as of December 31, 2013 were: Guarantor As of December 31, 2013 (In millions) Indirect Exposure National Public Finance Guarantee $ 1,098 Assured Guaranty Municipal Corp 517 AMBAC 154 Financial Guaranty Insurance Co. 34 Total $ 1,803 CIGNA CORPORATION - 2013 Form 10-K 55



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Commercial Mortgage Loans Our commercial mortgage loans are fixed rate loans, diversified by property type, location and borrower. Loans are secured by high quality commercial properties and are generally made at less than 75% of the property's value at origination of the loan. Property value, debt service coverage, quality, building tenancy and stability of cash flows are all important financial underwriting considerations. We hold no direct residential mortgage loans and do not securitize or service mortgage loans. We completed an annual in depth review of our commercial mortgage loan portfolio during the second quarter of 2013. This review included an analysis of each property's year-end 2012 financial statements, rent rolls, operating plans and budgets for 2013, a physical inspection of the property and other pertinent factors. Based on this review and subsequent fundings and repayments, the portfolio's average loan-to-value improved to 64% at December 31, 2013, decreasing from 65% as of December 31, 2012. The portfolio's average debt service coverage ratio was estimated to be 1.62 at December 31, 2013, an improvement from 1.56 as of December 31, 2012. Commercial real estate capital markets remain most active for well leased, quality commercial real estate located in strong institutional investment markets. The vast majority of properties securing the mortgages in our mortgage portfolio possess these characteristics. While commercial real estate fundamentals continued to improve, the improvement has varied across geographies and property types.



The following table reflects the commercial mortgage loan portfolio as of December 31, 2013, summarized by loan-to-value ratios.

Loan-to-Value Distribution Amortized Cost Loan-to-Value Ratios Senior Subordinated Total % of Mortgage Loans Below 50% $ 260$ 60$ 320 14% 50% to 59% 730 - 730 32% 60% to 69% 483 24 507 23% 70% to 79% 192 - 192 8% 80% to 89% 280 32 312 14% 90% to 99% 170 5 175 8% 100% or above 16 - 16 1% TOTALS $ 2,131$ 121$ 2,252 100% As summarized above, $121 million or 5% of the commercial mortgage loan portfolio is comprised of subordinated notes that were fully underwritten and originated by us using our standard underwriting procedures and are secured by first mortgage loans. Senior interests in these first mortgage loans were then sold to other institutional investors. This strategy allowed us to effectively utilize our origination capabilities to underwrite high quality loans, limit individual loan exposures, and achieve attractive risk adjusted yields. In the event of a default, we would pursue remedies up to and including foreclosure jointly with the holders of the senior interest, but would receive repayment only after satisfaction of the senior interest. The commercial mortgage loan portfolio contains approximately 120 loans, including five impaired loans with a carrying value totaling $112 million that are classified as problem or potential problem loans. Two of these loans totaling $31 million are current based on restructured terms and three loans totaling $81 million, net of $8 million in reserves, are current. All of the remaining loans continue to perform under their contractual terms. We have $177 million of loans maturing in the next twelve months. Given the quality and diversity of the underlying real estate, positive debt service coverage and significant borrower cash investment averaging 30%, we remain confident that the vast majority of borrowers will continue to perform as expected under the contract terms. Other Long-term Investments Our other long-term investments include $1,169 million in security partnership 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 (securities partnerships) and equity real estate. Given our subordinate position in the capital structure of these underlying entities, we assume a higher level of risk for higher expected returns. To mitigate risk, investments are diversified across approximately 95 separate partnerships, and approximately 60 general partners who manage one or more of these partnerships. Also, the funds' underlying investments are diversified by industry sector or property type, and geographic region. No single partnership investment exceeds 7% of our securities and real estate partnership portfolio. Although the total fair values of investments exceeded their carrying values as of December 31, 2013, the fair value of our ownership interest in certain funds that are carried at cost was less than carrying value by $30 million. We expect to recover our carrying value over the average remaining life of these investments of approximately 4 years. Given the current economic environment, future impairments are possible; however, management does not expect those losses to have a material effect on our results of operations, financial condition or liquidity.



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PART II

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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, including concessions by us for modification of interest rate, principal payment 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. We recognize 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 2013 or 2012.



The following table shows problem and potential problem investments at amortized cost, net of valuation reserves and write-downs:

December 31, 2013 December 31, 2012 (In millions) Gross Reserve Net Gross Reserve Net Problem bonds $ 2$ (2) $ - $ 35$ (17)$ 18 Problem commercial mortgage loans (1) 41 (3) 38 104 (16) 88 Foreclosed real estate 29 - 29 29 - 29 TOTAL PROBLEM INVESTMENTS $ 72$ (5)$ 67$ 168$ (33)$ 135 Potential problem bonds $ 30$ (9)$ 21$ 30$ (9)$ 21 Potential problem commercial mortgage loans 135 (8) 127 162 (7) 155



TOTAL POTENTIAL PROBLEM INVESTMENTS $ 165$ (17)$ 148$ 192$ (16)$ 176

(1) At December 31, 2013, included $7 million and at December 31, 2012, included $29 million of restructured loans classified in Other long-term investments that were previously reported in commercial mortgage loans. Net problem and potential problem investments representing approximately 1% of total investments, excluding policy loans at December 31, 2013, decreased by $96 million from December 31, 2012, primarily reflecting payoff activity.



Included in after-tax realized investment gains (losses) were increases in valuation reserves related to commercial mortgage loans and other-than-temporary impairments on fixed maturities and partnership investments as follows:

(In millions) 2013 2012 Credit-related (1) $ (5)$ (13) Other (14) (1) TOTAL $ (19)$ (14) (1)



There were no credit losses on fixed maturities for which a portion of the impairment was recognized in other comprehensive income.

Investment Outlook

Financial markets in the United States continued to stabilize during 2013; however, fixed income asset values declined during the year due to rising interest rates. In early 2014, there has been volatility in emerging markets around the globe. Because our domestic and foreign operations have limited exposure to investment securities in these markets, we do not expect this volatility to have a significant effect on results of operations, liquidity or financial condition. Future realized and unrealized investment results will be driven largely by market conditions that exist when a transaction occurs or at the reporting date. These future conditions are not reasonably predictable. We believe that the vast majority of our fixed maturity investments will continue to perform under their contractual terms and the commercial mortgage loan portfolio is positioned to perform well due to its solid aggregate loan-to-value ratio and strong debt service coverage. Based on our strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, we expect to hold a significant portion of these assets for the long term. Although future impairment losses resulting from credit deterioration and interest rate movements remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity. CIGNA CORPORATION - 2013 Form



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PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Market Risk



--------------------------------------------------------------------------------

Financial Instruments

Our assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. Our primary market risk exposures are: Interest-rate risk on fixed-rate, medium-term instruments. Changes in market interest rates affect the value of instruments that promise a fixed return and our employee pension liabilities.





Foreign currency exchange rate risk of the U.S. dollar primarily to the South Korean won, Euro, British pound, Taiwan dollar, Chinese yuan renminbi and Turkish lira. An unfavorable change in exchange rates reduces the carrying value of net assets denominated in foreign currencies.



Our Management of Market Risks

We predominantly rely on three techniques to manage our exposure to market risk:



Investment/liability matching. We generally select investment assets with characteristics (such as duration, yield, currency and liquidity) that correspond to the underlying characteristics of our related insurance and contractholder liabilities so that we can match the investments to our 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. We generally conduct our international business through foreign operating entities that maintain assets and liabilities in local currencies. While this technique does not reduce foreign currency exposure on our net assets, it substantially limits exchange rate risk to those net assets.





Use of derivatives. We generally use derivative financial instruments to minimize certain market risks.

See Notes 2(C) and 12 to the Consolidated Financial Statements for additional information about financial instruments, including derivative financial instruments.

Effect of Market Fluctuations The examples that follow illustrate the adverse effect of hypothetical changes in market rates or prices on the fair value of certain financial instruments including: a hypothetical increase in market interest rates, primarily for fixed maturities and commercial mortgage loans, partially offset by liabilities for long-term debt; and



a hypothetical strengthening of the U.S. dollar to foreign currencies, primarily for the net assets of foreign subsidiaries denominated in a foreign currency.

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 our financial instruments, subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as of December 31 (the effects of the GMIB business are presented as though our 2013 reinsurance agreement was effective as of December 31, 2012): Loss in



fair value Market scenario for certain non-insurance financial instruments (in millions)

2013



2012

100 basis point increase in interest rates $ 585$ 685 10% strengthening in U.S. dollar to foreign currencies $ 285



$ 275

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. The impact of a hypothetical increase to interest rates at December 31, 2013 was less than that at December 31, 2012 reflecting asset sales (primarily to fund the reinsurance transaction with Berkshire) and an increase in market yields, resulting in a decrease in fair values for certain of our financial instruments, primarily fixed maturities, commercial mortgage loans, and long-term debt. The effect of a hypothetical strengthening of the U.S. dollar relative to the foreign currencies held by us was estimated to be 10% of the U.S. dollar equivalent fair value. Our foreign operations hold investment assets, such as fixed maturities, cash, and cash equivalents, that are generally invested in the currency of the related liabilities. Due to the increase in the amount of these investments in 2013 that 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, 2013 was greater than that effect at December 31, 2012.



58 CIGNA CORPORATION - 2013 Form 10-K

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PART II ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk



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.

CIGNA CORPORATION - 2013 Form



10-K 59

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Source: Edgar Glimpses


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