Back to GetFilings.com

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

FORM 10-Q

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

For the quarterly period ended September 30, 2003

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

                                                                      Yes  x   No

        As of September 30, 2003, 140,490,168 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 STATEMENTS OF INCOME
(In millions, except per share amounts)

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

1

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.

2

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.

3

CIGNA CORPORATION

CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

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

4

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 accounting principles generally accepted in the United States.

The interim financial statements are unaudited but include all adjustments (consisting only 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 2002 Annual Report to Shareholders and Form 10-K for the year ended 2002.

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

Results of operations of Lovelace Health Systems, Inc. (Lovelace), an integrated health care system and subsidiary of CIGNA, are reported as discontinued operations because CIGNA sold that business in January 2003 (see Note 5). Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations. Certain other reclassifications have also been made to prior period amounts to conform to the 2003 presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Consolidation. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), that provides criteria for consolidating certain entities based on majority ownership of expected losses or residual returns. In October 2003, the FASB postponed the implementation date for FIN 46 from July 1, 2003 to December 31, 2003. CIGNA expects to implement FIN 46 on December 31, 2003, and expects to record additional assets and liabilities, primarily associated with real estate joint ventures, of up to $125 million each, including $110 million of nonrecourse liabilities. In the unlikely event that all of the underlying assets of these entities had no value and all other parties to these entities failed to meet their obligations, CIGNA estimates that its maximum exposure to loss at September 30, 2003 would approximate $90 million, representing CIGNA’s net investment in and additional commitments to these entities, including recourse liabilities.

Under FIN 46, CIGNA expects to disclose certain variable interest entities that it currently consolidates for which CIGNA serves as asset manager. These entities issue investment products secured by commercial loan pools and have assets and liabilities of approximately $205 million at September 30, 2003. CIGNA also expects to disclose real estate joint ventures that it currently consolidates with assets of $15 million. In the unlikely event that all of the underlying assets of these entities had no value and all other parties to these entities failed to meet their obligations, CIGNA estimates that its maximum exposure to loss at September 30, 2003 would approximate $195 million, primarily representing CIGNA’s net investment in these entities.

CIGNA expects to recover the recorded amounts of its investments in variable interest entities.

Stock compensation. In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” was issued. SFAS No. 148 requires companies using the intrinsic value method of accounting for stock-based compensation to disclose, on a quarterly basis, the effect on reported net income and earnings per share if compensation expense was based on the fair value

5

method of accounting for all stock awards. The following table illustrates the effect to CIGNA’s reported net income (loss) and earnings per share (using the Black-Scholes option-pricing model for stock options).

Derivative Instruments. In April 2003, the FASB issued an amendment to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Implementation of the SFAS 133 amendment in the third quarter of 2003 had no effect on CIGNA’s financial statements. In addition, the FASB finalized an implementation issue relating to SFAS 133.

The implementation issue and a recently issued Statement of Position (described below) address accounting for liabilities that provide contractholders with returns based on pools of investments, and each permits a one-time accounting reclassification of associated investment securities from available-for-sale to trading. In the fourth quarter of 2003, CIGNA expects to reclassify securities supporting experience-rated pension contracts to a separate balance sheet caption and to record their changes in fair value in other revenues each reporting period. Under the experience-rating process, gains and losses on assets related to experience-rated policyholder contracts generally accrue to contractholders and are not reflected in net income. Accordingly, CIGNA will recognize benefits expense in the amounts recorded in other revenues that accrue to contractholders, and the accounting reclassification will not affect CIGNA’s net income.

The implementation issue, effective in the fourth quarter of 2003, requires companies to recognize the fair value of an embedded derivative in contractholder liabilities. This embedded derivative reflects contractual features including the changes in credit risk of a pool of investments. The effect of implementing this requirement is not expected to be material to CIGNA’s financial statements.

Long-Duration Contracts. In July 2003, Statement of Position (SOP), “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” was issued for implementation in the first quarter of 2004.

The SOP addresses accounting for separate accounts and certain contractual features of investment-related and universal life contracts. The cumulative effect of implementing the SOP in the first quarter of 2004 may be material to net income as a result of recording liabilities to certain experience-rated pension contractholders based on the appreciated value of associated pools of mortgage loans. Based on historical changes in interest rates and credit spreads, ongoing volatility in benefits expense may also be material to CIGNA’s net income, and possibly to CIGNA’s shareholders’ equity. This volatility would result from adjusting liabilities for unrealized changes in the fair values of mortgage loans, while mortgage loans are carried at amortized cost. CIGNA considers these unrealized fair value changes to be temporary, as CIGNA generally holds mortgage loans to maturity. Generally, contractholders do not ultimately receive these changes in fair value given that mortgage loan values approximate amortized cost as maturity approaches. CIGNA is exploring various courses of action with respect to its mortgage loans which may mitigate the effect of this SOP.

CIGNA has determined that its accounting for reinsurance of guaranteed minimum death benefits and guaranteed minimum income benefits will not be affected by the provisions of the SOP. CIGNA continues to evaluate the potential effects of implementing various provisions of the SOP, and

6

cannot yet estimate the aggregate implementation effects on its financial statements.

NOTE 3 – SEGMENT REPORTING CHANGES

In the third quarter of 2003, CIGNA changed its segment presentation to report its health care operations and its separately managed group disability and life insurance operations as two discrete segments. In previous quarters, results from these operations were combined as a single segment.

In addition, CIGNA has renamed its segments to Health Care, Disability and Life, Retirement, International, Run-off Reinsurance and Other Operations.

Disability and life insurance products which were historically sold in connection with certain experience-rated medical accounts continue to be managed by CIGNA’s health care business and are reported in the Health Care segment.

NOTE 4 – SPECIALTY LIFE REINSURANCE CONTRACTS

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

In the second quarter of 2003, CIGNA recognized a charge related to an analysis of experience and reserve assumptions for the variable annuity death benefit product. The after-tax charge to increase reserves was $286 million ($441 million pre-tax). The reserve increase included a charge relating to both actual and projected future partial surrenders, as well as updates to other assumptions such as mortality.

The determination of reserves for variable annuity death benefits requires CIGNA to make critical accounting estimates, as discussed on page 21 and in CIGNA’s 2002 Annual Report to Shareholders. If actual experience differs from the assumptions and other considerations used in estimating these reserves (including lapse, partial surrender, mortality, interest rates and volatility), the resulting change could have a material adverse effect on CIGNA’s consolidated results of operations, and in certain situations, could have a material adverse effect on CIGNA’s financial condition.

CIGNA had future policy benefit reserves for these specialty life reinsurance contracts of approximately $1.4 billion as of September 30, 2003 and December 31, 2002.

In the third quarter of 2002, CIGNA implemented a program to substantially reduce the equity market risks associated with this business by selling exchange-traded futures contracts, which are expected to rise in value as the equity market declines and decline in value as the equity market rises.

CIGNA recognized an after-tax charge of $720 million ($1.1 billion pre-tax) in the third quarter of 2002 to increase reserves related to these specialty life reinsurance contracts and the adoption of this program. The charge consisted of:

In the second quarter of 2003, CIGNA added foreign-denominated, exchange-traded futures contracts and foreign currency forward contracts to this program to reduce international equity market risks associated with this business. To support its program to reduce equity risks associated with this business, CIGNA expects to adjust the futures and forward contract positions and enter into other positions over time, to reflect changing equity market levels and changes in the investment mix of the underlying variable annuity investments. CIGNA recorded pre-tax losses of $70 million for the third quarter and $326 million for the nine months of 2003 and pre-tax gains of $300 million for the third quarter and nine months

7

of 2002 from these contracts. Expense offsets reflecting corresponding changes in liabilities for these contracts are included in benefits, losses and settlement expenses.

As of September 30, 2003, the aggregate fair value of the underlying mutual fund investments was approximately $49.8 billion. The death benefit coverage in force as of that date (representing the amount that CIGNA would have to pay if all 1.4 million annuitants had died on that date) was approximately $17.1 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the fair value of the underlying mutual fund investments. The notional amount of the futures and forward contract positions held by CIGNA at September 30, 2003, was $2.1 billion.

CIGNA has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. See Note 12 for further information.

NOTE 5 –ACQUISITIONS AND DISPOSITIONS

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

Sale of Japanese pension operations. In September 2003, CIGNA sold its interest in a Japanese pension operation for cash proceeds of $18 million and recognized an after-tax gain of $5 million. The gain is reported in the International segment in continuing operations since this operation was accounted for under the equity method of accounting.

Sale of Lovelace Health Systems. In January 2003, CIGNA sold the operations of Lovelace Health Systems, Inc. (Lovelace), 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. The sale generated an after-tax gain of $32 million, which is reported in discontinued operations. In the fourth quarter of 2002, CIGNA began reporting this business as discontinued operations and prior period financial information was reclassified.

Sale of Brazilian health care operations. In January 2003, CIGNA sold its Brazilian health care operations. The sale generated an after-tax gain of $18 million, primarily as a result of the disposition of the net liabilities associated with these operations. The gain is reported in discontinued operations. Because the revenues, expenses and results of operations of the Brazilian health care operations are not material to CIGNA’s consolidated financial statements, prior period financial information has not been reclassified.

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 a gain of approximately $85 million after-tax, which was deferred because the sale was structured as an indemnity reinsurance arrangement. During the second and third quarters of 2002, 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 $1 million after-tax of the deferred gain for the third quarter and $3 million after-tax for the nine months of 2002.

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.

8

Discontinued operations. Summarized financial data for discontinued operations (which includes Lovelace and the gain on the sale of the Brazilian health care operations) are outlined below:

NOTE 6 –RESTRUCTURING PROGRAMS

Corporate effectiveness initiative. In the second quarter of 2003, CIGNA adopted a restructuring program to attain operational efficiencies in its corporate staff functions and to achieve additional cost savings. As a result, CIGNA recognized in other operating expenses an after-tax charge in Corporate of $9 million ($13 million pre-tax) for severance costs. The severance charge reflected the expected reduction of approximately 280 employees. As of September 30, 2003, approximately 250 employees had been terminated under the program and $4 million ($7 million pre-tax) of the liability had been spent.

Fourth quarter 2002 program. In the fourth quarter of 2002, CIGNA adopted a restructuring program primarily to realign the organizational structure and operations of its health care business. As a result, CIGNA recognized in other operating expenses an after-tax charge of $97 million ($151 million pre-tax) in the Health Care segment. The after-tax charge consisted of $74 million of severance costs ($116 million pre-tax), $22 million in real estate costs ($34 million pre-tax) related to vacating certain leased facilities and $3 million ($4 million pre-tax) of asset impairment charges. These amounts were partially offset by a reduction in costs of $2 million after-tax ($3 million pre-tax) for other postretirement benefits for employees terminated in 2002. This benefit cost reduction continues in 2003 as employees are terminated, and is estimated not to exceed $10 million after-tax ($15 million pre-tax) for the full year of 2003. CIGNA recorded a gain of $1 million after-tax ($1 million pre-tax) for the third quarter and $7 million after-tax ($10 million pre-tax) for the nine months of 2003 for other postretirement benefits for employees terminated during 2003.

When recorded in the fourth quarter of 2002, the severance charge reflected the expected reduction of approximately 3,900 employees. In the second quarter of 2003, CIGNA reduced the remaining liability for this program by $15 million pre-tax ($10 million after-tax). This reduction was primarily due to higher attrition (which does not result in severance benefits or costs) and lower costs relating to outplacement and other services.

CIGNA expects this restructuring program to be substantially completed by year end 2003. The table below shows CIGNA’s restructuring activity (pre-tax) related to severance and real estate for this program:

*Due to higher attrition.

9

NOTE 7 – 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:

Securities on Loan

During the second quarter of 2003, CIGNA began lending certain fixed maturity securities to major brokerage firms through an agent. CIGNA retains the risks and rewards of ownership of these securities loaned and the agent indemnifies CIGNA for their return at CIGNA’s demand. Cash collateral is received and must be maintained daily at least equal to 100% of the fair value of securities loaned. Cash collateral is invested by CIGNA in high quality, shorter term instruments such as U.S. Treasury bills, high-grade commercial paper and fixed maturities. CIGNA provides a contractual rate of return on collateral held and bears the risk of any loss on the collateral.

At September 30, 2003, CIGNA had $132 million of securities on loan in fixed maturities. Cash collateral received is reported in cash and cash equivalents, fixed maturities and short-term investments at September 30, 2003. A liability for the return of collateral held of $133 million was reported in accounts payable, accrued expenses and other liabilities at September 30, 2003.

10

NOTE 8 –ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

Minimum Pension Liability

During the second quarter of 2003, CIGNA increased its minimum pension liabilities, resulting in an after-tax charge to equity of $13 million ($21 million pre-tax). This increase is a result of CIGNA’s annual update of plan participant data. Plan asset values and actuarial assumptions are consistent with those disclosed in CIGNA’s 2002 Annual Report to Shareholders.

11

NOTE 9 – EARNINGS PER SHARE

Basic and diluted earnings per share are computed as follows:

Common shares held as Treasury shares were 133,913,353 as of September 30, 2003, and 133,317,419 as of December 31, 2002.

NOTE 10 – REINSURANCE

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.

Individual life and annuity reinsurance. CIGNA had a reinsurance recoverable of $5.4 billion at September 30, 2003, and $5.6 billion at December 31, 2002, 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 other run-off reinsurance. The Run-off Reinsurance segment participates in a workers’ compensation reinsurance pool, which ceased accepting new risks in early 1999. This pool was formerly managed by Unicover Managers, Inc. Although an arbitration over the most significant reinsurance (retrocessional) contracts for the pool was completed in the fourth quarter of 2002, disputes over collection of amounts due CIGNA from the retrocessionaires have arisen, which may require further arbitration actions to resolve. Also, disputes and arbitrations regarding other reinsurance (retrocessional) contracts for the pool remain and may not be resolved for some time.

The Run-off Reinsurance segment includes other workers’ compensation reinsurance contracts, as well as personal accident reinsurance contracts, including contracts assumed in the London market. CIGNA obtained retrocessional reinsurance coverage for a significant portion of its liabilities under these contracts. Some of these retrocessionaires have disputed the validity of their contracts with CIGNA and arbitration over some of these disputes has commenced.

In the third quarter of 2002, CIGNA recorded an after-tax charge of $317 million ($408 million pre-tax) related to the completed Unicover arbitration and the London market exposures noted above.

_________________

*Because of the loss from continuing operations for the third quarter and nine months of 2002, the number of shares used to compute loss per share does not reflect the dilution caused by stock options and restricted stock grants of approximately 1.1 million for third quarter and 1.7 million for the nine months ended September 30, 2002.

12

The retrocessional disputes are not expected to be resolved for some time. In addition, unfavorable claims experience related to workers’ compensation and personal accident exposures is possible and could result in future losses, including losses attributable to the inability to recover amounts from retrocessionaires (either due to disputes with the retrocessionaires or their financial condition).

CIGNA’s reserves for amounts recoverable from retrocessionaires, as well as for reserves for liabilities associated with underlying reinsurance exposures assumed by CIGNA, are considered appropriate as of September 30, 2003, based on current information. However, it is possible that future developments could have a material adverse effect on CIGNA’s consolidated results of operations, and, in certain situations, could have a material adverse effect on CIGNA’s financial condition.

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 adverse 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 11 – SEGMENT INFORMATION

CIGNA’s operating segments generally reflect groups of related products, but the International segment is based on geography. As discussed in Note 3, CIGNA changed its segment presentation in the third quarter of 2003. CIGNA measures the financial results of its segments using “segment earnings” which is defined as income (loss) from continuing operations before realized investment gains (losses).

Refer to Note 2 for discussion of the potential effects of adopting an SOP on the experience-rated business in the Retirement segment.

Summarized segment financial information was as follows:

13

NOTE 12 – 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 guaranteed $95 million of construction loans as of September 30, 2003, and $106 million as of December 31, 2002, related to investments in certain real estate joint ventures. These loans are secured by the joint ventures’ real estate properties, which have fair values in excess of the loan amounts. The loans mature at various dates from 2003 to 2005, including extension options. CIGNA would be required to repay the construction loans if permanent financing could not be obtained. CIGNA also guaranteed $14 million of interest and principal for industrial revenue bonds as of September 30, 2003, and $50 million as of December 31, 2002, that are payable in 2007. These bonds are secured by mortgages on properties and other assets held by real estate partnerships and CIGNA has recourse to partners for 50% of any amounts paid under these guarantees. There were no liabilities required for these guarantees as of September 30, 2003, or December 31, 2002.

CIGNA has indemnification obligations to lenders up to $376 million as of September 30, 2003, and $280 million as of December 31, 2002, related to borrowings by certain real estate joint ventures in which CIGNA holds investments. These borrowings, which are nonrecourse to CIGNA, are secured by the joint ventures’ real estate properties, which have fair values in excess of the loan amounts, and mature at various dates from 2004 to 2015. CIGNA’s indemnification obligations would require payment

14

to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, CIGNA does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, CIGNA also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of September 30, 2003, or December 31, 2002.

As of September 30, 2003 and December 31, 2002, CIGNA guaranteed that it would compensate the lessor for a shortfall of up to $49 million in the market value of leased equipment at the end of the lease. Guarantees of $21 million expire in 2006 and $28 million expire in 2012.

CIGNA has indemnification obligations as of September 30, 2003, and December 31, 2002, in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by CIGNA, such as representations for the presentation of financial statements, the filing of tax returns or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. CIGNA does not believe that it is possible to determine the maximum potential amount due under these guarantees, since not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities required for these indemnification obligations as of September 30, 2003, or December 31, 2002.

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

Specialty life reinsurance contracts. CIGNA has written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. When annuitants elect to receive these minimum income benefits, CIGNA may be required to make payments based on changes in underlying mutual fund values and interest rates.

CIGNA has purchased reinsurance from third parties, which covers 80% of the exposures of these contracts. CIGNA estimates the fair value of the assets and liabilities associated with these contracts using assumptions as to equity market returns, volatility of the underlying equity and bond mutual fund investments, interest rates, mortality, annuity election rates, policy surrenders and credit risk. During the first quarter of 2003, CIGNA recognized an after-tax charge of $6 million ($9 million pre-tax) related to revised credit risk assumptions for amounts recoverable from reinsurers.

CIGNA is required to disclose the maximum potential undiscounted future payments for guarantees related to minimum income benefits using worst-case assumptions, defined as follows:

The maximum potential undiscounted payments that CIGNA would make under those assumptions would aggregate $2.3 billion before reinsurance recoveries. CIGNA believes the likelihood of such payment is remote. CIGNA has reinsurance for 80% of this amount. CIGNA expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount.

As of September 30, 2003, CIGNA had liabilities of $98 million related to these contracts and amounts recoverable from reinsurers of $70 million. CIGNA had an additional liability of $41 million associated with the cost of reinsurance as of September 30, 2003. As of December 31, 2002, CIGNA had liabilities of $95 million related to these contracts

15

and amounts recoverable from reinsurers of $76 million. CIGNA had an additional liability of $44 million associated with the cost of reinsurance as of December 31, 2002. Management believes the current assumptions used to estimate reserves for these liabilities are appropriate.

Regulatory and Industry Developments

CIGNA’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some 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 state and federal level over health care liability is expected to continue.

Privacy regulations under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 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 was required by April 2003, and CIGNA has implemented appropriate compliance initiatives. In addition to the privacy regulations, HIPAA establishes national electronic transaction standards, which apply to health insurers, providers and other covered entities. They are intended to improve the efficiency and effectiveness of the nation’s health care system by encouraging the widespread use of electronic data interchange. Compliance with these regulations was required by October 2003, and CIGNA has implemented appropriate compliance initiatives.

Regulations issued in February 2003 set standards for the security of electronic health information, and must be implemented by CIGNA by April 2005. CIGNA has implemented certain security measures and planned others in anticipation of these rules. Other proposed HIPAA regulations include standards for the assignment of a unique national identifier for each health plan and provider and requirements for a unique national identifier for employer groups. CIGNA has commenced significant systems enhancements, training and administrative efforts to satisfy these requirements. Incremental technology and business-related expenses associated with CIGNA’s compliance efforts were approximately $14 million after-tax for the third quarter and $45 million after-tax for the nine months ended September 30, 2003.

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 could be subject to government efforts to bring criminal actions in circumstances that could previously have given rise only to civil or administrative proceedings.

16

Split-dollar life insurance. Recently issued regulations by the Internal Revenue Service and statutory changes may result in withdrawals of assets, policy terminations and fewer sales of new policies. Approximately $5 million in earnings for full year 2002 was associated with these policies.

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. Management expects revenues and earnings associated with these products to decline. For the third quarter and nine months of 2003, revenues of $31 million and $120 million, respectively, and earnings of $4 million and $16 million, respectively, were from products affected by this legislation.

Litigation and Other Legal Matters

CIGNA and several health care industry competitors were named as defendants in federal and state purported class action lawsuits. A Florida federal court handling this multi-district litigation matter certified a class of physicians who allege violations under the Racketeer Influenced and Corrupt Organizations Act and ERISA. The Florida federal court denied class certification to health plan subscribers. During the second quarter of 2003, CIGNA settled these subscriber cases for minimal amounts.

An Illinois state court certified a class action lawsuit against CIGNA by health care providers alleging breach of contract and seeking increased reimbursements. This state action was amended to include federal claims and was removed to federal court in Illinois where a settlement was filed and preliminarily approved. The case was then transferred to federal court in Florida as part of the multi-district litigation described above. In September of 2003, the federal court in Florida preliminarily approved a settlement agreement between the physician class and CIGNA, and scheduled a fairness hearing for December 2003. Upon final approval by the court, the settlement would resolve for CIGNA and the plaintiffs all physician claims reflected in the Florida multi-district litigation, including the Illinois case transferred to federal court in Florida.

CIGNA recorded an after-tax charge of $37 million ($57 million pre-tax) in the third quarter of 2003 to increase the reserve for this settlement and other non-physician health care litigation. CIGNA had previously recognized an after-tax charge in the fourth quarter of 2002 of $50 million ($77 million pre-tax) for expected costs associated with the health care provider class action litigation. The reserve reflects expected insurance recoveries. No significant amounts will be disbursed until the settlement becomes final, most likely in early 2004.

In the third quarter of 2002, CIGNA recognized a charge based on a review of CIGNA’s exposures for the run-off reinsurance operations, including an assessment of London market retrocessional disputes and exposures. The underlying London market retrocessional disputes are not expected to be resolved for some time. CIGNA’s reserve balance is based on a current assessment of these matters, the outcomes of which could result in adjustments to CIGNA’s reserve. See also Note 10 for further discussion.

The U. S. Attorney’s Office for the Eastern District of Pennsylvania is investigating compliance with federal 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.

In the fourth quarter of 2002, several purported class action lawsuits, as well as two shareholder derivative complaints nominally brought on behalf of CIGNA, were filed in federal court in the Eastern District of Pennsylvania against CIGNA and certain of its senior officers and directors. These suits, which allege securities law violations and breaches of fiduciary duty, have been consolidated. Two other purported class action lawsuits asserting violations of ERISA were filed against CIGNA and certain officers in the Eastern District of Pennsylvania by individuals who seek to represent a class of participants in the CIGNA 401(k) Plan who allegedly suffered losses on investments in CIGNA stock. These ERISA class action cases have been consolidated.

17

During 2002, a Connecticut federal court certified a class action lawsuit against CIGNA and the CIGNA Pension Plan. The plaintiffs are participants in the Plan who earned certain Plan benefits prior to 1998. The plaintiffs allege, among other things, that the Plan violated ERISA by impermissibly conditioning certain post-1997 benefit accruals on the amount of pre-1998 benefit accruals, that these conditions are not adequately disclosed to Plan participants, and that the Plan’s cash balance formula discriminates against older employees.

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 could result in losses material to CIGNA’s consolidated results of operations, liquidity or financial condition.

18

INTRODUCTION

In this filing and in other marketplace communications, CIGNA makes certain predictions relating to its operations. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2003”). Actual results may differ from CIGNA’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis, including in the Cautionary Statement on page 42.

The following discussion addresses the financial condition of CIGNA as of September 30, 2003, compared with December 31, 2002, and its results of operations for the quarter and nine months ended September 30, 2003, compared with the same periods last year. This discussion should be read in conjunction with Management’s Discussion and Analysis included in CIGNA’s 2002 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 full year results based on interim results of operations.

Segment Reporting Changes

In the third quarter of 2003, CIGNA changed its segment presentation to report its health care operations and its separately managed group disability and life insurance operations as two discrete segments. In previous quarters, results from these operations were combined as a single segment.

In addition, CIGNA has renamed its segments to Health Care, Disability and Life, Retirement, International, Run-off Reinsurance and Other Operations.

Disability and life insurance products which were historically sold in connection with certain experience-rated medical accounts continue to be managed by CIGNA’s health care business and are reported in the Health Care segment.

Charges for Run-off Reinsurance

In the second quarter of 2003, CIGNA recognized an after-tax charge of $286 million ($441 million pre-tax) related to a review of reserves for certain specialty life reinsurance contracts.

In the third quarter of 2002, CIGNA recognized an after-tax charge of $720 million ($1.1 billion pre-tax) to strengthen reserves related to these contracts and the adoption of a program to substantially reduce equity market risks also related to these contracts. In addition, CIGNA recognized an after-tax charge of $317 million ($408 million pre-tax) in the third quarter of 2002 for Unicover and other run-off reinsurance exposures, including London reinsurance business.

See the Run-off Reinsurance segment beginning on page 31 for further information on these charges.

19

Acquisitions and Dispositions

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

Sale of Japanese pension operations. In September 2003, CIGNA sold its interest in a Japanese pension operation for cash proceeds of $18 million and recognized an after-tax gain of $5 million. The gain is reported in the International segment in continuing operations since this operation was accounted for under the equity method of accounting.

Sale of Lovelace Health Systems. In January 2003, CIGNA sold the operations of Lovelace Health Systems, Inc. (Lovelace), 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. The sale generated an after-tax gain of $32 million, which is reported in discontinued operations. In the fourth quarter of 2002, CIGNA began reporting this business as discontinued operations and prior period financial information was reclassified.

Sale of Brazilian health care operations. In January 2003, CIGNA sold its Brazilian health care operations. The sale generated an after-tax gain of $18 million, primarily as a result of the disposition of the net liabilities associated with these operations. The gain is reported in discontinued operations. Because the revenues, expenses and results of operations of the Brazilian health care operations are not material to CIGNA’s consolidated financial statements, prior period financial information has not been reclassified.

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 a gain of approximately $85 million after-tax, which was deferred because the sale was structured as an indemnity reinsurance arrangement. During the second and third quarters of 2002, 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 $1 million after-tax of the deferred gain for the third quarter and $3 million after-tax for the nine months of 2002. 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.

Restructuring Programs

Corporate effectiveness initiative. In the second quarter of 2003, CIGNA adopted a restructuring program to attain operational efficiencies in its corporate staff functions and to achieve additional cost savings. As a result, CIGNA recognized in other operating expenses an after-tax charge in Corporate of $9 million ($13 million pre-tax) for severance costs. The severance charge reflected the expected reduction of approximately 280 employees. As of September 30, 2003, approximately 250 employees had been terminated under the program and $4 million ($7 million pre-tax) of the liability had been spent. Annualized after-tax savings are estimated to be $15 million reflecting the elimination of salary and benefits costs for terminated employees.

Fourth quarter 2002 program. In the fourth quarter of 2002, CIGNA adopted a restructuring program primarily to realign the organizational structure and operations of its health care business. As a result, CIGNA recognized in other operating expenses an after-tax charge of $97 million ($151 million pre-tax) in the Health Care segment. The after-tax charge consisted of $74 million of severance costs ($116 million pre-tax), $22 million in real estate costs ($34 million pre-tax) related to vacating certain leased facilities and $3 million ($4 million pre-tax) of asset impairment charges. These amounts were partially offset by a reduction in costs of $2 million after-tax ($3 million pre-tax) for other postretirement benefits for employees terminated in 2002. This benefit cost reduction continues in 2003 as employees are terminated, and is estimated not to exceed $10 million after-tax ($15 million pre-tax) for the full year of 2003. CIGNA recorded a gain of $1 million after-tax ($1 million pre-tax) for the third quarter and $7 million after-tax ($10 million pre-tax) for the nine months of 2003 for other postretirement benefits for employees terminated during 2003.

20

When recorded in the fourth quarter of 2002, the severance charge reflected the expected reduction of approximately 3,900 employees. In the second quarter of 2003, CIGNA reduced the remaining liability for this program by $15 million pre-tax ($10 million after-tax). This reduction was primarily due to higher attrition (which does not result in severance benefits or costs) and lower costs relating to outplacement and other services.

CIGNA expects this restructuring program to be substantially completed by year end 2003 and does not expect cash outlays under this program to have a significant effect on liquidity. CIGNA expects the program to result in net annual after-tax savings of approximately $100 million in 2003 and approximately $150 million beginning in 2004, reflecting the elimination of salary costs for terminated employees and lower facility costs.

The table below shows CIGNA’s restructuring activity (pre-tax) related to severance and real estate for this program:

As CIGNA continues its improvement efforts into 2004, additional expense reduction and productivity initiatives are likely.

Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if:

CIGNA's most critical accounting estimates, as well as the effects of hypothetical changes in material assumptions used to develop each estimate, are described in CIGNA's 2002 Annual Report to Shareholders beginning on page 22 and include the following, with the updated effects of hypothetical changes disclosed parenthetically:

In addition, there are other accounting estimates used in the preparation of CIGNA’s consolidated financial statements, including liabilities for unpaid claims and claim expenses and future policy benefits other than those identified above, as well as pension, post employment and postretirement benefits, certain compensation accruals and income taxes.

21

Management believes the current assumptions and other considerations used to estimate amounts reflected in CIGNA’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in CIGNA’s consolidated financial statements, the resulting changes could have a material adverse effect on CIGNA’s consolidated results of operations, and in certain situations, could have a material adverse effect on CIGNA’s financial condition.

Regulatory and Industry Developments

CIGNA’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some 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 state and federal level over health care liability is expected to continue.

Privacy regulations under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 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 was required by April 2003, and CIGNA has implemented appropriate compliance initiatives. In addition to the privacy regulations, HIPAA establishes national electronic transaction standards, which apply to health insurers, providers and other covered entities. They are intended to improve the efficiency and effectiveness of the nation’s health care system by encouraging the widespread use of electronic data interchange. Compliance with these regulations was required by October 2003, and CIGNA has implemented appropriate compliance initiatives.

Regulations issued in February 2003 set standards for the security of electronic health information, and must be implemented by CIGNA by April 2005. CIGNA has implemented certain security measures and planned others in anticipation of these rules. Other proposed HIPAA regulations include standards for the assignment of a unique national identifier for each health plan and provider and requirements for a unique national identifier for employer groups. CIGNA has commenced significant systems enhancements, training and administrative efforts to satisfy these requirements. Incremental technology and business-related expenses associated with CIGNA’s compliance efforts were approximately $14 million after-tax for the third quarter and $45 million after-tax for the nine months ended September 30, 2003, and are estimated to be approximately $60 million after-tax for full year 2003.

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

22

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

Litigation and other legal matters. CIGNA and several health care industry competitors were named as defendants in federal and state purported class action lawsuits. A Florida federal court handling this multi-district litigation matter certified a class of physicians who allege violations under the Racketeer Influenced and Corrupt Organizations Act and ERISA. The Florida federal court denied class certification to health plan subscribers. During the second quarter of 2003, CIGNA settled these subscriber cases for minimal amounts.

An Illinois state court certified a class action lawsuit against CIGNA by health care providers alleging breach of contract and seeking increased reimbursements. This state action was amended to include federal claims and was removed to federal court in Illinois where a settlement was filed and preliminarily approved. The case was then transferred to federal court in Florida as part of the multi-district litigation described above. In September 2003, the federal court in Florida preliminarily approved a settlement agreement between the physician class and CIGNA, and scheduled a fairness hearing for December 2003. Upon final approval by the court, the settlement would resolve for CIGNA and the plaintiffs all physician claims reflected in the Florida multi-district litigation, including the Illinois case transferred to federal court in Florida.

CIGNA recorded an after-tax charge of $37 million ($57 million pre-tax) in the third quarter of 2003 to increase the reserve for this settlement and other non-physician health care litigation. CIGNA had previously recognized an after-tax charge in the fourth quarter of 2002 of $50 million ($77 million pre-tax) for expected costs associated with the health care provider class action litigation. The reserve reflects expected insurance recoveries. No significant amounts will be disbursed until the settlement becomes final, most likely in early 2004.

In the third quarter of 2002, CIGNA recognized a charge based on a review of CIGNA’s exposures for the run-off reinsurance operations, including an assessment of London market retrocessional disputes and exposures. The underlying London market retrocessional disputes are not expected to be resolved for some time. CIGNA’s reserve balance is based on a current assessment of these matters, the outcomes of which could result in adjustments to CIGNA’s reserve. See also page 33 in the “Unicover and other run-off reinsurance” section.

The U. S. Attorney’s Office for the Eastern District of Pennsylvania is investigating compliance with federal 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.

In the fourth quarter of 2002, several purported class action lawsuits, as well as two shareholder derivative complaints nominally brought on behalf of CIGNA, were filed in federal court in the Eastern District of Pennsylvania against CIGNA and certain of its senior officers and directors. These suits, which allege securities law violations and breaches of fiduciary duty, have been consolidated. Two other purported class action lawsuits asserting violations of ERISA were filed against CIGNA and certain officers in the Eastern District of Pennsylvania by individuals who seek to represent a class of participants in the CIGNA 401(k) Plan who allegedly suffered losses on investments in CIGNA stock. These ERISA class action cases have been consolidated.

During 2002, a Connecticut federal court certified a class action lawsuit against CIGNA and the CIGNA Pension Plan. The plaintiffs are participants in the Plan who earned certain Plan benefits prior to 1998. The plaintiffs allege, among other things, that the Plan violated ERISA by impermissibly conditioning certain post-1997 benefit accruals on the amount of pre-1998 benefit accruals, that these conditions are not adequately disclosed to Plan participants, and that the Plan’s cash balance formula discriminates against older employees.

CIGNA is routinely involved in numerous lawsuits and other legal matters arising, for the most part, in the ordinary course of the business of

23

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 could result in losses material to CIGNA’s consolidated results of operations, 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 Note 12 to the Financial Statements.

Other Matters

CIGNA is exploring strategic alternatives to further maximize the value of its retirement and investment services business.

CIGNA is conducting account reviews related to contracts associated with its retirement and leveraged corporate life insurance businesses. The reviews, which are expected to be completed in the fourth quarter of 2003, may result in adjustments, which could have a neutral to material positive effect on CIGNA’s consolidated net income. The potential adjustments are expected to be reflected in the Retirement and Other Operations segments in the fourth quarter of 2003.

Accounting Pronouncements

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

CONSOLIDATED RESULTS OF OPERATIONS

Net Income (Loss)

Net income (loss) is determined in accordance with GAAP, and includes both income (loss) from continuing operations (including realized investment gains (losses), net of taxes) and discontinued operations.

Income (loss) from continuing operations increased significantly for the third quarter and nine months of 2003, compared with the same periods last year, primarily due to reduced losses in the Run-off Reinsurance segment and improved results in the International segment as well as improved after-tax realized investment results. These improvements were partially offset by lower results in the Health Care segment. Segment results are discussed in more detail below.

Income (loss) from discontinued operations for the nine months of 2003 primarily reflects the after-tax gains on the sales of Lovelace and the Brazilian health care operations. Income (loss) from discontinued operations for the third quarter and nine months of 2002 reflects operating losses from Lovelace. See “Acquisitions and Dispositions” on page 20 for additional information.

24

In order to facilitate an understanding and comparison of results of operations, the following table presents special items, which management believes are not representative of the underlying results of continuing operations.

Revenues

Total revenues for the third quarter and nine months of 2003 compared with the same periods last year were impacted by:

These decreases were substantially offset by:

Realized Investment Gains (Losses)

The improvement in realized investment results for the third quarter and nine months of 2003, compared with the same periods last year primarily reflects:

The weakness in certain sectors of the economy may cause investment losses in the future. Refer to “Investment Assets” beginning on page 39 for further information.

_________________
^*Restructuring items for the nine months of 2003 include a reduction of costs of $10 million after-tax ($15 million pre-tax) associated with the 2002 program, and a charge of $9 million after-tax ($13 million pre-tax) associated with the Corporate Effectiveness Initiative (see page 20).

25

Stock Market Performance

The performance of equity markets can have a significant effect on CIGNA’s businesses including:

Minimum Pension Liability

During the second quarter of 2003, CIGNA increased its minimum pension liabilities, resulting in an after-tax charge to equity of $13 million ($21 million pre-tax). This increase is a result of CIGNA’s annual update of plan participant data. Plan asset values and actuarial assumptions are consistent with those disclosed in CIGNA’s 2002 Annual Report to Shareholders.

Outlook for 2003 and 2004

Subject to the factors noted in the Cautionary Statement on page 42, management expects full year 2003 income from continuing operations excluding realized investment gains (losses) and special items to be lower than the comparable 2002 amount (see page 19 of CIGNA’s 2002 Annual Report to Shareholders). This lower outlook for 2003 primarily reflects expected lower earnings in the Health Care segment due to:

Information is not available for management to reasonably estimate realized investment gains (losses) or special items for 2003 (with the exception of gains associated with other postretirement benefits discussed on page 27). Refer to page 25 for special items recognized through the nine months of 2003. Realized investment gains, net of taxes, were $83 million for the nine months of 2003, however realized investment results are not predictable and therefore this amount is not necessarily indicative of full year results.

CIGNA expects income from continuing operations excluding realized investment gains (losses) and special items in 2004 to be higher than the comparable 2003 amount. This expectation primarily reflects improved results in the Health Care segment. Special items in 2004 will include the effect of adopting a new accounting standard (see Note 2 for further discussion) and may include any charges incurred related to expense reduction initiatives.

Segment Analysis

CIGNA’s operating segments generally reflect groups of related products, but the International segment is based on geography. As discussed on page 19, CIGNA changed its segment presentation in the third quarter of 2003. CIGNA measures the financial results of its segments using “segment earnings,” which is defined as income (loss) from continuing operations before realized investment gains (losses).

HEALTH CARE

26

Results

Health Care segment earnings decreased 42% for the third quarter, and 45% for the nine months of 2003, compared with the same periods last year.

CIGNA reports the results of this segment in two parts, 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 and pharmaceutical fulfillment services. Indemnity includes medical and dental indemnity, and that portion of CIGNA’s group disability and life insurance business that continues to be managed by the health care business.

Segment earnings for the HMO and Indemnity operations were as follows:

Special items (after-tax) included in segment earnings for the HMO and Indemnity operations were as follows:

HMO results, excluding the special items noted above, declined $4 million for the third quarter and $78 million for the nine months of 2003, compared with the same periods last year, primarily due to:

These factors were partially offset by improved results in pharmaceutical fulfillment services.

The nine months of 2003 also reflects higher prior year claim experience, including the impact of reprocessing certain 2002 claims.

Indemnity results, excluding the special items noted above, declined $4 million for the third quarter and $123 million for the nine months of 2003, compared with the same periods last year. These declines are primarily due to:

These declines were partially offset by improved results in experience-rated business reflecting margin improvements on renewing business, increased margins on new business and higher gains from the cancellation of certain cases.

The nine months of 2003 also reflects higher prior year claim experience, including the impact of reprocessing certain 2002 claims.

Premiums and Fees

Premiums and fees decreased 2% for the third quarter and nine months of 2003 due to a decline in membership which was substantially offset by rate increases.

Premium Equivalents

A significant portion of CIGNA’s health care business consists of ASO programs where the

27

customer self-funds all of their claims and minimum premium programs where the customer self-funds a portion of their claims. Under ASO programs, the customer or plan sponsor, rather than CIGNA, assumes the risk for claim costs incurred. Under minimum premium programs, the policyholder assumes the risk and self-funds claims up to a predetermined aggregate, maximum amount, and CIGNA bears the risk for claim costs incurred in excess of that amount.

“Premium equivalents” generally equal paid claims under ASO and minimum premium 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. Premium equivalents do not represent premium and fee revenue recognized under GAAP. Management uses premium equivalents as an indicator of business volume associated with ASO and minimum premium programs. “Adjusted premiums and fees” consists of premiums and fees plus premium equivalents, which management believes is a useful measure of volume to evaluate CIGNA’s health care operations as a whole.

Premiums and fees associated with ASO programs were $413 million for the third quarter and $1.3 billion for the nine months of 2003, compared with $404 million for the third quarter and $1.3 billion for the nine months of 2002.

Premiums and fees associated with minimum premium programs were $74 million for the third quarter and $185 million for the nine months of 2003, compared with $78 million for the third quarter and $215 million for the nine months of 2002.

Adjusted premiums and fees for the Health Care segment were as follows:

The increase in premium equivalents is primarily due to higher medical costs in HMO and Indemnity ASO and minimum premium programs that, in turn, increase the amount of paid claims.

Net Investment Income

Net investment income decreased 6% for the third quarter and 8% for the nine months of 2003 compared with the same periods last year primarily resulting from lower yields.

Other Revenues

Other revenues increased 17% for the third quarter and 29% for the nine months of 2003 compared with the same periods last year primarily due to growth in the specialty health care operations, predominantly in pharmaceutical fulfillment services and medical cost and utilization management services.

Medical Membership

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

The decline in HMO medical membership is primarily due to lower guaranteed cost HMO program membership, and, to a lesser extent, declines in HMO ASO programs.

The decline in Indemnity medical membership primarily reflects cancellations of, and lower enrollment in, Preferred Provider Organization (PPO) plans and, to a lesser extent, declines in traditional indemnity programs.

Other Matters

CIGNA continues to focus on improving operational effectiveness and financial results in its health care operations. Key areas of focus include: reducing medical cost trend; stabilizing and growing medical membership; continuing to deliver improved quality service; and driving operating efficiency. CIGNA expects successful execution of these initiatives to improve results.

28

DISABILITY AND LIFE

The Disability and Life segment includes group accident and specialty association business in addition to its disability and life products.

Results

Disability and Life segment earnings increased by 14% for the third quarter and 17% for the nine months of 2003 compared to the same periods last year primarily due to higher earnings in the disability business due to improved claim experience and improved margins in the life business. These increases were partially offset by lower results in the specialty business.

Premiums and Fees

Premiums and fees increased 11% for the third quarter and 5% for the nine months of 2003 compared to the same periods last year reflecting higher new business and strong retention in both disability and life products.

RETIREMENT

Results

Retirement segment earnings increased 2% for the third quarter and 1% for the nine months of 2003 compared with the same periods last year. Results for the third quarter of 2003 reflect higher fees due to asset appreciation, partially offset by lower interest earnings. In addition to the above factors, the nine months of 2003 also includes the impact of a shift to higher margin products.

Revenues

Premiums and fees are principally:

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.

29

Premiums and fees increased 8% for the third quarter of 2003 compared with the same period last year mainly due to the impact of equity appreciation on asset-based fees. Premiums and fees increased 1% for the nine months of 2003 compared to the same period last year due to product shift into separate accounts, partially offset by the impact of equity depreciation on asset-based fees.

Assets Under Management

Assets under management consist of invested assets and separate account assets, as well as third-party investment advisory account assets in the Retirement segment. Assets under management are a determinant of earnings for this segment because a significant portion of this segment’s revenues is based on asset values.

The following table shows assets under management and the related activity for the nine months ended September 30.

Changes in assets under management are discussed below.

Premiums and deposits. For the nine months of 2003, approximately 70% of premiums and deposits were from existing customers, and 30% were from sales to new customers and new plan sales to existing customers. For the nine months of 2002, approximately 68% of premiums and deposits were from existing customers, and 32% were from sales to new customers and new plan sales to existing customers.

Fair value of assets. The fair value of assets under management fluctuates because of changes in the market value of fixed maturities, related derivatives and equity securities. The increase in fair value of assets in 2003 was primarily attributable to market value appreciation of equity securities in separate accounts, compared with depreciation of these securities in 2002.

Customer withdrawals. Withdrawals were higher in 2003 primarily due to three large customer withdrawals in the defined contribution business.

Other. The increase is primarily due to the fluctuation of certain separate account assets supporting retiree benefits obligations.

Other Matters

Split-dollar life insurance. Recently issued regulations by the Internal Revenue Service and statutory changes may result in withdrawals of assets, policy terminations and fewer sales of new policies. Approximately $5 million in earnings for full year 2002 was associated with these policies.

INTERNATIONAL