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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2002

OR

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

for the transition period from _____ to _____

Commission file number 1-8323

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

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

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

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                      Yes  x   No

As of June 30, 2002, 140,130,070 shares of the issuer’s common stock were outstanding.

CIGNA CORPORATION

INDEX

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

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

CIGNA CORPORATION
CONSOLIDATED INCOME STATEMENTS
(In millions, except per share amounts)

The accompanying Notes to the Financial Statements are an integral part of these statements.

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CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)

The accompanying Notes to the Financial Statements are an integral part of these statements.

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CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN
  SHAREHOLDERS’ EQUITY
(In millions)

The accompanying Notes to the Financial Statements are an integral part of these statements.

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CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

The accompanying Notes to the Financial Statements are an integral part of these statements.

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CIGNA CORPORATION
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of CIGNA Corporation and all significant subsidiaries, which are referred to collectively as “CIGNA.” Intercompany transactions and accounts have been eliminated in consolidation. These consolidated financial statements were prepared in conformity with generally accepted accounting principles (GAAP).

The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the period reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in CIGNA’s 2001 Annual Report to Shareholders and Form 10-K for the year ended 2001.

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

Certain reclassifications have been made to prior year amounts to conform to the 2002 presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Goodwill and other intangible assets. As of January 1, 2002, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 eliminates the practice of amortizing goodwill through periodic charges to earnings and establishes a new methodology for reporting and measuring goodwill and other intangible assets.

In accordance with the standard, CIGNA ceased goodwill amortization on January 1, 2002. Although goodwill is no longer amortized, SFAS No. 142 requires goodwill to be evaluated for impairment at least annually, and written down through earnings when impaired. At implementation, CIGNA’s evaluation of its goodwill, based on discounted cash flow analyses, resulted in no impairment loss.

For comparative purposes, the following table adjusts net income and basic and diluted earnings per share for the second quarter and six months ended June 30, 2001, as if goodwill amortization had ceased at the beginning of 2001. Goodwill amortization is attributable to the Employee Health Care, Life and Disability Benefits segment.

CIGNA’s other intangible assets are primarily purchased customer lists and provider contracts. As of January 1, 2002, the gross carrying value of CIGNA’s other intangible assets was $247 million and accumulated amortization was $91 million. These intangible assets will continue to be amortized through periodic charges to earnings.

Impairment of long-lived assets. As of January 1, 2002, CIGNA adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” At implementation, CIGNA reclassified real estate of $119 million to “held and used” that was previously “held for sale.” Adoption of SFAS No. 144 did not have a material effect on CIGNA’s consolidated results of operations.

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Under the new standard, beginning on January 1, 2002, CIGNA accounts for real estate as follows:

Derivative instruments and hedging activities. As of January 1, 2001, CIGNA implemented SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires companies to report derivatives on the balance sheet at fair value with changes in fair values reported in net income or accumulated other comprehensive income. SFAS No. 133 allows companies to use hedge accounting when derivatives are designated, qualify and are highly effective as hedges. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in net income.

At implementation, SFAS No. 133 had an immaterial effect on CIGNA’s consolidated financial statements. The effects of derivatives were not material to CIGNA’s consolidated results of operations, liquidity or financial condition for the second quarter or six months ended June 30, 2002 or 2001.

NOTE 3 – ACQUISITIONS AND DISPOSITIONS

CIGNA’s priorities for use of capital are internal growth, acquisitions and share repurchase. CIGNA conducts regular strategic and financial reviews of its businesses to ensure that its capital is used effectively. As a result of these reviews, CIGNA may acquire or dispose of assets, subsidiaries or lines of business. Significant transactions are described below.

Sale of Lovelace Health Systems. In July 2002, CIGNA entered into an agreement to sell the operations of Lovelace Health Systems, Inc., an integrated health care system located in New Mexico that includes a multi-specialty physician group practice, a hospital, family practice clinics and a health plan, for cash proceeds of approximately $235 million. Sale proceeds will be adjusted by changes in net assets through the closing for results of operations. The sale, which is subject to regulatory approval and other conditions to closing, is expected to be completed before December 31, 2002. The determination of the gain on sale will be affected by transaction costs and other adjustments.

Sales of interests in Japanese life insurance operation. In 2001, CIGNA sold portions of its interest in its Japanese life insurance operation to Yasuda Fire & Marine Insurance Company Ltd. as follows:

As a result of the January 2001 sale, CIGNA stopped consolidating the assets, liabilities, revenues and expenses of this operation and, until the November

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2001 sale, accounted for its remaining interest under the equity method of accounting.

Sale of portions of U.S. life reinsurance business. In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance business for cash proceeds of approximately $170 million. The sale generated an after-tax gain of approximately $85 million, which was deferred because the sale was structured as an indemnity reinsurance arrangement.

In the second quarter of 2002 and in the second, third and fourth quarters of 2001, the acquirer entered into agreements with the reinsured parties, relieving CIGNA of any remaining obligations to those parties. As a result, CIGNA accelerated the recognition of $2 million after-tax of the deferred gain in the second quarter and six months of 2002 and $22 million after-tax in the second quarter and six months of 2001. Excluding the accelerated gain recognition, CIGNA recognized in Other Operations $3 million after-tax of the deferred gain in the second quarter of 2001 and $6 million after-tax in the six months of 2001, compared with less than $1 million in the second quarter and six months of 2002. The remaining deferred gain as of June 30, 2002, was approximately $1 million after-tax.

CIGNA has placed its remaining reinsurance businesses (including its accident, domestic health, international life and health, and specialty life reinsurance businesses) into run-off and has stopped underwriting new reinsurance business. See Note 8 for further discussion related to the run-off reinsurance operations.

NOTE 4 – RESTRUCTURING PROGRAM

In the fourth quarter of 2001, CIGNA adopted a restructuring program primarily to consolidate existing health service centers into regional service centers. As a result, CIGNA recognized in operating expenses a pre-tax charge of $96 million ($62 million after-tax) in the Employee Health Care, Life and Disability Benefits segment. The pre-tax charge consisted of $48 million of severance costs ($31 million after-tax) and $48 million in real estate costs ($31 million after-tax) related to vacating certain locations.

The severance charge reflected the expected reduction of approximately 3,100 employees. As a result of the consolidation of health service centers, CIGNA expects to hire approximately 1,100 employees, thereby resulting in a net reduction of approximately 2,000 employees under this program. As of June 30, 2002, 1,301 employees had been terminated under the program (662 employees were terminated in the second quarter of 2002). The real estate charges consisted of $37 million pre-tax related to vacating leased facilities, which are cash obligations pertaining to non-cancelable lease obligations and lease termination penalties. The charge also included $11 million pre-tax of non-cash asset write-downs. As of June 30, 2002, CIGNA paid $23 million related to severance and vacating leased facilities under this program ($8 million was paid in the second quarter of 2002).

CIGNA expects this restructuring program to be substantially completed during 2002. The table below indicates CIGNA’s restructuring activity (pre-tax) for this program:

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NOTE 5 – INVESTMENTS

Realized Investment Gains and Losses

Realized gains and losses on investments, excluding policyholder share, were as follows:

Fixed Maturities and Equity Securities

Sales of available-for-sale fixed maturities and equity securities, including policyholder share, were as follows:

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income (which exclude policyholder share) were as follows:

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NOTE 7 – EARNINGS PER SHARE

Basic and diluted earnings per share are computed as follows:

Common shares held as Treasury shares were 132,711,298 as of June 30, 2002, and 122,514,161 as of June 30, 2001.

NOTE 8 – REINSURANCE RECOVERABLES

In the normal course of business, CIGNA’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors their concentrations of credit risk to confirm that CIGNA and its reinsurers are not unduly exposed to risk in the same geographic regions or industries.

Individual life and annuity reinsurance. CIGNA had a reinsurance recoverable of $5.6 billion at June 30, 2002, and December 31, 2001, from Lincoln National Corporation that arose from the 1998 sale of CIGNA’s individual life insurance and annuity business to Lincoln through an indemnity reinsurance arrangement.

Unicover and London reinsurance. The run-off reinsurance operations, which are reported in Other Operations, include an approximate 35% share in the primary layer of a workers’ compensation reinsurance pool, which was formerly managed by Unicover Managers, Inc. The pool had obtained reinsurance for a significant portion of its exposure to claims, but disputes have arisen regarding this reinsurance (also known as retrocessional) coverage. The retrocessionaires have commenced arbitration in the United States against Unicover and the pool members, seeking rescission or damages.

The run-off reinsurance operations also include reinsurance contracts assumed by CIGNA in the London market. CIGNA also obtained reinsurance in the London market for a significant portion of the claims under these contracts. Some of these London market retrocessionaires are disputing the validity of their contracts with CIGNA and arbitration over some of these disputes has commenced.

Certain of the London matters were resolved during the second quarter of 2002, and the Unicover arbitration is likely to be completed in the third quarter of 2002. CIGNA has undertaken a review of exposures for the run-off reinsurance operations, including an assessment of the Unicover and London

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reinsurance retrocessional disputes noted above. CIGNA expects to complete this review during 2002.

These matters could result in losses material to CIGNA’s consolidated results of operations. However, management does not expect them to have a material adverse effect on CIGNA’s liquidity or financial condition.

Other reinsurance. CIGNA could have losses if reinsurers fail to indemnify CIGNA on other reinsurance arrangements, whether because of reinsurer insolvencies or contract disputes. However, management does not expect charges for other unrecoverable reinsurance to have a material effect on CIGNA’s consolidated results of operations, liquidity or financial condition.

Effects of reinsurance. In CIGNA’s consolidated income statements, premiums and fees were net of ceded premiums, and benefits, losses and settlement expenses were net of reinsurance recoveries, in the following amounts:

NOTE 9 – SEGMENT INFORMATION

Operating segments generally reflect groups of related products, but the International Life, Health and Employee Benefits segment is based on geography. CIGNA measures the financial results of its segments using operating income (net income excluding after-tax realized investment results).

Summarized segment financial information was as follows:

As discussed in Note 2, CIGNA ceased goodwill amortization as of January 1, 2002, pursuant to SFAS No. 142. Goodwill amortization was $12 million after-tax for the second quarter of 2001 and $24 million after-tax for the six months ended June 30, 2001, and was attributable to the Employee Health Care, Life and Disability Benefits segment.

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NOTE 10 – CONTINGENCIES AND OTHER MATTERS

Financial Guarantees

CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business.

Separate account assets are contractholder funds maintained in accounts with specific investment objectives. CIGNA records separate account liabilities equal to separate account assets. In certain cases, CIGNA guarantees a minimum level of benefits for retirement and insurance contracts written in separate accounts. CIGNA establishes an additional liability if management believes that CIGNA will be required to make a payment under these guarantees, which include the following:

CIGNA does not expect that these guarantees will have a material adverse effect on CIGNA’s consolidated results of operations, liquidity or financial condition.

CIGNA guaranteed $42 million of industrial revenue bond issues as of June 30, 2002, and December 31, 2001, which will mature in 2007. If the issuers default, CIGNA will be required to make periodic payments based on the original terms of the bonds. Unlike many debt obligations, an event of default under these bonds will not cause the scheduled principal payments to be due immediately.

Specialty life reinsurance contracts. The run-off reinsurance operations include specialty life reinsurance contracts that guarantee certain minimum death benefits based on unfavorable changes in variable annuity account values. Liabilities for this business are estimated using actuarial assumptions as to premiums, future investment yield, mortality, withdrawals, equity market returns and the volatility of the underlying equity and bond mutual fund investments. These assumptions are based on CIGNA’s experience, actuarial tables and historical market experience adjusted to reflect both short-term and long-term future expectations. As previously disclosed, significant and sustained stock market declines could trigger increased payments under these contracts. If the stock market were to remain at or fall below current levels for a sustained period, CIGNA would be required to increase reserves for these contracts in amounts that would be material to CIGNA’s consolidated results of operations and could be material to its financial condition. These amounts are not expected to be material to CIGNA’s liquidity.

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Regulatory and Industry Developments

CIGNA’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some current issues that may affect CIGNA’s businesses include:

Health care regulation. Federal and state legislatures, administrative agencies and courts continue efforts to increase regulation of the health care industry and change its operational practices. Regulatory and operational changes could have an adverse effect on CIGNA’s health care operations if they reduce marketplace competition and innovation or result in increased medical or administrative costs without improving the quality of care. Debate at the federal level over “managed care reform” and “patients’ bill of rights” legislation is expected to continue.

In 2001, the U.S. Senate and House of Representatives passed different versions of “patients’ bill of rights” legislation. Congress will attempt to reconcile the two bills in a conference committee. Although both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances under which lawsuits may be brought against managed care organizations and the scope of their liability.

Final privacy regulations under the Health Insurance Portability and Accountability Act of 1996 became effective April 2001. The regulations cover all aspects of the health care delivery system, and address the use and disclosure of individually identifiable health care information. Compliance with the privacy regulations is required by April 2003. CIGNA expects to undertake significant systems enhancements, training and administrative efforts to satisfy these requirements.

Other possible regulatory changes that could have an adverse effect on CIGNA’s health care operations include:

The health care industry is under increasing scrutiny by various state and federal government agencies and may be subject to government efforts to bring criminal actions in circumstances that would previously have given rise only to civil or administrative proceedings.

Tax benefits for corporate life insurance. In 1996, Congress passed legislation implementing a three-year phase-out period for tax deductibility of policy loan interest for most leveraged corporate life insurance products. As a result, management expects revenues and operating income associated with these products to decline. For the second quarter and six months of 2002, revenues of $53 million and $124 million, and operating income of $2 million and $14 million were from products affected by this legislation.

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Litigation and Other Legal Matters

CIGNA and several health care industry competitors are defendants in proposed federal and state class action lawsuits. The federal lawsuits allege violations under the Racketeer Influenced and Corrupt Organizations Act and ERISA. A class has been certified in an Illinois state court lawsuit against CIGNA in which health care providers allege breach of contract and seek increased reimbursements.

CIGNA is involved in arbitration proceedings related to reinsurance (retrocessional) coverage of a workers’ compensation reinsurance pool. A ruling is likely in the third quarter of 2002. CIGNA is also involved in disputes and arbitrations for reinsurance business ceded in the London market. See also Note 8 for further discussion.

The U.S. Attorney’s Office for the Eastern District of Pennsylvania is investigating compliance with federal health care laws in connection with pharmaceutical companies’ marketing practices and their impact on prices paid by the government to pharmaceutical companies for products under federal health programs. As part of this investigation, CIGNA is responding to subpoenas concerning contractual relationships between pharmaceutical companies and CIGNA’s health care operations.

The Department of Justice and Office of Inspector General are investigating Medicare cost reporting practices of a subsidiary of CIGNA, Lovelace Health Systems, Inc., for the years 1990 through 1999. Medicare cost reports form the basis for reimbursements to Lovelace by the Centers for Medicare and Medicaid Services for Medicare-covered services Lovelace provides to eligible individuals.

In addition, CIGNA is routinely involved in numerous lawsuits and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs. An increasing number of these claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. CIGNA believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened, including the reinsurance arbitration proceedings noted above and discussed in Note 8, could result in losses material to CIGNA’s consolidated results of operations, although CIGNA does not expect losses material to its liquidity or financial condition.

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INTRODUCTION

In this filing and in other marketplace communications, CIGNA will make certain predictions relating to its operations. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2002”). Actual results may differ from CIGNA’s predictions. CIGNA’s discussion of risk factors that could cause results to differ is summarized in the Cautionary Statement at page 29.

The following discussion addresses the financial condition of CIGNA as of June 30, 2002, compared with December 31, 2001, and its results of operations for the second quarter and six months ended June 30, 2002, compared with the same periods last year. This discussion should be read in conjunction with Management’s Discussion and Analysis included in CIGNA’s 2001 Annual Report to Shareholders, to which the reader is directed for additional information.

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

Acquisitions and Dispositions

CIGNA’s priorities for use of capital are internal growth, acquisitions and share repurchase. CIGNA conducts regular strategic and financial reviews of its businesses to ensure that its capital is used effectively. As a result of these reviews, CIGNA may acquire or dispose of assets, subsidiaries or lines of business. Significant transactions are described below.

Sale of Lovelace Health Systems. In July 2002, CIGNA entered into an agreement to sell the operations of Lovelace Health Systems, Inc., an integrated health care system located in New Mexico that includes a multi-specialty physician group practice, a hospital, family practice clinics and a health plan, for cash proceeds of approximately $235 million. Sale proceeds will be adjusted by changes in net assets through the closing for results of operations. The sale, which is subject to regulatory approval and other conditions to closing, is expected to be completed before December 31, 2002. The determination of the gain on sale will be affected by transaction costs and other adjustments.

Sales of interests in Japanese life insurance operation. CIGNA sold a portion of its interest in its Japanese life insurance operation in January 2001 and sold its remaining interest in this operation in November 2001. See the International Life, Health and Employee Benefits section for further information.

Sale of portions of U.S. life reinsurance business. In 2000, CIGNA sold its U.S. individual life, group life and accidental death reinsurance business for cash proceeds of approximately $170 million. The sale generated an after-tax gain of approximately $85 million, which was deferred because the sale was structured as an indemnity reinsurance arrangement.

In the second quarter of 2002 and in the second, third and fourth quarters of 2001, the acquirer entered into agreements with the reinsured parties,

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relieving CIGNA of any remaining obligations to those parties. As a result, CIGNA accelerated the recognition of $2 million after-tax of the deferred gain in the second quarter and six months of 2002 and $22 million after-tax in the second quarter and six months of 2001. Excluding the accelerated gain recognition, CIGNA also recognized in Other Operations $3 million after-tax of the deferred gain in the second quarter of 2001 and $6 million after-tax in the six months of 2001, compared with less than $1 million in the second quarter and six months of 2002. The remaining deferred gain as of June 30, 2002, was approximately $1 million after-tax.

CIGNA has placed its remaining reinsurance businesses (including its accident, domestic health, international life and health, and specialty life reinsurance businesses) into run-off and has stopped underwriting new reinsurance business. See pages 23 and 24 for further discussion related to the run-off reinsurance operations.

Restructuring Program

In the fourth quarter of 2001, CIGNA adopted a restructuring program primarily to consolidate existing health service centers into regional service centers. As a result, CIGNA recognized in operating expenses a pre-tax charge of $96 million ($62 million after-tax) in the Employee Health Care, Life and Disability Benefits segment. The pre-tax charge consisted of $48 million of severance costs ($31 million after-tax) and $48 million in real estate costs ($31 million after-tax) related to vacating certain locations.

The severance charge reflected the expected reduction of approximately 3,100 employees. As a result of the consolidation of health service centers, CIGNA expects to hire approximately 1,100 employees, thereby resulting in a net reduction of approximately 2,000 employees under this program. As of June 30, 2002, 1,301 employees had been terminated under the program (662 employees were terminated in the second quarter of 2002). The real estate charges consisted of $37 million pre-tax related to vacating leased facilities, which are cash obligations pertaining to non-cancelable lease obligations and lease termination penalties. The charge also included $11 million pre-tax of non-cash asset write-downs. As of June 30, 2002, CIGNA paid $23 million related to severance and vacating leased facilities under this program ($8 million was paid in the second quarter of 2002).

CIGNA expects this restructuring program to be substantially completed during 2002. Cash outlays under this program are not expected to have a significant effect on CIGNA’s liquidity. The program is expected to result in net annual after-tax savings of $45-$55 million, reflecting the elimination of salary costs for terminated employees and lower facility costs, partially offset by salary costs for new employees in the regional service centers and higher expenses associated with technology improvement initiatives. CIGNA expects savings from the program to be fully realized beginning in 2003. As a result of additional technology enhancement expenses and other expenses associated with the restructuring program, CIGNA does not expect to achieve significant savings in 2002 from this restructuring program.

The table below indicates CIGNA’s restructuring activity (pre-tax) for this program:

Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make judgments, assumptions and estimates that affect amounts reported in the financial statements. The accounting policies considered most significant by management include CIGNA’s accounting policies pertaining to its investments, reinsurance recoverables, unpaid claims and claim expenses, and future policy benefits. These accounting policies inherently require estimation and actual results could differ from those estimates. Also, changes in CIGNA’s financial and operating environment could influence the accounting

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estimates that support CIGNA’s financial statements. For a description of CIGNA’s significant accounting policies, see Management’s Discussion and Analysis and Note 2 to the Financial Statements in CIGNA’s 2001 Annual Report to Shareholders. With the exception of potential losses associated with specialty life reinsurance contracts (see page 24), CIGNA does not expect that changes in the estimates determined under these policies would have a material effect on CIGNA’s consolidated financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

Regulatory and Industry Developments

CIGNA’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some current issues that may affect CIGNA’s businesses include:

Health care regulation. Federal and state legislatures, administrative agencies and courts continue efforts to increase regulation of the health care industry and change its operational practices. Regulatory and operational changes could have an adverse effect on CIGNA’s health care operations if they reduce marketplace competition and innovation or result in increased medical or administrative costs without improving the quality of care. Debate at the federal level over “managed care reform” and “patients’ bill of rights” legislation is expected to continue.

In 2001, the U.S. Senate and House of Representatives passed different versions of “patients’ bill of rights” legislation. Congress will attempt to reconcile the two bills in a conference committee. Although both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances under which lawsuits may be brought against managed care organizations and the scope of their liability.

Final privacy regulations under the Health Insurance Portability and Accountability Act of 1996 became effective April 2001. The regulations cover all aspects of the health care delivery system, and address the use and disclosure of individually identifiable health care information. Compliance with the privacy regulations is required by April 2003. CIGNA expects to undertake significant systems enhancements, training and administrative efforts to satisfy these requirements.

Other possible regulatory changes that could have an adverse effect on CIGNA’s health care operations include:

The health care industry is under increasing scrutiny by various state and federal government agencies and may be subject to government efforts to bring criminal actions in circumstances that would previously have given rise only to civil or administrative proceedings.

Litigation and other legal matters. CIGNA and several health care industry competitors are defendants in proposed federal and state class action lawsuits. The federal lawsuits allege violations under the Racketeer Influenced and Corrupt Organizations Act and ERISA. A class has been certified in an Illinois state court lawsuit against CIGNA in which health care providers allege breach of contract and seek increased reimbursements.

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CIGNA is involved in arbitration proceedings related to reinsurance (retrocessional) coverage of a workers’ compensation reinsurance pool. A ruling is likely in the third quarter of 2002. CIGNA is also involved in disputes and arbitrations for reinsurance business ceded in the London market. See also pages 23 and 24 for further discussion.

The U. S. Attorney’s Office for the Eastern District of Pennsylvania is investigating compliance with federal health care laws in connection with pharmaceutical companies’ marketing practices and their impact on prices paid by the government to pharmaceutical companies for products under federal health programs. As part of this investigation, CIGNA is responding to subpoenas concerning contractual relationships between pharmaceutical companies and CIGNA’s health care operations.

The Department of Justice and Office of Inspector General are investigating Medicare cost reporting practices of a subsidiary of CIGNA, Lovelace Health Systems, Inc., for the years 1990 through 1999. Medicare cost reports form the basis for reimbursements to Lovelace by the Centers for Medicare and Medicaid Services for Medicare-covered services Lovelace provides to eligible individuals.

In addition, CIGNA is routinely involved in numerous lawsuits and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. CIGNA believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened, including the reinsurance arbitration proceedings noted above and discussed on pages 23 and 24, could result in losses material to CIGNA’s consolidated results of operations, although CIGNA does not expect losses material to its liquidity or financial condition.

Summary. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information on contingencies that could affect CIGNA’s results, see Notes 8 and 10 to the Financial Statements.

Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2 to the Financial Statements.

CONSOLIDATED RESULTS OF OPERATIONS

Operating Income

CIGNA focuses on “operating income” to evaluate segment results. Operating income is defined as net income excluding after-tax realized investment results. Since operating income excludes the effects of realized gains and losses attributable to CIGNA’s investment portfolio, management believes it presents the underlying results of operations of CIGNA’s businesses. Operating income is not determined in accordance with GAAP and should not be viewed as a substitute for net income determined in accordance with GAAP. Other companies may define operating income differently than does CIGNA.

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The following table presents operating income, as defined above, adjusted for certain nonrecurring items. These nonrecurring items are attributable to special circumstances not associated with normal operations and are identified in the table below. Management believes that results excluding these items, defined as adjusted operating income, represent an appropriate basis to assess the results of operations of CIGNA’s businesses.

As discussed in Note 2 to the Financial Statements, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and ceased goodwill amortization as of January 1, 2002. For comparative purposes, throughout this discussion CIGNA presents “operating income excluding goodwill amortization,” which adjusts 2001 operating income to exclude goodwill amortization.

Adjusted operating income excluding goodwill amortization increased 2% for the second quarter and decreased 1% for the six months of 2002. The second quarter increase was primarily attributable to increased earnings in the Employee Health Care, Life and Disability Benefits segment, partially offset by increased losses in Corporate. In addition to these factors, the decline in adjusted operating income for the six months of 2002 reflected lower earnings in the International Life, Health and Employee Benefits segment (because CIGNA sold its interest in the Japanese life insurance operation in 2001).

Realized Investment Losses

The increase in realized investment losses for the second quarter of 2002 compared to the same period last year was primarily due to the following:

These losses were partially offset by lower impairments on collateralized debt obligations.

The increase in realized investment losses for the six months of 2002 compared to the same period last year primarily reflects:

These losses were partially offset by lower impairments on investments in collateralized debt obligations. Further information regarding collateralized debt obligations is presented on page 27.

The weakness in certain sectors of the economy is likely to cause additional investment losses. Refer to “Investment Assets” on page 27 for further information.

Recent Stock Market Declines

The performance of equity markets can have a significant effect on CIGNA’s businesses and recent declines in equity markets, if sustained, will have an adverse effect on CIGNA. For example, the run-off reinsurance operations include specialty life reinsurance contracts that guarantee certain minimum death benefits based on unfavorable changes in variable annuity account values (see page 24 for further discussion). In addition, assets under management are a determinant of earnings for the retirement business, and a reduction in asset values reduces asset-based fees (see page 21). Equity securities also comprise a key portion of the assets of CIGNA’s pension plans. The reduced value of pension plan assets, as well as any reduction in

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expected future asset returns, would result in increased pension expenses in future periods.

Outlook for 2002

Subject to the factors noted in the Cautionary Statement on page 29, management expects full year adjusted operating income to improve slightly in 2002 compared to 2001 adjusted operating income of $1.1 billion. Adjusted operating income in 2002 and 2001 excludes the following items:

EMPLOYEE HEALTH CARE, LIFE AND DISABILITY BENEFITS

Operating Income

Operating income (excluding goodwill amortization in 2001) increased 6% for the second quarter and 4% for the six months of 2002 compared with the same periods last year.

CIGNA further separates this segment into Health Maintenance Organization (HMO) and Indemnity operations. HMO includes medical managed care and specialty health care operations such as managed behavioral health, medical cost and utilization management, managed dental, managed pharmacy programs, pharmaceutical fulfillment services and vision services. Indemnity includes medical and dental indemnity, and group disability, life and accident insurance operations.

Operating income excluding goodwill amortization in 2001 for the HMO and Indemnity operations was as follows:

HMO results, excluding goodwill amortization in 2001, increased 8% for the second quarter and 2% for the six months of 2002 due to:

These increases were partially offset by lower earnings in HMO alternative funding programs resulting from higher operating expenses for customer service initiatives, and lower Medicare earnings.

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Indemnity results, excluding goodwill amortization in 2001, increased 2% for the second quarter and 7% for the six months of 2002 due to improved results in the long-term disability business, primarily due to higher rates and improved claim execution. This increase was partially offset by lower earnings for the experience-rated health care business, primarily associated with losses on new business and, for the six months, lower earnings in the group life insurance business due to unfavorable mortality experience.

Premiums and Fees

Premiums and fees increased 11% for the second quarter and 9% for the six months of 2002 primarily due to rate increases.

Alternative Funding Programs and Premium Equivalents

Under alternative funding programs, the customer or plan sponsor, rather than CIGNA, assumes all or a portion of the responsibility for funding claims, and CIGNA provides claims processing and other services. In contrast to most other major companies in the health care industry, a significant portion of CIGNA’s health care business consists of alternative funding programs. CIGNA generally earns a lower margin on alternative funding programs than under guaranteed cost or retrospectively experience-rated programs.

Premiums and fees associated with alternative funding programs were $790 million for the second quarter and $1.6 billion for the six months of 2002 compared to $676 million for the second quarter and $1.4 billion for the six months of 2001. These amounts are included in the table below.

“Adjusted premiums and fees,” which consist of premiums and fees plus “premium equivalents,” is a useful measure of volume in CIGNA’s health care operations. Premium equivalents generally equal paid claims under alternative funding programs. CIGNA would have recorded the amount of these paid claims as additional premiums if these programs had been written as guaranteed cost or retrospectively experience-rated programs. Thus, premium equivalents are an indicator of business volume associated with alternative funding programs. However, premium equivalents do not represent premium and fee revenue recognized under GAAP and may not be comparable to similarly titled measures presented by other companies.

Adjusted premiums and fees for the Employee Health Care, Life and Disability Benefits segment were as follows:

The increases in premium equivalents are primarily due to higher medical costs in HMO and indemnity alternative funding programs that, in turn, increase the amount of paid claims.

Net Investment Income

Net investment income remained the same for the second quarter and decreased 5% for the six months of 2002 primarily resulting from lower yields.

Other Revenues

Other revenues increased 24% for the second quarter and 23% for the six months of 2002 primarily due to business growth in the specialty health care operations (predominantly in pharmaceutical fulfillment services).

Medical Membership

As of June 30, medical membership was as follows for the HMO and Indemnity operations:

The growth in HMO medical membership is primarily due to HMO alternative funding programs, partially offset by declines in guaranteed cost HMO program membership.

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The declines in Indemnity medical membership are primarily due to cancellations in traditional indemnity programs.

EMPLOYEE RETIREMENT BENEFITS AND INVESTMENT SERVICES

Operating Income

Operating income increased 8% for the second quarter and 1% for the six months of 2002 compared with the same periods last year. These increases primarily reflect higher asset-based fees resulting from business growth and a favorable shift to higher margin products, partially offset by the negative effect of stock market declines. The improvements also reflect higher interest margins on general account assets.

Revenues

Premiums and fees are principally asset management and administrative charges on general and separate account assets and amounts earned from non-leveraged corporate life insurance. Net investment income primarily represents earnings from general account assets. Most of this net investment income is credited to customers and included in benefits and expenses.

Premiums and fees increased 29% for the second quarter and 9% for the six months of 2002 compared with the same periods last year. These increases primarily reflect an increase in single premium annuity sales as well as higher asset-based fees due to growth and, to a lesser extent, a shift to higher margin products. These increases were partially offset by the effect of stock market declines on asset-based fees.

Assets Under Management

Assets under management are a determinant of earnings for this segment because a significant portion of this segment’s revenues are based on asset values. The following table shows assets under management and related activity, including amounts attributable to separate accounts for the six months ended June 30. Assets under management fluctuate because of changes in the market value of fixed maturities and equity securities.

Changes in assets under management are discussed below.

Premiums and deposits. For the six months of 2002, approximately 74% of premiums and deposits were from existing customers, and 26% were from sales to new customers and new plan sales to existing customers. For the six months of 2001, approximately 59% of premiums and deposits were from existing customers, and 41% were from sales to new customers and new plan sales to existing customers. The decline in 2002 primarily reflects the absence of two large deposits reported in 2001 and, to a lesser extent, lower new sales in 2002.

Fair value of assets. The decline in fair value of assets for the six months of 2002 was greater than the same period last year. The declines in 2002 and 2001 are primarily attributable to market value depreciation of equity securities in separate accounts.

Customer withdrawals. Withdrawals were lower in 2002 due to improved customer retention in the defined contribution business.

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INTERNATIONAL LIFE, HEALTH AND EMPLOYEE BENEFITS

Adjusted Operating Income

Adjusted operating income declined for the second quarter and six months of 2002 because the same periods of last year include CIGNA’s share in the earnings of the Japanese life insurance operation ($10 million after-tax for the second quarter and $21 million after-tax for the six months of 2001), which was fully divested in the fourth quarter of 2001.

Excluding the gain on sale of the partial interest in the Japanese life insurance operation and excluding its operating results, adjusted operating income was breakeven for the second quarter of 2001 and $2 million for the six months of 2001. On this basis, the increases in operating income in the second quarter and six months of 2002 compared with the same periods of last year were due to:

Premiums and Fees

Premiums and fees increased 6% for the second quarter and six months of 2002 compared to the same periods last year reflecting:

Other Revenues

Other revenues for 2001 include CIGNA’s share in the earnings of the Japanese life insurance operation ($15 million pre-tax for the second quarter and $32 million pre-tax for the six months of 2001). Other revenues for the six months of 2001 also reflect the $12 million pre-tax gain associated with the sale of a portion of CIGNA’s interest in this operation.

Japanese Life Insurance Operation

In 2001, CIGNA sold portions of its interest in its Japanese life insurance operation to Yasuda Fire & Marine Insurance Company Ltd. as follows:

As a result of the January 2001 sale, CIGNA stopped consolidating the assets, liabilities, revenues and expenses of this operation and, until the November 2001 sale, accounted for its remaining interest under the equity method of accounting.

International Expansion

CIGNA expects to pursue international growth through acquisitions, joint ventures and other investments. Such projects inevitably involve start-up costs that could result in initial losses for those operations.

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OTHER OPERATIONS

Other Operations consists of:

Adjusted Operating Income

The declines in adjusted operating income for the second quarter and six months of 2002 compared with the same periods last year were primarily due to lower earnings from the run-off reinsurance business.

Premiums and Fees

Premiums and fees decreased 38% for the second quarter and 27% for the six months of 2002 compared with the same periods last year primarily due to lower premiums from the run-off reinsurance business and leveraged corporate life insurance.

Other Revenues

The declines in other revenues for the second quarter and six months of 2002 compared with the same periods last year primarily reflect the expected reduction in accelerated gain recognition of the deferred gain on the sale of the life reinsurance business.

Other Matters

Tax benefits for corporate life insurance. In 1996, Congress passed legislation implementing a three-year phase-out period for tax deductibility of policy loan interest for most leveraged corporate life insurance products. As a result, management expects revenues and operating income associated with these products to decline. For the second quarter and six months of 2002, revenues of $53 million and $124 million, and operating income of $2 million and $14 million were from products affected by this legislation.

Unicover and London reinsurance. The run-off reinsurance operations include an approximate 35% share in the primary layer of a workers’ compensation reinsurance pool, which was formerly managed by Unicover Managers, Inc. The pool had obtained reinsurance for a significant portion of its exposure to claims, but disputes have arisen regarding this reinsurance (also known as retrocessional) coverage. The retrocessionaires have commenced arbitration in the United States against Unicover and the pool members, seeking rescission or damages.

The run-off reinsurance operations also include reinsurance contracts assumed by CIGNA in the London market. CIGNA also obtained reinsurance in the London market for a significant portion of the claims under these contracts. Some of these London market retrocessionaires are disputing the validity of their contracts with CIGNA and arbitration over some of these disputes has commenced.

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Certain of the London matters were resolved during the second quarter of 2002, and the Unicover arbitration is likely to be completed in the third quarter of 2002. CIGNA has undertaken a review of exposures for the run-off reinsurance operations, including an assessment of the Unicover and London reinsurance retrocessional disputes noted above. CIGNA expects to complete this review during 2002.

These matters could result in losses material to CIGNA’s consolidated results of operations. However, management does not expect them to have a material adverse effect on CIGNA’s liquidity or financial condition.

Specialty life reinsurance contracts. The run-off reinsurance operations include specialty life reinsurance contracts that guarantee certain minimum death benefits based on unfavorable changes in variable annuity account values. Liabilities for this business are estimated using actuarial assumptions as to premiums, future investment yield, mortality, withdrawals, equity market returns and the volatility of the underlying equity and bond mutual fund investments. These assumptions are based on CIGNA’s experience, actuarial tables and historical market experience adjusted to reflect both short-term and long-term future expectations. As previously disclosed, significant and sustained stock market declines could trigger increased payments under these contracts. If the stock market were to remain at or fall below current levels for a sustained period, CIGNA would be required to increase reserves for these contracts in amounts that would be material to CIGNA’s consolidated results of operations and could be material to its financial condition. These amounts are not expected to be material to CIGNA’s liquidity.

CORPORATE

Corporate reflects amounts not allocated to segments, such as interest expense on corporate debt, net investment income on unallocated investments, intersegment eliminations and certain corporate overhead expenses.

The increased operating losses for the second quarter and six months of 2002 primarily reflects lower net investment income on unallocated corporate investments, principally due to declining interest rates, and higher unallocated expenses in 2002.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

CIGNA normally meets its operating requirements by:

Operating cash flows consist of operating income adjusted to reflect the timing of cash receipts and disbursements for premiums and fees, investment income, and benefits, losses and expenses.

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Cash flows for the six months ended June 30 were as follows:

2002:

2001:

Capital Resources

CIGNA’s capital resources (primarily retained earnings and the proceeds from the issuance of long-term debt and equity securities) provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. CIGNA’s priorities for use of capital are internal growth, acquisitions and share repurchase.

Senior management and the Board of Directors, guided by regulatory requirements, determine the amount of capital resources that CIGNA maintains. Management allocates resources to new long-term business commitments when returns, considering the risks, look promising and when the resources available to support existing business are adequate.

CIGNA’s financial strength provides the capacity and flexibility to raise funds in the capital markets. CIGNA issued the following debt securities in 2001:

CIGNA has $500 million remaining under an effective shelf registration statement filed with the Securities and Exchange Commission, which may be issued as debt securities, equity securities or both. Management and the Board of Directors will consider market conditions and internal capital requirements when deciding whether CIGNA should issue new securities.

In March 2002, CIGNA entered into a syndicated bank letter of credit agreement of $650 million in support of an internal reinsurance arrangement associated with obligations of a subsidiary.

As of June 30, 2002, and December 31, 2001, CIGNA had available $255 million in committed lines of credit. These lines are provided by U.S. banks and have terms ranging from one to three years.

CIGNA’s long-term debt outstanding as of June 30, 2002, was $1.5 billion compared to $1.6 billion as of December 31, 2001. CIGNA’s short-term debt was $132 million as of June 30, 2002, an increase of $82 million from December 31, 2001.

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Separate account assets are contractholder funds maintained in accounts with specific investment objectives. CIGNA records separate account liabilities equal to separate account assets. In certain cases, CIGNA guarantees a minimum level of benefits for retirement and insurance contracts written in separate accounts. CIGNA establishes an additional liability if management believes that CIGNA will be required to make a payment under these guarantees, which include the following:

CIGNA does not expect that these guarantees will have a material adverse effect on CIGNA’s consolidated results of operations, liquidity or financial condition.

CIGNA guaranteed $42 million of industrial revenue bond issues as of June 30, 2002, and December 31, 2001, which will mature in 2007. If the issuers default, CIGNA will be required to make periodic payments based on the original terms of the bonds. Unlike many debt obligations, an event of default under these bonds will not cause the scheduled principal payments to be due immediately.

Stock repurchase activity for the six months ended June 30 was as follows:

From July 1, 2002 through August 1, 2002, CIGNA repurchased an additional 498,300 shares for $46 million. On July 24, 2002, CIGNA’s Board of Directors increased the share repurchase authorization by an additional $500 million. The total remaining share repurchase authorization as of August 1, 2002, was $572 million.

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INVESTMENT ASSETS

Information regarding investment assets held by CIGNA is presented below. CIGNA’s investment assets do not include separate account assets. Additional information regarding CIGNA’s investment assets and related accounting policies is included in Notes 2, 6, 7 and 8 to the Financial Statements in CIGNA’s 2001 Annual Report to Shareholders and Form 10-K.

A significant portion of CIGNA’s investment assets is attributable to experience-rated policyholder contracts. The following table shows the percentage of certain categories of investment assets that are held under policyholder contracts:

Fixed Maturities and Mortgage Loans

Investments in fixed maturities (bonds) include publicly traded and privately placed debt securities, mortgage and other asset-backed securities and redeemable preferred stocks. CIGNA’s mortgage loans are diversified by property type, location and borrower to reduce exposure to potential losses.

CIGNA’s investment in collateralized debt obligations, which are secured by pools of corporate debt obligations, as of June 30, 2002, was $248 million compared to $321 million as of December 31, 2001, excluding policyholder share. CIGNA recorded pre-tax losses of $8 million ($5 million after-tax) for the second quarter and $23 million ($15 million after-tax) for the six months of 2002 as a result of an increased level of defaults in the underlying pools of corporate debt obligations, reflecting economic conditions.

Problem and Potential Problem Investments

“Problem” bonds and mortgage loans are delinquent or have been restructured as to terms (interest rate or maturity date). “Potential problem” bonds and mortgage loans are fully current, but management believes they have certain characteristics that increase the likelihood that they will become “problems.” CIGNA also considers mortgage loans to be potential problems if the borrower has requested restructuring, or principal or interest payments are past due by more than 30 but fewer than 60 days.

CIGNA recognizes interest income on “problem” bonds and mortgage loans only when payment is actually received because of the risk profile of the underlying investment.

The following table shows problem and potential problem bonds and mortgage loans as well as foreclosed real estate, net of valuation reserves and write-downs, and includes amounts attributable to policyholder contracts: