Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.04M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 33K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 33K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 30K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 29K
12: R1 Document and Entity Information HTML 81K
13: R2 Consolidated Statements of Income HTML 113K
14: R3 Consolidated Statements of Comprehensive Income HTML 66K
15: R4 Consolidated Balance Sheets HTML 157K
16: R5 Consolidated Balance Sheets (Parenthetical) HTML 35K
17: R6 Consolidated Statements of Changes in Total Equity HTML 126K
18: R7 Consolidated Statements of Changes in Total Equity HTML 30K
(Parenthetical)
19: R8 Consolidated Statements of Cash Flows HTML 147K
20: R9 Consolidated Statements of Cash Flows HTML 43K
(Parenthetical)
21: R10 Description of Business HTML 42K
22: R11 COVID-19 and Related Economic Impact HTML 34K
23: R12 Summary of Significant Accounting Policies HTML 57K
24: R13 Accounts Receivable, Net HTML 50K
25: R14 Mergers and Acquisitions HTML 31K
26: R15 Assets and Liabilities of Business Held for Sale HTML 47K
27: R16 Earnings Per Share HTML 111K
28: R17 Debt HTML 139K
29: R18 Insurance and Contractholder Liabilities HTML 178K
30: R19 Reinsurance HTML 133K
31: R20 Investments HTML 374K
32: R21 Fair Value Measurements HTML 310K
33: R22 Variable Interest Entities HTML 36K
34: R23 Accumulated Other Comprehensive Income (Loss) HTML 136K
35: R24 Organizational Efficiency Plan HTML 31K
36: R25 Leases HTML 84K
37: R26 Income Taxes HTML 33K
38: R27 Contingencies and Other Matters HTML 47K
39: R28 Segment Information HTML 100K
40: R29 Summary of Significant Accounting Policies HTML 151K
(Policies)
41: R30 Summary of Significant Accounting Policies HTML 54K
(Tables)
42: R31 Accounts Receivable, Net (Tables) HTML 45K
43: R32 Assets and Liabilities of Business Held for Sale HTML 50K
(Tables)
44: R33 Earnings Per Share (Tables) HTML 113K
45: R34 Debt (Tables) HTML 133K
46: R35 Insurance and Contractholder Liabilities (Tables) HTML 174K
47: R36 Reinsurance (Tables) HTML 131K
48: R37 Investments (Tables) HTML 370K
49: R38 Fair Value Measurements (Tables) HTML 298K
50: R39 Accumulated Other Comprehensive Income (Loss) HTML 136K
(Tables)
51: R40 Leases (Tables) HTML 56K
52: R41 Segment Information (Tables) HTML 514K
53: R42 COVID-19 and Related Economic Impact (Details) HTML 48K
54: R43 Summary of Significant Accounting Policies HTML 58K
(Details)
55: R44 Accounts Receivable, Net - Summary of Accounts HTML 44K
Receivable, Net (Details)
56: R45 Accounts Receivable, Net - Narrative (Details) HTML 38K
57: R46 Mergers and Acquisitions (Details) HTML 32K
58: R47 Assets and Liabilities of Business Held for Sale - HTML 34K
Narrative (Details)
59: R48 Assets and Liabilities of Business Held for Sale - HTML 59K
Assets and Liabilities Held for Sale (Details)
60: R49 Earnings Per Share - Computation of Basic and HTML 59K
Diluted Earnings Per Share (Details)
61: R50 Earnings Per Share - Outstanding Employee Stock HTML 34K
Options Not Included in the Computation of Diluted
Earnings Per Share (Details)
62: R51 Earnings Per Share - Narrative (Details) HTML 31K
63: R52 Debt - Outstanding Amounts of Debt and Finance HTML 166K
Leases (Details)
64: R53 Debt - Narrative (Details) HTML 92K
65: R54 Debt - Summary of Debt Issuances (Details) HTML 43K
66: R55 Insurance and Contractholder Liabilities - Summary HTML 98K
of Insurance and Contractholder Liabilities
(Details)
67: R56 Insurance and Contractholder Liabilities - HTML 35K
Narrative (Details)
68: R57 Insurance and Contractholder Liabilities - HTML 57K
Integrated Medical - Activity (Details)
69: R58 Insurance and Contractholder Liabilities - HTML 40K
Variances in Incurred Costs Related to Prior
Years' Unpaid Claims and Claims Expenses (Details)
70: R59 Insurance and Contractholder Liabilities - HTML 45K
Liability Details for Unpaid Claims and Claim
Expenses (Details)
71: R60 Insurance and Contractholder Liabilities - HTML 70K
Activity in Liabilities for Unpaid Claims and
Claim Expenses (Details)
72: R61 Reinsurance - Narrative (Details) HTML 62K
73: R62 Reinsurance - Reinsurance Recoverables by Range of HTML 95K
External Credit Rating and Collateral Level
(Details)
74: R63 Reinsurance - Effects of Reinsurance (Details) HTML 34K
75: R64 Reinsurance - Account Value, Net Amount at Risk HTML 38K
and Contractholders for GMDB Business (Details)
76: R65 Reinsurance - GMIB Reinsurers (Details) HTML 46K
77: R66 Investments - Investments by Category (Details) HTML 73K
78: R67 Investments - Debt Securities by Contractual HTML 56K
Maturity Periods (Details)
79: R68 Investments - Gross Unrealized Appreciation HTML 62K
(Depreciation) on Debt Securities (Details)
80: R69 Investments - Summary of Debt Securities with a HTML 65K
Decline in Fair Value (Details)
81: R70 Investments - Roll-Forward of the Allowance for HTML 39K
Credit Losses on Debt Securities (Details)
82: R71 Investments - Equity Security Investments HTML 48K
(Details)
83: R72 Investments - Narrative (Details) HTML 78K
84: R73 Investments - Summary of the Credit Risk Profile HTML 53K
of the Commercial Mortgage Loan Portfolio
(Details)
85: R74 Investments - Carrying Values of Other Long-Term HTML 37K
Investments (Details)
86: R75 Investments - Short-Term Investments and Cash HTML 39K
Equivalents (Details)
87: R76 Investments - Realized Gains and Losses on HTML 36K
Investments (Details)
88: R77 Investments - Sales Information for HTML 36K
Available-for-Sale Debt Securities (Details)
89: R78 Investments - Summary of Derivative Instruments HTML 41K
Held (Details)
90: R79 Fair Value Measurements - Financial Assets and HTML 98K
Financial Liabilities Carried at Fair Value
(Details)
91: R80 Fair Value Measurements - Narrative (Details) HTML 66K
92: R81 Fair Value Measurements - Fair Value and HTML 61K
Significant Unobservable Inputs Used in Pricing
Debt Securities (Details)
93: R82 Fair Value Measurements - Changes in Level 3 HTML 67K
Financial Assets and Financial Liabilities Carried
at Fair Value (Details)
94: R83 Fair Value Measurements - Fair Values of Separate HTML 57K
Account Assets (Details)
95: R84 Fair Value Measurements - Additional Information HTML 59K
on Separate Account Assets Priced at NAV (Details)
96: R85 Fair Value Measurements - Fair Value Disclosures HTML 40K
for Financial Instruments Not Carried at Fair
Value (Details)
97: R86 Variable Interest Entities (Details) HTML 56K
98: R87 Accumulated Other Comprehensive Income (Loss) HTML 83K
(Details)
99: R88 Organizational Efficiency Plans (Details) HTML 32K
100: R89 Leases (Details) HTML 63K
101: R90 Income Taxes (Details) HTML 30K
102: R91 Contingencies and Other Matters (Details) HTML 76K
103: R92 Segment Information - Summary of Special Items HTML 55K
(Details)
104: R93 Segment Information - Summarized Segment Financial HTML 153K
Information (Details)
105: R94 Segment Information - Revenue from External HTML 81K
Customers (Details)
106: R95 Segment Information - Narrative (Details) HTML 34K
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(Exact name of registrant as specified in its charter)
iDelaware
i82-4991898
(State
or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
i900 Cottage Grove Road
iBloomfield,iConnecticuti06002
(Address of principal executive offices) (Zip Code)
Registrant’s telephone
number, including area code (i860)i226-6000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant
to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, Par Value $0.01
iCI
iNew
York Stock Exchange, Inc.
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. iYesx No
_
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No _
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge Accelerated Filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller Reporting Company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes _
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐No
☒
As of July 31, 2020, i367,200,629 shares of the issuer’s common stock were outstanding.
Non-current
insurance and contractholder liabilities
i16,064
i16,052
Deferred
tax liabilities, net
i9,170
i9,387
Other
non-current liabilities
i4,775
i4,460
Long-term
debt
i31,774
i31,893
Separate
account liabilities
i8,261
i8,465
TOTAL
LIABILITIES
i112,223
i110,395
Contingencies
— Note 18
i
i
Redeemable noncontrolling interests
i34
i35
Shareholders’
equity
Common stock (1)
i4
i4
Additional
paid-in capital
i28,699
i28,306
Accumulated
other comprehensive loss
(i788)
(i941)
Retained
earnings
i23,052
i20,162
Less: treasury
stock, at cost
(i3,601)
(i2,193)
TOTAL
SHAREHOLDERS’ EQUITY
i47,366
i45,338
Other
noncontrolling interests
i5
i6
Total
equity
i47,371
i45,344
Total
liabilities and equity
$
i159,628
$
i155,774
(1)Par
value per share, $ii0.01/; shares issued,
i389 million as of June 30, 2020 and i386 million as of December 31, 2019; authorized
shares, ii600/ million.
The
accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
5
Cigna
Corporation
Consolidated Statements of Changes in Total Equity
(1)See
Note 3 for further information about the Company's adoption of new credit loss guidance (ASU 2016-13).
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
7
Cigna
Corporation
Consolidated Statements of Cash Flows
Unaudited
Six Months Ended June 30,
(In millions)
2020
2019
Cash Flows from Operating Activities
Net
income
$
i2,949
$
i2,782
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i1,387
i1,811
Realized
investment losses (gains), net
i50
(i33)
Deferred
income tax (benefit)
(i259)
(i241)
Debt
extinguishment costs
i199
i—
Net
changes in assets and liabilities, net of non-operating effects:
Accounts receivable
(i2,121)
(i1,165)
Inventories
(i50)
i524
Deferred
policy acquisition costs
(i177)
(i99)
Reinsurance
recoverable and Other assets
i28
(i177)
Insurance
liabilities
i483
i297
Pharmacy
and service costs payable
i1,655
i713
Accounts
payable and Accrued expenses and other liabilities
i630
(i370)
Other,
net
i387
i189
NET
CASH PROVIDED BY OPERATING ACTIVITIES
i5,161
i4,231
Cash
Flows from Investing Activities
Proceeds from investments sold:
Debt securities and equity securities
i1,638
i2,036
Investment
maturities and repayments:
Debt securities and equity securities
i765
i738
Commercial
mortgage loans
i10
i169
Other
sales, maturities and repayments (primarily short-term and other long-term investments)
i664
i650
Investments
purchased or originated:
Debt securities and equity securities
(i2,150)
(i2,212)
Commercial mortgage
loans
(i13)
(i184)
Other
(primarily short-term and other long-term investments)
(i934)
(i847)
Property
and equipment purchases, net
(i523)
(i497)
Acquisitions,
net of cash acquired
i—
(i6)
Other,
net
i37
(i6)
NET
CASH (USED IN) INVESTING ACTIVITIES
(i506)
(i159)
Cash
Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds
i529
i498
Withdrawals
and benefit payments from contractholder deposit funds
(i483)
(i542)
Net
change in short-term debt
(i953)
(i621)
Net
proceeds on issuance of term loan
i1,398
i—
Payments
for debt extinguishment
(i212)
i—
Repayment
of long-term debt
(i4,798)
(i2,740)
Net
proceeds on issuance of long-term debt
i3,465
i—
Repurchase
of common stock
(i1,324)
(i866)
Issuance
of common stock
i229
i70
Other,
net
i19
(i106)
NET
CASH (USED IN) FINANCING ACTIVITIES
(i2,130)
(i4,307)
Effect
of foreign currency rate changes on cash, cash equivalents and restricted cash
(i15)
(i10)
Net
increase (decrease) in cash, cash equivalents and restricted cash
i2,510
(i245)
Cash,
cash equivalents, and restricted cash January 1, (1)
i5,411
i3,855
Cash,
cash equivalents and restricted cash, June 30,
i7,921
i3,610
Cash
reclassified to assets of business held for sale
(i418)
i—
Cash,
cash equivalents, and restricted cash June 30, per Consolidated Balance Sheets (2)
$
i7,503
$
i3,610
Supplemental
Disclosure of Cash Information:
Income taxes paid, net of refunds
$
i190
$
i1,190
Interest
paid
$
i743
$
i865
(1)
Includes restricted cash of $i26 million reported in Other assets, $i23 million in Long-term investments, and $i743
million reported in Assets of business held for sale as of January 1, 2020.
(2) See table below for Cash, cash equivalents and restricted cash reconciliation as of June 30, 2020 and June 30, 2019.
8
The following table provides
a reconciliation of cash, cash equivalents and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above:
Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,”“we,”“our” or “us”) is a global health service organization with a mission of helping those we serve improve their health, well-being and peace of mind. We offer a differentiated set of pharmacy, medical, dental, disability, life and accident insurance and related products and services offered by our subsidiaries.
The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations. Cigna also offers commercial health and dental insurance,
Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the United States and selected international markets. In addition to these ongoing operations, Cigna also has certain run-off operations.
The Company reports its results in the following segments.
Health Services includes pharmacy benefits management, specialty pharmacy services, clinical solutions, home delivery and health management services.
Integrated Medical offers a variety of health care solutions to employers and individuals.
•The Commercial operating segment serves employers (also referred
to as “clients”) and their employees (also referred to as “customers”) and other groups. This segment provides deeply integrated medical and specialty offerings including medical, pharmacy, dental, behavioral health and vision, health advocacy programs and other products and services to insured and self-insured clients.
•The Government operating segment offers Medicare Advantage, Medicare Supplement and Medicare Part D plans for seniors (including the acquired Express Scripts' Medicare Part D business), Medicaid plans, and individual health insurance coverage both on and off the public exchanges.
International Markets includes supplemental health, life and accident insurance products and health care coverage in our international markets, as well as health care benefits to
globally mobile employees of multinational organizations.
The remainder of our business operations are reported in Group Disability and Other, consisting of the following:
•Group Disability and Life provides group long-term and short-term disability, group life, accident, voluntary and specialty insurance products and related services. In December 2019, Cigna entered into a definitive agreement to sell the U.S. Group Disability and Life insurance business to New York Life Insurance Company. See Note 6 for further information on the classification of this business as held for sale.
•Corporate-Owned Life Insurance (“COLI”) offers permanent insurance contracts
sold to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations.
•Run-off businesses:
•Reinsurance: predominantly comprised of guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) in 2013.
•Settlement Annuity business in run-off.
11
•Individual
Life Insurance and Annuity and Retirement Benefits Businesses: deferred gains from the sales of these businesses.
Corporate reflects amounts not allocated to operating segments, including interest expense, net investment income on investments not supporting segment and other operations, interest on uncertain tax positions, certain litigation matters, expense associated with our frozen pension plans, severance, certain enterprise-wide projects and intersegment eliminations for products and services sold between segments.
Note 2 – iCOVID-19
and Related Economic Impact
Cigna continues to actively monitor all aspects of our business in light of the ongoing coronavirus ("COVID-19") pandemic. As described below, management has taken a number of steps to assess the impact on our business, including the financial reporting implications associated with this pandemic.
The COVID-19 pandemic has pervasively impacted the economy, financial markets and the global health care delivery systems during the second quarter, including significant deferral of care of our customers. These impacts were most prominent in April 2020 and moderated throughout the quarter with utilization levels returning to nearly normal levels by the end of June 2020. These impacts were most significant in our Integrated Medical segment where results reflect higher quarterly earnings and a lower medical care ratio as a result of the deferral
of care significantly exceeding the incremental COVID-19 costs, partially offset by COVID-19 related actions including premium relief programs for clients as well as cost share waivers for customers. The Health Services segment quarterly earnings also reflected effects of the pandemic, specifically, a favorable mix of claims as a result of both the type of drugs dispensed as well as the distribution method used for dispensing and fulfilling, partially offset by lower non-specialty, 30-day retail script volume.
The Company conducted its normal quarterly qualitative assessment of goodwill impairment, and concluded that the current economic and business conditions did not result in a triggering event requiring a quantitative impairment analysis. All other long-lived assets, including intangible assets, were reviewed for impairment and no
material impairments were recorded for the six months ended June 30, 2020.
The Company reviewed all classes of financial instruments including investments, accounts receivable and reinsurance recoverables, and recorded an additional allowance for expected credit losses of $i48 million related to investments (see Note 11) and $i13
million related to accounts receivable (see Note 4) for the six months ended June 30, 2020. The Company also initiated several actions to assist our customers, clients, health care providers, and employees in this time of crisis.
Additionally, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The direct impact of this new legislation was not material to the Company's results of operations for the six months ended June 30, 2020. As permitted by the CARES Act and COVID-19 related regulatory actions, the
Company deferred approximately $i900 million in income and payroll tax payments during the second quarter of 2020. Approximately $i825 million
of the deferred tax payments will be made during the third quarter of 2020. The Company did not request any funding under the CARES Act. However, in April 2020 the Company received $ii41/ million
from the provider relief fund which was immediately returned to the U.S. Department of Health and Human Services.
12
Note 3 – iSummary
of Significant Accounting Policies
i
Basis of Presentation
The Consolidated Financial Statements include the accounts of Cigna Corporation and its consolidated subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Amounts
recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment and receivable valuations, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment.
These interim Consolidated Financial Statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The interim Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes included in the 2019 Annual Report on Form 10-K (“2019 Form 10-K”). The preparation of interim Consolidated
Financial Statements necessarily relies heavily on estimates. This and other factors, including the seasonal nature of portions of the health care and related benefits business, competitive and other market conditions, as well as COVID-19 related impacts, call for caution in estimating full-year results based on interim results of operations.
i
Recent Accounting Pronouncements
The
Company's 2019 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted our financial statements or may impact them in the future. The following information provides updates on recently adopted or recently issued accounting pronouncements that have occurred since the Company filed its 2019 Form 10-K.
13
i
Recently
Adopted Accounting Guidance
Accounting Standard and Adoption Date
Requirements and Effects of Adopting New Guidance
Measurement of Credit Losses on Financial Instruments (Accounting Standards Update (ASU) 2016-13 and related amendments)
A
new approach using expected credit losses to estimate and recognize credit losses for certain financial instruments (such as mortgage loans, reinsurance recoverables and other receivables) when such instruments are first originated or acquired, and in each subsequent reporting period, compared with the incurred loss model previously followed under GAAP. At adoption, the Company recorded an allowance for estimated credit losses and subsequent changes in the allowance will be reported in current period earnings.
•
Changes in the criteria for impairment of available-for-sale debt securities
Effects of adoption:
•
Adopted
using a modified retrospective approach
•
Cumulative effect adjustment of $i30 million after-tax was recorded as a reduction to retained earnings as of January 1, 2020, reflecting an additional allowance for future expected credit losses required under the new model,
primarily related to reinsurance recoverables.
•
See additional information regarding the Company’s accounting policy for establishing the allowance for credit losses in Note 4, Accounts Receivable, Net, Note 10, Reinsurance, and Note 11, Investments.
Simplifying the Test for Goodwill Impairment (ASU 2017-04)
A simplified approach to the
accounting for goodwill impairment by eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment
•
The amount of goodwill impairment to equal the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill of the reporting unit
Effects of adoption:
•
Adopted on a prospective basis
•
There was no impact
of adopting this new standard to the Company’s financial statements because our quarterly qualitative assessments did not result in a triggering event for impairment of goodwill.
/
14
Accounting Guidance Not Yet Adopted
Accounting
Standard and Effective Date
Requirements and Expected Effects of New Guidance Not Yet Adopted
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
Provides temporary optional relief to ease the potential burden of accounting for reference rate
reform under existing GAAP.Amendments are elective and apply to all entities that have contracts, hedging relationships and other transactions that reference interbank offered rates, including LIBOR, expected to be discontinued by December 31, 2021.
•
Permits optional expedients and exceptions to simplify the accounting for contract modifications, hedging arrangements and held-to-maturity investments, when certain changes are made to a contract
or instrument to facilitate reference rate reform.
•
An entity may elect to apply the amendments, by topic or subsection, at any point prospectively through December 31, 2022. When elected, the optional expedients must be applied consistently for all eligible contracts or transactions.
Expected effects:
•
To date, the
Company has identified minimal exposure to LIBOR and does not anticipate that LIBOR’s phase-out will have a material impact on its operations or financial results.
The Financial Accounting Standards Board voted to propose the deferral of the effective date of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts and, in July 2020, issued a proposed standard for comment extending the effective date by one
year, or until January 1, 2023 for the Company.
Note 4 - iAccounts Receivable, Net
Accounting policy. iThe
Company's accounts receivable balances primarily include amounts due from clients, third-party payors, customers and pharmaceutical manufacturers, and are presented net of allowances. The Company's adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), as of January 1, 2020 did not have a material impact on our accounts receivable credit loss allowance, as there were no substantive changes to our methodology for this class of assets. The allowance for expected credit losses for current accounts receivable is based primarily on past collections experience relative to the length of time receivables are past due; however, when available evidence reasonably supports an assumption that counterparty credit risk over the expected payment period will differ
from current and historical payment collections, a forecasting adjustment is reflected in the allowance for expected credit losses.
All other (non-credit) allowances are based on the current status of each customer's receivable balance as well as current economic and market conditions and a variety of other factors, including the length of time the receivables are past due, the financial health of customers and our past experience. We bill pharmaceutical manufacturers based on management's interpretation of contractual terms and estimate a contractual allowance based on the best information available at the time a claim is processed. Contractual allowances for certain rebates receivable from pharmaceutical manufacturers are determined by reviewing payment experience and specific known items that could be adjusted under contract
terms. The Company's estimation process for contractual allowances for pharmaceutical manufacturer receivables generally results in an allowance for balances outstanding greater than 90 days.
15
Contractual allowances for certain receivables from third-party payors are based on their contractual terms and are estimates based on the Company's best information available at the time revenue is recognized.
Receivables and any associated allowance are written off only when all collection attempts have failed and such amounts are determined unrecoverable. We regularly
review the adequacy of these allowances based on a variety of factors, including age of the outstanding receivable and collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted.
i
The following amounts were included within accounts receivable, net:
Accounts
receivable, net classified as assets of business held for sale
(i631)
(i521)
Accounts
receivable, net per Consolidated Balance Sheets
$
i12,694
$
i10,716
/
These
receivables are reported net of our allowances of $i1.1 billion as of June 30, 2020 and $i778 million as of December 31,
2019. These allowances include contractual allowances for certain rebates receivable with pharmaceutical manufacturers and certain receivables from third-party payors, discounts and claims adjustments issued to customers in the form of client credits, an allowance for the balance of our risk corridor receivables under the Patient Protection and Affordable Care Act ("ACA"), an allowance for current expected credit losses and other non-credit adjustments. The Company's allowance for current expected credit losses was $i72
million as of June 30, 2020 and $i39 million as of January 1, 2020 (no change to allowance for credit losses from December 31, 2019). The allowance for current expected credit losses as of June 30, 2020 includes an additional forecasting adjustment of $i13
million related to COVID-19.
Note 5 – iMergers and Acquisitions
Integration and Transaction-related Costs
The Company incurred integration and transaction costs
related to the acquisition and integration of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”), the sale of the U.S. Group Disability and Life insurance business, and other transactions. These costs were $i130 million pre-tax ($i99
million after-tax) for the three months and $i227 million pre-tax ($i173 million after tax) for the six months ended June 30, 2020, compared with $i155
million pre-tax ($i115 million after-tax) for the three months and $i291 million pre-tax ($i223
million after-tax) for the six months ended June 30, 2019. These costs consisted primarily of certain projects to integrate or separate the Company’s systems, products and services, fees for legal, advisory and other professional services and certain employment-related costs.
16
Note 6 – iAssets
and Liabilities of Business Held for Sale
In December 2019, Cigna entered into a definitive agreement to sell its U.S. Group Disability and Life insurance business to New York Life Insurance Company for $i6.3 billion. The sale is expected to close in the third quarter of 2020 following applicable regulatory approvals and other customary closing conditions. The Company believes
this sale is probable and has aggregated and classified the assets and liabilities directly associated with the pending sale of its Group Disability and Life insurance business as held for sale and has reported them separately on our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019. iThe
assets and liabilities of business held for sale were as follows:
(Shares in thousands, dollars in millions, except per share amounts)
Basic
Effect
of Dilution
Diluted
Basic
Effect of Dilution
Diluted
Shareholders’ net income
$
i2,935
$
i2,935
$
i2,776
$
i2,776
Shares:
Weighted
average
i368,918
i368,918
i378,672
i378,672
Common
stock equivalents
i3,750
i3,750
i3,824
i3,824
Total
shares
i368,918
i3,750
i372,668
i378,672
i3,824
i382,496
EPS
$
i7.96
$
(i0.08)
$
i7.88
$
i7.33
$
(i0.07)
$
i7.26
/
17
i
The
following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive.
$i1,400
million, Floating Rate Term Loan due 3/2021
i1,398
i—
$i78 million,
i6.37% Notes due 6/2021
i78
i—
Commercial
paper
i5
i944
Other,
including finance leases
i22
i27
Total
short-term debt
$
i4,750
$
i5,514
Long-term
debt
$i500 million, i3.3%
Notes due 2021
$
i—
$
i499
$i300 million,
i4.5% Notes due 2021
i—
i298
$i78
million, i6.37% Notes due 2021
i—
i78
$i1,000 million,
Floating Rate Notes due 2021
i998
i998
$i1,250 million,
i3.4% Notes due 2021
i1,248
i1,247
$i1,248 million,
i4.75% Notes due 2021
i—
i1,272
$i277 million,
i4% Notes due 2022
i276
i747
$i973 million,
i3.9% Notes due 2022
i972
i999
$i500 million,
i3.05% Notes due 2022
i488
i485
$i17 million,
i8.3% Notes due 2023
i17
i17
$i63 million,
i7.65% Notes due 2023
i63
i100
$i700 million,
Floating Rate Notes due 2023
i698
i698
$i1,000 million,
i3% Notes due 2023
i971
i966
$i2,187 million,
i3.75% Notes due 2023
i2,180
i3,088
$i1,000 million,
i3.5% Notes due 2024
i974
i970
$i900 million,
i3.25% Notes due 2025
i895
i895
$i2,200 million,
i4.125% Notes due 2025
i2,189
i2,188
$i1,500 million,
i4.5% Notes due 2026
i1,505
i1,506
$i1,500 million,
i3.4% Notes due 2027
i1,404
i1,396
$i259 million,
i7.875% Debentures due 2027
i259
i259
$i600 million,
i3.05% Notes due 2027
i595
i595
$i3,800 million,
i4.375% Notes due 2028
i3,778
i3,776
$i1,500 million,
i2.4% Notes due 2030
i1,489
i—
$i45 million,
i8.3% Step Down Notes due 2033
i45
i45
$i190 million,
i6.15% Notes due 2036
i190
i190
$i2,200 million,
i4.8% Notes due 2038
i2,179
i2,178
$i750 million,
i3.2% Notes due 2040
i742
i—
$i121 million,
i5.875% Notes due 2041
i119
i119
$i448 million,
i6.125% Notes due 2041
i490
i491
$i317 million,
i5.375% Notes due 2042
i315
i315
$i1,500 million,
i4.8% Notes due 2046
i1,464
i1,465
$i1,000 million,
i3.875% Notes due 2047
i988
i988
$i3,000 million,
i4.9% Notes due 2048
i2,965
i2,964
$i1,250 million,
i3.4% Notes due 2050
i1,235
i—
Other,
including finance leases
i43
i61
Total
long-term debt
$
i31,774
$
i31,893
/
19
Debt
issuance and redemption. In order to decrease future interest expense and reduce future refinancing risk, the Company entered into the following transactions:
•Debt issuance: On March 16, 2020, the Company issued $i3.5 billion of new senior notes. The proceeds of
this debt were mainly used to pay the consideration for the cash tender and redemption offer as described below. Interest on this debt is paid semi-annually.
•Debt tender and redemption: In March and April 2020, the Company completed a tender offer and an optional redemption totaling $i3.5 billion of aggregate principal amount of certain of its outstanding debt securities. The principal
amount repurchased in this tender offer was $i1.5 billion. Additionally, $i2.0 billion
of notes were repurchased via optional redemption. The Company recorded a pre-tax loss of $i199 million ($i151
million after-tax), consisting primarily of premium payments on the tender and optional redemption.
Debt Exchange.In the fourth quarter of 2019, the Company settled an exchange of approximately $i12.7 billion of Notes issued by Express Scripts Holding Company, Medco Health Solutions, Inc. and Cigna Holding Company (formerly named
Cigna Corporation) for privately placed Notes issued by Cigna with the same interest rates and maturities and comparable other terms. We initiated an exchange offer to register such debt in the second quarter of 2020 and completed the exchange in July 2020.
Debt Repayment. During the first six months of 2020, the Company repaid $i4.8 billion of long-term debt,
including the $i3.5 billion debt tender and redemption described above.
Revolving Credit Agreements. Cigna has a revolving credit and letter of credit agreement that matures in April 2023 and is diversified among i23
banks. Cigna can borrow up to $i3.25 billion for general corporate purposes, with up to $i500
million available for issuance of letters of credit. This revolving credit agreement also includes an option to increase the facility amount up to $i500 million and an option to extend the termination date for additional ione
year periods, subject to consent of the banks.
In the fourth quarter of 2019, the Company entered into an additional i364-day revolving credit agreement that matures in October 2020 and is diversified among i23
banks. Pursuant to this revolving credit agreement, Cigna can borrow up to $i1.0 billion for general corporate purposes. The agreement includes the option to “term out” any revolving loans that are outstanding at maturity by converting them into a term loan maturing on the one year anniversary of conversion.
The revolving credit agreements contain customary covenants and restrictions including a financial covenant that the
Company’s leverage ratio may not exceed ii60/%. As
of June 30, 2020, there were iino/ outstanding balances under the revolving
credit agreements.
Term Loan Credit Agreement. On April 1, 2020, the Company borrowed an aggregate principal amount of $i1.4 billion under a new i364-Day
Term Loan Credit Agreement (the "Credit Agreement"). The Company entered into the Credit Agreement to enhance its liquidity position in light of disruption in the commercial paper market and used a portion of the net proceeds to pay down amounts outstanding under its commercial paper facility. The Credit Agreement may be prepaid at any time in whole or in part without premium or penalty. Term loans prepaid may not be reborrowed. The Credit Agreement provides for mandatory prepayment of the term loans in an amount equal to i20%
of any Net Cash Proceeds (as defined in the Credit Agreement) arising from the previously announced sale of Cigna’s U.S. Group Disability and Life insurance business to New York Life Insurance Company.
Commercial Paper. The commercial paper program had approximately $i5 million outstanding at June 30, 2020 at an average interest rate of i1.0%.
Insurance
and contractholder liabilities classified as liabilities of business held for sale(1)
(i2,149)
(i4,400)
(i6,549)
(i2,089)
(i4,219)
(i6,308)
Total
insurance and contractholder liabilities
$
i5,060
$
i16,064
$
i21,124
$
i4,921
$
i16,052
$
i20,973
$
i27,048
(1)
Amounts classified as Liabilities of business held for sale primarily include $i5.1 billion of unpaid claims, $i758
million of contractholder deposit funds and $i644 million of future policy benefits as of June 30, 2020 and $i4.9
billion of unpaid claims, $i717 million of contractholder deposit funds and $i653 million of future policy benefits as
of December 31, 2019.
/
Insurance and contractholder liabilities expected to be paid within one year are classified as current.
B.iUnpaid Claims and Claim Expenses – Integrated Medical
This
liability reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.
21
The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $ii2.7/
billion at June 30, 2020 and June 30, 2019.
Activity, net of intercompany transactions, in the unpaid claims liability for the Integrated Medical segment for the six months ended June 30 was as follows:
iReinsurance
and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims of certain business for which the Company administers the plan benefits without any right of offset. See Note 10 for additional information on reinsurance.
i
Variances in incurred costs related to prior years’ unpaid claims
and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions for the six months ended June 30 were as follows:
(1)Percentage
of current year incurred costs as reported for the year ended December 31, 2019.
(2)Percentage of current year incurred costs as reported for the year ended December 31, 2018.
/
Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered
as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.
Prior year development increased shareholders’ net income by $i44 million ($i56
million before-tax) for the six months ended June 30, 2020, compared with $i62 million ($i78
million before-tax) for the six months ended June 30, 2019. Favorable prior year development in both periods reflects lower than expected utilization of medical services.
22
C.Unpaid Claims and Claim Expenses – Group Disability and Other and International Markets
Liability balance details. The liability details for unpaid claims and claim expenses are as follows:
Unpaid
claims and claim expenses Group Disability and Other and International Markets
$
i6,150
$
i5,793
(1)
Includes unpaid claim amounts classified as Liabilities of business held for sale.
Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.
(1)
Includes Unpaid claims amounts classified as Liabilities of business held for sale.
Reinsurance in the table above reflects amounts due from reinsurers related to unpaid claims liabilities. The Company’s insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses. See Note 10 for additional information on reinsurance.
iThe
majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts that relate to a business held for sale. Interest earned on assets backing these liabilities is an integral part of pricing and reserving. Therefore, interest accreted on prior year balances is shown as a separate component of prior
23
year incurred claims and reported in Medical costs and other benefit expenses in the income statement. This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period. The remaining prior year incurred claims amount primarily reflects updates to the Company’s
liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability. Assumptions reflect the Company’s expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business. Favorable prior year incurred claims for the six months ended June 30, 2020 primarily reflected favorable experience in Europe and the Middle East and favorable Voluntary and Life incidence, partially offset by unfavorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve. Favorable prior year incurred claims for the six months ended June 30,
2019 primarily reflected favorable life and voluntary loss ratio experience relative to expectations reflected in the prior year reserve.
Note 10 – iReinsurance
The Company’s insurance subsidiaries
enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance is also used to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance does not relieve the originating insurer of liability. Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.
A.Reinsurance Recoverables
Accounting policy. Reinsurance recoverables represent amounts due from reinsurers
for both paid and unpaid claims of the Company’s insurance businesses. Most reinsurance recoverables are classified as non-current assets. The current portion of reinsurance recoverables is reported in Other current assets and consists primarily of recoverables on paid claims expected to be settled within one year. Reinsurance recoverables are presented net of allowances for uncollectible reinsurance that, effective with adopting ASU 2016-13 on January 1, 2020, consists primarily of an allowance for expected credit losses. Estimates of the allowance for expected credit losses are based on internal and external data used to develop expected loss rates over the anticipated duration of the recoverable asset that vary by external credit rating and collateral level. The
Company's allowance for credit losses on reinsurance recoverables was $i34 million as of June 30, 2020, of which $i31 million
was through a cumulative effect adjustment to retained earnings at adoption.
24
The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Included in the table below is $i224 million
of current reinsurance recoverables that are reported in Other current assets as of June 30, 2020; as of December 31, 2019 there was $i222 million of current reinsurance recoverables reported in Other current assets. iThe
Company’s reinsurance recoverables are presented in the following table by range of external credit rating and collateral level.
(Dollars in millions)
Fair value of collateral contractually required to meet or exceed
carrying value of recoverable
Collateral provisions exist that may mitigate risk of credit loss (3)
No collateral
Total
Ongoing Operations
Upper-medium grade and higher (1)
$
i—
$
i6
$
i311
$
i317
Lower-medium
grade (2)
i—
i—
i66
i66
Not
rated
i89
i14
i17
i120
Total
recoverables related to ongoing operations (3)
$
i89
$
i20
$
i394
$
i503
Acquisition,
disposition or runoff activities
Upper-medium grade and higher (1)
Lincoln National Life and Lincoln Life & Annuity of New York
i—
i3,064
i—
i3,064
Berkshire
i329
i493
i—
i822
Prudential
Retirement Insurance and Annuity
i660
i—
i—
i660
Other
i241
i21
i19
i281
Not
rated
i—
i40
i3
i43
Total
recoverables related to acquisition, disposition or runoff activities
i1,230
i3,618
i22
i4,870
Total
$
i1,319
$
i3,638
$
i416
$
i5,373
Allowance
for uncollectible reinsurance
(i34)
Reinsurance recoverables classified as assets of business held for sale
(i173)
Total
reinsurance recoverables
$
i5,166
(1) Includes A- equivalent and higher current ratings certified by a nationally recognized statistical rating organization
('NRSRO')
(2) Includes BBB- to BBB+ equivalent current credit ratings certified by a NRSRO
(3) This includes collateral provisions requiring the reinsurer to fully collateralize its obligation if its external credit rating is downgraded to a specified level
Collateral
levels are defined internally based on the fair value of the collateral relative to the carrying amount of the reinsurance recoverable, the frequency at which collateral is required to be replenished and the potential for volatility in the collateral’s fair value. The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables, as further described above.
25
B.Effects
of Reinsurance
i
In the Company’s Consolidated Statements of Income, premiums were reported net of amounts ceded to reinsurers and medical costs and other benefit expenses were reported net of reinsurance recoveries in the following amounts:
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions)
2020
2019
2020
2019
Total ceded premiums
$
i117
$
i126
$
i245
$
i256
Total
reinsurance recoveries
$
i102
$
i53
$
i280
$
i112
/
C.Effective
Exit of GMDB and GMIB Business
The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013. Berkshire reinsured i100% of the Company’s future claim payments in this business, net of other reinsurance arrangements existing at that time. The reinsurance agreement is subject to
an overall limit with approximately $i3.3 billion remaining at June 30, 2020.
GMDB is accounted for as assumed and ceded reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below. GMIB assets are reported in Other current assets and Other assets, and GMIB liabilities are reported in Accrued expenses and other liabilities and Other non-current liabilities.
GMDB
The
GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death. The Company’s exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death.
i
The following table presents the account value, net amount at risk and the number of contractholders for guarantees assumed by the
Company in the event of death. The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date. The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.
(Dollars in millions, excludes impact of reinsurance ceded)
The
Company reinsured contracts with issuers of GMIB products. The Company’s exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values. Payment by the Company depends on the actual account value in the related underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that can only occur within i30
days of a policy
26
anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage (“GMIB assets”) for these contracts including retrocessional coverage from Berkshire.
Assumptions used in fair value measurement. GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates). The Company
classifies GMIB assets and liabilities in Level 3 of the fair value hierarchy described in Note 12 because assumptions related to future annuitant behavior are largely unobservable.
The only assumption expected to impact future shareholders’ net income is non-performance risk. The non-performance risk adjustment reflects a market participant’s view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company, and (b) the GMIB assets to be paid by the reinsurers, after considering collateral. The impact of non-performance risk was immaterial for the three and six months ended June 30, 2020 and June 30, 2019.
GMIB
liabilities totaling $i838 million as of June 30, 2020 and $i688 million as of December 31, 2019 were reported in Accrued expenses and other liabilities and Other non-current
liabilities. iThere were iithree/
reinsurers covering ii100/%
of the GMIB exposures as of June 30, 2020 and December 31, 2019 as follows:/
Total GMIB recoverables reported in Other current assets and Other assets
$
i871
$
i713
Amounts
included in shareholders’ net income for GMIB assets and liabilities were not material for the three or six months ended June 30, 2020 or June 30, 2019.
27
Note 11 – iInvestments
Cigna’s
investment portfolio consists of a broad range of investments including debt securities, equity securities, commercial mortgage loans, policy loans, other long-term investments, short-term investments and derivative financial instruments. The sections below provide more detail regarding our investment balances and realized investment gains and losses. See Note 12 for information about the valuation of the Company’s investment portfolio. iThe following
table summarizes the Company's investments by category and current or long-term classification.
Investments
classified as assets of business held for sale(1)
(i312)
(i7,869)
(i8,181)
(i414)
(i7,295)
(i7,709)
Investments
per Consolidated Balance Sheets
$
i1,190
$
i21,338
$
i22,528
$
i937
$
i21,542
$
i22,479
(1)
The table above includes $i8.2 billion as of June 30, 2020 and $i7.7 billion
as of December 31, 2019 of investments associated with the U.S. Group Disability and Life business that are held for sale to New York Life. Under the terms of the definitive agreement, some of the assets currently associated with the Group Disability and Life business can be substituted for other assets. The assets that will transfer to New York Life will be primarily debt securities and to a lesser extent commercial mortgage loans and short-term investments.
A.Investment Portfolio
i
Debt
Securities
Accounting policy. Debt securities (including bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor) are classified as available for sale and are carried at fair value with changes in fair value recorded either in Accumulated other comprehensive income (loss) within Shareholders’ equity or in credit loss expense based on fluctuations in the allowance for credit losses, as further discussed below. Net unrealized appreciation on debt securities supporting the Company’s run-off settlement annuity business is reported in Non-current insurance and contractholder liabilities rather than Accumulated other comprehensive income (loss). When the Company intends to sell or determines that it is more
likely than not to be required to sell an impaired debt security, the excess of amortized cost over fair value is directly written down with a charge to Realized investment gains and losses.
As of January 1, 2020, the Company adopted ASU 2016-13 that included certain targeted improvements to the accounting for available-for-sale debt securities. The new guidance resulted in certain policy changes related to the process used by the Company to review declines in fair value from a security’s amortized cost basis to determine whether a credit loss exists. For example, the length of time that a debt security has been impaired is no longer a criterion for this review. In addition, under this
new guidance, the Company recognizes an allowance for credit loss with a corresponding charge to credit loss expense, presented in Realized investment gains and losses in the Company’s income statement. Prior to this new guidance, the Company recorded a direct write-down of the instrument’s amortized cost basis. The allowance for credit loss represents the excess of amortized cost over the greater of its fair value or the net present value of the debt security's projected future cash flows (based on
28
qualitative and
quantitative factors, including the probability of default, and the estimated timing and amount of recovery). Each period, the allowance for credit loss is adjusted through credit loss expense.
The Company elected the expedient to not measure an allowance for credit losses for accrued interest receivables. Consistent with prior practice, when interest payments are delinquent based on contractual terms or when certain terms (interest rate or maturity date) of the investment have been restructured, accrued interest, reported in Other current assets, is written off through a charge to Net investment income, and interest income is recognized on a cash basis.
Debt securities are classified as either Current or Long-term investments based on their contractual maturities.
Review
of declines in fair value. Management reviews impaired debt securities to determine whether a credit loss allowance is needed based on criteria that include:
•severity of decline;
•financial health and specific prospects of the issuer; and
•changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region.
i
The
amortized cost and fair value by contractual maturity periods for debt securities were as follows at June 30, 2020:
(In millions)
Amortized Cost
Fair Value
Due in one year or less
$
i1,049
$
i1,059
Due
after one year through five years
i7,298
i7,593
Due
after five years through ten years
i8,751
i9,582
Due
after ten years
i4,053
i4,969
Mortgage
and other asset-backed securities
i475
i471
Total
$
i21,626
$
i23,674
/
Actual
maturities of these securities could differ from their contractual maturities used in the table above because issuers may have the right to call or prepay obligations, with or without penalties.
29
i
Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below.
Investments
supporting liabilities of the Company’s run-off settlement annuity business (included in total above)(1)
$
i2,229
$
i—
$
i740
$
(i4)
$
i2,965
(1)Net
unrealized appreciation for these investments is excluded from accumulated other comprehensive income.
/
i
The table below summarizes debt securities with a decline in fair value from amortized cost by investment grade and the length of time these securities have been in an unrealized loss position. These debt securities
are primarily corporate securities with a decline in fair value that reflects an increase in market yields since purchase. See discussion of Realized Investment Gains and Losses below for further information on the credit loss expense recorded for the Company's investments.
Equity securities with a readily determinable fair value consist primarily of mutual funds that invest in fixed income debt securities. Equity securities without a readily determinable fair value consist of private equity investments and are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The amount of impairments or value changes resulting from observable price changes was not material as of June 30, 2020 and December 31, 2019. Hybrid equity securities consist of preferred stock investments that have call features.
Equity securities with readily determinable fair values
$
i140
$
i134
$
i61
$
i64
Equity
securities with no readily determinable fair value
$
i187
$
i196
$
i183
$
i192
Hybrid
equity securities
$
i58
$
i43
$
i58
$
i47
Total
$
i385
$
i373
$
i302
$
i303
/
Commercial
Mortgage Loans
Accounting policy.Commercial mortgage loans are carried at unpaid principal balances. Beginning January 1, 2020 with the adoption of ASU 2016-13, unpaid principal balances are presented net of an allowance for expected credit losses. Changes in the allowance for expected credit losses are recognized as credit loss expense and presented in Realized investment gains and losses in the Company’s income statement. Each period, the Company establishes (or adjusts) its allowance for expected credit losses for commercial mortgage loans. The allowance for expected credit losses is based on a credit risk category that is assigned to each loan at origination using
key credit quality indicators, including debt service coverage and loan-to-value ratios. Credit risk categories are updated as key credit quality indicators change. An expected loss rate, assigned based on the credit risk category, is applied to each loan's unpaid principal balance to develop an aggregate allowance for expected credit losses. Prior to adoption, impaired commercial mortgage loans were written down to the lower of unpaid principal or fair value of the underlying collateral when it became probable that the Company would not collect all amounts due under its promissory note. The Company recorded an allowance of $ii7/ million
through a cumulative effect adjustment to retained earnings to reflect expected credit losses at adoption. The credit loss allowance for the Company’s commercial mortgage loan investments was $i8 million as of June 30, 2020.
31
Commercial
mortgage loans are considered impaired and written off against the allowance when it is probable that the Company will not collect all amounts due per the terms of the promissory note. The Company elected the expedient to not measure an allowance for credit losses for accrued interest receivables. Consistent with our prior practice, accrued interest, reported in other current assets, is written off through a charge to net investment income; interest income on impaired loans is only recognized when a payment is received.
In the event of a foreclosure, the allowance for credit losses is based on the excess of the carrying value of the mortgage loan over the fair value of its underlying collateral.
Mortgage
loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are generally issued at fixed rates of interest and are secured by high quality, primarily completed and substantially leased operating properties. Commercial mortgage loans are classified as either current or long-term investments based on their contractual maturities.
Credit quality.The Company regularly evaluates and monitors credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal credit quality rating system designed
to evaluate the relative risk of the transaction at origination that is then updated each year as part of the annual portfolio loan review. The Company evaluates and monitors credit quality on a consistent and ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.
Quality ratings are based on our evaluation of a number of key inputs related to the loan, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the amount of property cash flow available to meet annual interest and principal payments on debt,
with a ratio below 1.0 indicating that there is not enough cash flow to cover the required loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property collateralizing the loan.
i
The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios as of June 30,
2020 and December 31, 2019:
The
Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. The Company’s investment professionals completed the annual in-depth review in the second quarter of 2020 that included an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimated the current year and future stabilized property income and fair value for each loan. The average loan to value increased slightly from last year and remains strong. The portfolio's average debt service coverage ratio decreased
slightly as June 30, 2020 compared with December 31, 2019 but remains at a high level.
32
The Company re-evaluates a loan’s credit quality between annual reviews if new property information is received or an event such as delinquency or a borrower’s request for restructure causes management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.
Other long-term investments include investments in unconsolidated entities, including certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company's ownership percentage of reporting income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income or loss from these investments is reported on a one quarter lag due to the timing of when financial information
is received from the general partner or manager of the investments.
i
Other long-term investments also include investment real estate, foreign currency swaps, and statutory and other deposits. The following table provides carrying value information for these investments.
Accounting policy. Realized investment gains and losses are based on specifically identified assets and results from sales, investment asset write-downs, change in the fair value of certain derivatives and equity securities, and changes in valuation reserves on commercial mortgage loans. Commencing January 1, 2020, realized gains and losses also
33
include credit loss expense resulting from the impact of changes in the allowances for credit losses on debt securities and commercial mortgage loan investments under ASU 2016-13.
i
The
following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business (consistent with accounting for a premium deficiency), as well as realized gains and losses attributed to the Company’s separate accounts because those gains and losses generally accrue directly to separate account policyholders.
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions)
2020
2019
2020
2019
Net realized investment gains, excluding credit loss expense and asset write-downs
$
i33
$
i25
$
i9
$
i36
Credit
loss expense on invested assets
i6
i—
(i49)
i—
Other
investment asset write-downs
(i1)
(i2)
(i10)
(i3)
Net
realized investment gains (losses), before income taxes
$
i38
$
i23
$
(i50)
$
i33
/
Net
realized investment gains, excluding credit loss expense and asset write-downs, for the six months ended June 30, 2020 primarily represent gains on the sales of debt securities, partially offset by mark-to-market losses on foreign exchange derivatives and equity securities. Net realized investment gains, excluding credit loss expense and asset write-downs, for the six months ended June 30, 2019 represent mark-to-market gains on equity securities and gains on the sales of debt securities and real estate partnerships. Credit loss expense on invested assets for the six months ended June 30, 2020 reflects credit losses incurred on debt securities due to uncertainty around issuers in certain industries that are particularly impacted by the global COVID-19 pandemic. Realized gains and losses on equity securities still held at
June 30, 2020 and 2019 were not material.
i
The following table presents sales information for available-for-sale debt securities. Gross gains on sales and gross losses on sales exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions)
2020
2019
2020
2019
Proceeds from sales
$
i880
$
i565
$
i1,623
$
i1,651
Gross
gains on sales
$
i27
$
i9
$
i66
$
i23
Gross
losses on sales
$
(i14)
$
(i2)
$
(i21)
$
(i12)
/
C.Derivative
Financial Instruments
The Company uses derivative financial instruments to manage the characteristics of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contract holder liabilities. The Company also uses derivative financial instruments to hedge the risk of changes in the net assets of certain of its foreign subsidiaries due to changes in foreign currency exchange rates. The Company has written and purchased GMIB
reinsurance contracts in its run-off reinsurance business that are accounted for as freestanding derivatives as discussed in Note 10. Derivatives in the Company’s separate accounts are excluded from the following discussion because associated gains and losses generally accrue directly to separate account policyholders.
Derivative instruments used by the Company typically include foreign currency swap contracts and foreign currency forward contracts. Foreign currency swap contracts
periodically exchange cash flows between two currencies for principal and interest. Foreign currency forward contracts require the Company to purchase a foreign currency in
34
exchange for the functional currency of its operating unit at a future date, generally within ithree
months from the contracts’ trade dates.
The Company manages the credit risk of these derivative instruments by diversifying its portfolio among approved dealers of high credit quality and through routine monitoring of credit risk exposures. Certain of the Company’s over-the-counter derivative instruments require either the Company or the counterparty to post collateral or demand immediate payment depending on the amount of the net liability position of the derivative instrument and predefined financial strength or credit rating thresholds. These collateral posting requirements
vary by counterparty. The Company would incur a loss if dealers completely failed to perform under derivative contracts, however collateral has been posted by dealers to cover substantially all of the fair values owed by dealers at June 30, 2020 and December 31, 2019. The fair value of collateral posted by the Company was not significant as of June 30, 2020 or December 31, 2019.
The gross fair values of our derivative financial instruments are presented in Note 12. iThe
following table summarizes the types and notional quantity of derivative instruments held by the Company. As of June 30, 2020 and December 31, 2019, the effects of these individual hedging strategies were not material to the Consolidated Financial Statements, including gains or losses reclassified from accumulated other comprehensive income into shareholders' net income, as well as amounts excluded from the assessment of hedge effectiveness.
Fair value hedge:To hedge the foreign exchange-related
changes in fair values of certain foreign-denominated bonds. The notional value of these derivatives matches the amortized cost of the hedged bonds.
Net
investment hedge: To reduce the risk of changes in net assets due to changes in foreign currency spot exchange rates for certain foreign subsidiaries that conduct their business principally in Euros, Korean Won, and Taiwan Dollar. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.
Economic
hedge: To hedge the foreign exchange-related changes in fair value of a U.S. dollar-denominated bond portfolio to reflect the local currency for the Company’s foreign subsidiary in South Korea. The notional value of hedging instruments generally aligns with the fair value of the hedged bond portfolio.
The
Company’s derivative financial instruments are presented as follows:
•Fair value hedges of the foreign exchange-related changes in fair values of certain foreign-denominated bonds: Swap fair values are reported in Long-term investments or Other non-current liabilities. Changes in fair values attributable to foreign exchange risk of the swap contracts and the hedged bonds are reported in Realized investment gains and losses. The portion of the swap contracts’ changes in fair value excluded from the assessment of hedge effectiveness is recorded in Other comprehensive income and recognized in Net investment income as swap coupon payments are accrued, offsetting the foreign-denominated coupons received
on the designated bonds. Net cash flows are reported in Operating activities, while exchanges of notional principal amounts are reported in Investing activities.
•Net investment hedges of certain foreign subsidiaries that conduct their business principally in currencies other than the U.S. dollar: The fair values of the foreign currency swap and forward contracts are reported in Other assets or Other liabilities. The changes in fair values of these instruments are reported in Other comprehensive income, specifically in translation of foreign currencies. The portion of the change in fair values relating to foreign exchange spot rates will be recognized in earnings upon deconsolidation of the
35
hedged
foreign subsidiaries. The remaining changes in fair value of these instruments are excluded from our effectiveness assessment and recognized in interest expense when coupon payments are accrued or ratably over the term of the instrument. The notional value of hedging instruments matches the hedged amount of subsidiary net assets. Cash flows relating to these contracts are reported in Investing activities.
•Economic hedges for derivatives not designated as accounting hedges: Fair values of forward contracts are reported in current Investments or Accrued expenses and other liabilities. The changes in fair values
are reported in Realized investment gains and losses. Cash flows relating to these contracts are reported in Investing activities.
Note 12 – iFair Value Measurements
i
The
Company carries certain financial instruments at fair value in the financial statements including debt securities, certain equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value only under certain conditions, such as when impaired or when there are observable price changes for equity securities with no readily determinable fair value.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
The Company’s financial assets and liabilities carried at
fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The Company estimates fair values using prices from third parties or internal pricing
methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available, and other market information that a market participant would use to estimate fair value. The internal pricing methods are performed by the Company’s investment professionals and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These
valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.
The Company is responsible for determining fair value and for assigning the appropriate level within the fair value hierarchy based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they
represent appropriate estimates of fair value. The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. The minimal exceptions identified during these processes indicate that adjustments to prices are
36
infrequent and do not significantly impact valuations. We conduct an annual on-site visit of the most significant pricing service to review their processes, methodologies and controls. This on-site review includes a walk-through
of inputs for a sample of securities held across various asset types to validate the documented pricing process.
A.Financial Assets and Financial Liabilities Carried at Fair Value
i
The following table provides information as of June 30, 2020 and December 31, 2019
about the Company’s financial assets and liabilities carried at fair value. Separate account assets are also recorded at fair value on the Company’s Consolidated Balance Sheets and are reported separately in the Separate Accounts section below as gains and losses related to these assets generally accrue directly to policyholders.
(In
millions)
Quoted Prices in Active Markets for Identical Assets
Real
estate funds priced at NAV as a practical expedient (2)
i168
i184
Financial
liabilities at fair value
Derivative liabilities
$
i—
$
i—
$
i15
$
i18
$
i—
$
i—
$
i15
$
i18
(1)Excludes
certain equity securities that have no readily determinable fair value.
/
(2)As a practical expedient, certain real estate funds are carried at fair value based on the Company’s ownership share of the equity of the investee (Net Asset Value (“NAV“)) including changes in the fair value of its underlying investments. The Company has $i55
million in unfunded commitments in these funds as of June 30, 2020.
Level 1 Financial Assets
Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. A relatively small portion of the Company’s investment assets are classified in this category given the narrow definition of Level 1 and the Company’s investment
asset strategy to maximize investment returns.
37
Level 2 Financial Assets and Financial Liabilities
Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.
Debt
and equity securities. Approximately i95% of the Company’s investments in debt and equity securities are classified in Level 2 including most public and private corporate debt and hybrid equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Third-party pricing services
and internal methods often use recent trades of securities with similar features and characteristics because many debt securities do not trade daily. Pricing models are used to determine these prices when recent trades are not available. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.
Nearly all
of these instruments are valued using recent trades or pricing models. Less than i1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued using a single, unadjusted market-observable input derived by averaging multiple broker-dealer quotes, consistent with local market practice.
Short-term investments are carried at
fair value that approximates cost. The Company compares market prices for these securities to recorded amounts on a regular basis to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.
Derivative assets and liabilities classified in Level 2 represent over-the-counter instruments such as foreign currency forward and swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the
Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties and determined that iiiino///
adjustments for credit risk were required as of June 30, 2020 or December 31, 2019. The nature and use of these derivative financial instruments are described in Note 11.
Level 3 Financial Assets and Financial Liabilities
Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The
Company classifies certain newly-issued, privately-placed, complex or illiquid securities in Level 3. Approximately i4% of debt and equity securities are priced using significant unobservable inputs and classified in this category.
38
Fair
values of mortgage and other asset-backed securities, as well as corporate and government debt securities, are primarily determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. Inputs and assumptions for pricing may also include characteristics of the issuer, collateral attributes and prepayment speeds for mortgage and other asset-backed securities. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research in its evaluation, as well as the issuer’s financial statements.
Quantitative Information about Unobservable
Inputs
i
The following table summarizes the fair value and significant unobservable inputs used in pricing the following debt securities that were developed directly by the Company as of June 30, 2020 and December 31, 2019. The range and weighted average basis
point (“bps”) amounts for liquidity and credit spreads (adjustment to discount rates) reflect the Company’s best estimates of the unobservable adjustments a market participant would make to calculate these fair values. These inputs have increased over the reported periods, resulting from continued uncertainty over the economic impacts related to COVID-19.
Corporate and government debt securities. The significant unobservable input used to value the following corporate and government debt securities is an adjustment for liquidity. This adjustment is needed to reflect current market conditions and issuer circumstances when there is limited trading activity for the security.
Mortgage and other asset-backed securities. The significant unobservable
inputs used to value the following mortgage and other asset-backed securities are liquidity and weighting of credit spreads. An adjustment for liquidity is made as of the measurement date that considers current market conditions, issuer circumstances and complexity of the security structure when there is limited trading activity for the security. An adjustment to weight credit spreads is needed to value a more complex bond structure with multiple underlying collateral and no standard market valuation technique. The weighting of credit spreads is primarily based on the underlying collateral’s characteristics and their proportional cash flows supporting the bond obligations.
Fair
Value as of
Unobservable Adjustment Range (Weighted Average by Quantity) as of
(1)The
fair values for these securities use single, unadjusted non-binding broker quotes not developed directly by the Company.
/
Significant increases in liquidity or credit spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. The unobservable inputs are generally not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.
39
Changes
in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
i
The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three and six months ended June 30, 2020 and 2019. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and
unobservable inputs.
Debt and Equity Securities
For the Three Months Ended June
30,
For the Six Months Ended June 30,
(In millions)
2020
2019
2020
2019
Balance at beginning of period
$
i766
$
i436
$
i555
$
i410
Total
gains (losses) included in shareholders’ net income
i17
i—
i5
(i1)
Gains
(losses) included in other comprehensive income
i12
i5
(i59)
i12
Gains
(losses) required to adjust future policy benefits for settlement annuities (1)
i7
i—
(i3)
i2
Purchases,
sales and settlements
Purchases
i2
i43
i64
i43
Sales
i—
i—
(i12)
i—
Settlements
(i5)
(i9)
(i7)
(i10)
Total
purchases, sales and settlements
$
(i3)
$
i34
$
i45
$
i33
Transfers
into/(out of) Level 3
Transfers into Level 3
i179
i13
i527
i33
Transfers
out of Level 3
(i118)
(i57)
(i210)
(i58)
Total
transfers into/(out of) Level 3
$
i61
$
(i44)
$
i317
$
(i25)
Balance
at June 30,
$
ii860/
$
i431
$
i860
$
i431
Total
gains (losses) included in shareholders’ net income attributable to instruments held at the reporting date
$
i16
$
(i1)
$
(i1)
$
(i1)
Change
in unrealized gains or losses included in other comprehensive income for assets held at the end of the reporting period
$
i12
N/A
$
(i54)
N/A
(1)Amounts
do not accrue to shareholders.
/
Total gains and losses included in Shareholders’ net income in the tables above are reflected in the Consolidated Statements of Income as Net realized investment gains (losses) and Net investment income.
Gains and losses included in Other comprehensive income in the tables above are reflected in Net unrealized appreciation (depreciation) on securities in the Consolidated Statements of Comprehensive Income.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s
best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. Transfers between Level 2 and Level 3 during 2020 and 2019 primarily reflected changes in liquidity and credit risk estimates for certain private placement issuers across several sectors.
Separate Accounts
iThe investment income and fair value gains and losses of separate account assets generally accrue directly to the contractholders and, together with their deposits and withdrawals, are excluded from the
Company’s Consolidated Statements of Income and Cash Flows.
Non-guaranteed
separate accounts priced at NAV as a practical expedient (1)
i727
i756
Total
$
i8,275
$
i8,481
Separate
account assets of business classified as held for sale
(i14)
(i16)
Separate
account assets per Consolidated Balance Sheets
$
i8,261
$
i8,465
(1)Non-guaranteed
separate accounts included $i3.9 billion as of June 30, 2020 and $i4.0
billion as of December 31, 2019 in assets supporting the Company’s pension plans, including $i0.3 billion classified in Level 3 as of June 30, 2020 and $i0.2
billion classified in Level 3 as of December 31, 2019.
/
Separate account assets classified as Level 1 primarily include exchange-listed equity securities. Level 2 assets primarily include:
•corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and
•actively-traded institutional and retail mutual fund investments.
Separate account assets classified in Level 3 primarily support Cigna’s pension plans and include certain newly-issued,
privately-placed, complex, or illiquid securities that are priced using methods discussed above, as well as commercial mortgage loans. Activity, including transfers into and out of Level 3, was not material for the three and six months ended June 30, 2020 and 2019.
Separate account investments in securities partnerships, real estate, and hedge funds are generally valued based on the separate account’s ownership share of the equity of the investee (NAV as a practical expedient) including changes in the fair values of its underlying investments. Substantially all of these assets support the Cigna Pension Plans. iThe
following table provides additional information on these investments.
As
of June 30, 2020, the Company does not have plans to sell any of these assets at less than fair value. These investments are structured to satisfy longer-term investment objectives. Securities partnerships are contractually
41
unredeemable, and the underlying investment assets are expected to be liquidated by the fund managers within iten
years after inception.
B.Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions such as when investments become impaired, including investment real estate and commercial mortgage loans and certain equity securities with no readily determinable fair value. Equity securities with no readily determinable fair value are also measured at fair value when there are observable price changes from orderly transactions with the same issuer. For the six months ended June 30, 2020, there were immaterial losses relating to price changes for equity securities with no readily determinable fair value and ino
impaired investments written down to their fair values. For the six months ended June 30, 2019, there were immaterial gains relating to price changes for equity securities with no readily determinable fair value and ino impaired investments written down to their fair values . Carrying values represented less
than ii1/%
of total investments as of both June 30, 2020 and June 30, 2019.
C.Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
i
The following table includes the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at June 30,
2020 and December 31, 2019. In addition to universal life products and finance leases, financial instruments that are carried in the Company’s Consolidated Financial Statements at amounts that approximate fair value are excluded from the following table.
When
the Company becomes involved with a variable interest entity and when there is a change in the Company’s involvement with an entity, the Company must determine if it is the primary beneficiary and must consolidate the entity. The Company is considered the primary beneficiary if it has the power to direct the entity’s most significant economic activities and has the right to receive benefits or obligation to absorb losses that could be significant to the entity. The Company evaluates the following criteria:
•the
structure and purpose of the entity;
•the risks and rewards created by, and shared through, the entity; and
•the Company’s ability to direct its activities, receive its benefits and absorb its losses relative to the other parties involved with the entity including its sponsors, equity holders, guarantors, creditors and servicers.
42
The Company determined it was not a primary beneficiary in any material variable interest entities as of June 30,
2020 or December 31, 2019. The Company’s involvement in variable interest entities for which it is not the primary beneficiary is described below.
Securities limited partnerships and real estate limited partnerships.The Company owns interests in securities limited partnerships and real estate limited partnerships that are defined as variable interest entities. These partnerships invest in the equity or mezzanine debt of privately-held companies and real estate properties. General partners unaffiliated with the Company control decisions that most significantly impact the partnership’s operations
and the limited partners do not have substantive kick-out or participating rights. The Company’s maximum exposure to loss from these entities of $i3.8 billion across approximately i150
limited partnerships as of June 30, 2020, included $i1.9 billion reported in Long-term investments and commitments to contribute an additional $i1.9
billion. The Company’s noncontrolling interest in each of these limited partnerships is generally less than i15% of the partnership ownership interests.
Other asset-backed and corporate securities. In the normal course of its investing activities, the Company also makes passive investments in certain asset-backed and corporate
securities that are issued by variable interest entities whose sponsors or issuers are unaffiliated with the Company. The Company receives fixed-rate cash flows from these investments and the maximum potential exposure to loss is limited to our carrying amount of $ii0.7/
billion as of June 30, 2020 that is reported in debt securities. The Company’s combined ownership interests are insignificant relative to the total principal amounts issued by these entities.
The Company is involved with various other variable interest entities with immaterial carrying values and maximum exposures to loss.
The Company has not provided, and does not intend to provide, financial support to any of the variable interest entities beyond what it is contractually required to provide. The
Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.
43
Note 14 – iAccumulated Other Comprehensive Income (Loss) (“AOCI”)
iAOCI
includes unrealized appreciation on securities and derivatives (excluding appreciation on investments supporting future policy benefit liabilities of the run-off settlement annuity business) (See Note 11), foreign currency translation and the net postretirement benefits liability adjustment. AOCI includes the Company’s share from unconsolidated entities reported on the equity method. Generally, tax effects in AOCI are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCI reclassifications are recognized.iChanges
in the components of AOCI were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(In
millions)
2020
2019
2020
2019
Securities and Derivatives
Beginning balance
$
i547
$
i460
$
i975
$
i18
Appreciation
on securities and derivatives
i920
i442
i340
i1,007
Tax
(expense)
(i197)
(i94)
(i69)
(i216)
Net
appreciation on securities and derivatives
i723
i348
i271
i791
Reclassification
adjustment for losses (gains) included in shareholders' net income (net realized investment losses (gains))
(i19)
(i6)
i13
(i7)
Tax
(expense) benefit
i5
i1
(i3)
i1
Net
losses (gains) reclassified from AOCI to net income
(i14)
(i5)
i10
(i6)
Other
comprehensive income, net of tax
i709
i343
i281
i785
Ending
balance
$
i1,256
$
i803
$
i1,256
$
i803
Translation
of foreign currencies
Beginning balance
$
(i446)
$
(i245)
$
(i275)
$
(i221)
Translation
of foreign currencies
i65
(i42)
(i95)
(i67)
Tax
(expense) benefit
i5
i—
(i10)
(i1)
Net
translation of foreign currencies
i70
(i42)
(i105)
(i68)
Less: Net
translation of foreign currencies attributable to noncontrolling interests
(i2)
(i2)
(i6)
(i4)
Shareholders'
net translation of foreign currencies
i72
(i40)
(i99)
(i64)
Ending
balance
$
(i374)
$
(i285)
$
(i374)
$
(i285)
Postretirement
benefits liability
Beginning balance
$
(i1,628)
$
(i1,497)
$
(i1,641)
$
(i1,508)
Reclassification
adjustment for amortization of net losses from past experience and prior service costs (interest expense and other)
i18
i16
i36
i31
Reclassification
adjustment for settlement (interest expense and other)
i—
i—
i—
i10
Tax
(expense) benefit
(i4)
i5
(i9)
(i9)
Net
adjustments reclassified from AOCI to net income
i14
i21
i27
i32
Valuation
update
(i73)
(i8)
(i73)
(i8)
Tax
benefit
i17
i1
i17
i1
Net
change due to valuation update
(i56)
(i7)
(i56)
(i7)
Other
comprehensive (loss) income, net of tax
(i42)
i14
(i29)
i25
Ending
balance
$
(i1,670)
$
(i1,483)
$
(i1,670)
$
(i1,483)
44
Note
15 - iOrganizational Efficiency Plan
The Company is continuously evaluating ways to deliver our products and services more efficiently and at a lower cost. During the fourth quarter of 2019, we committed to a plan to increase our organizational alignment and operational efficiency and reduce costs. As a result, we recognized a charge in Selling, general and administrative expenses of $i207 million
pre-tax ($i162 million after-tax) in the fourth quarter of 2019 and an additional $i31 million pre-tax ($i24
million after-tax) in the first quarter 2020, primarily for severance costs related to headcount reductions. As of June 30, 2020 we expect most of the severance to be paid by the end of 2021.
Note
16 – iiLeases/
i
Operating
and finance lease right of use ("ROU") assets and lease liabilities were as follows:
The i20.0% effective tax rate
for the six months ended June 30, 2020 was lower than the i21.5% rate for the same period in 2019. This decrease is primarily attributable to incremental tax benefits including the remeasurement of deferred state income taxes and the settlement of uncertain tax positions. This decrease was partially offset by return of the nondeductible health insurer tax.
45
Note
18 – iContingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various guarantees provided in the ordinary course of business.
A.Financial Guarantees: Retiree and Life Insurance Benefits
The
Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits. For the majority of these benefits, the sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. If employers fail to do so, the Company or an affiliate of the buyer of the retirement benefits business has the right to redirect the management of the related assets to provide for benefit payments. As of June 30, 2020, employers maintained assets that exceeded the benefit obligations under these arrangements of approximately $ii455/
million. An additional liability is established if management believes that the Company will be required to make payments under the guarantees; there were ino additional liabilities required for these guarantees, net of reinsurance, as of June 30, 2020. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy.
The
Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.
B.Certain Other Guarantees
The Company had indemnification obligations as of June 30, 2020 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, filing of tax returns, compliance with law
or identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations because not all amounts due under these indemnification obligations are subject to limitation. There were ino
liabilities for these indemnification obligations as of June 30, 2020.
C.Guaranty Fund Assessments
The Company operates in a regulatory environment that may require its participation in assessments under state insurance guaranty association laws. The Company’s exposure to assessments for certain obligations of insolvent insurance companies to policyholders and claimants is based on its share of business written in the relevant jurisdictions.
There were no material effects for existing or new guaranty fund assessments for the six months ended June 30,
2020.
46
D.Legal and Regulatory Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory inquiries and audits, government investigations, including under the federal False Claims Act and state false claims acts initiated by a government investigating body or by a qui tam relator’s filing of a complaint under court seal, and other legal matters arising, for the most part, in the ordinary course of managing a global health service business. Additionally, the Company has received and is cooperating with subpoenas
or similar processes from various governmental agencies requesting information, all arising in the normal course of its business. Disputed tax matters arising from audits by the Internal Revenue Service or other state and foreign jurisdictions, including those resulting in litigation, are accounted for under GAAP guidance for uncertain tax positions. Further information on income tax matters can be found in Note 17.
Pending litigation and legal or regulatory matters that the Company has identified with a reasonably possible material loss and certain other material litigation matters are described below. iFor
those matters that the Company has identified with a reasonably possible material loss, the Company provides disclosure in the aggregate of accruals and range of loss, or a statement that such information cannot be estimated.The Company’s accruals for the matters discussed below under “Litigation Matters” and "Regulatory Matters" are immaterial. Due to numerous uncertain factors presented in these cases, it is not possible to estimate an aggregate range of loss (if any) for these matters at this time. In light of the uncertainties involved in these matters, there is no assurance that their ultimate resolution will not exceed the amounts currently accrued by the
Company. An adverse outcome in one or more of these matters could be material to the Company’s results of operations, financial condition or liquidity for any particular period. The outcomes of lawsuits are inherently unpredictable and we may be unsuccessful in these ongoing litigation matters or any future claims or litigation.
Litigation Matters
Risk Corridors and CSR Litigation with the Federal Government. As a result of the Supreme Court decision in April 2020, the Company filed suit in early May against the United States in the U.S. Court of Federal Claims seeking to recover two types of payments the Federal Government owes Cigna under the risk corridors and cost-sharing reduction (“CSR”)
programs of the ACA. In aggregate, the complaint seeks to recover more than $i315 million: $i120 million in risk corridors payments and more than $i195 million
in CSR payments. Cigna’s complaint is pending and we await the Federal Government’s response.
Cigna Litigation with Anthem. In February 2017, the Company delivered a notice to Anthem terminating the 2015 merger agreement and notifying Anthem that it must pay the Company the $i1.85
billion reverse termination fee pursuant to the terms of the merger agreement. Also in February 2017, the Company filed suit against Anthem in the Delaware Court of Chancery (the “Chancery Court”) seeking declaratory judgments that the Company’s termination of the merger agreement was valid and that Anthem was not permitted to extend the termination date. The complaint also sought payment of the reverse termination fee and additional damages in an amount exceeding $i13
billion, including the lost premium value to the Company’s shareholders caused by Anthem’s willful breaches of the merger agreement. Anthem has countersued, alleging its own claims for damages.
On February 15, 2017, the Chancery Court granted Anthem’s motion for a temporary restraining order and temporarily enjoined the Company from terminating the merger agreement. In May 2017, the Chancery Court denied Anthem’s motion for a preliminary injunction to enjoin Cigna from terminating the merger agreement but stayed its ruling pending Anthem’s determination as to whether to seek an appeal. Anthem subsequently notified Cigna and the Chancery Court that it did not intend to appeal the Chancery Court’s decision.
As a result, the merger agreement was terminated.
47
The litigation between the parties remains pending. A trial was held during the first quarter of 2019. Oral arguments on post-trial briefs were held on November 26, 2019. In February 2020, the Chancery Court requested additional post-trial briefing, which has been completed. In June 2020, the Company was notified by the Chancery Court that its decision had been delayed, due in part to COVID-19 complexities. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.
Express
Scripts Litigation with Anthem. In March 2016, Anthem filed a lawsuit in the United States District Court for the Southern District of New York alleging various breach of contract claims against Express Scripts relating to the parties’ rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties including allegations that Express Scripts failed to negotiate new pricing concessions in good faith, as well as various alleged service issues. Anthem also requested that the court enter declaratory judgment that Express Scripts is required to provide Anthem competitive benchmark pricing, that Anthem can terminate the agreement, and that Express Scripts is required to provide Anthem with post-termination services at competitive benchmark pricing for one year following any termination by Anthem.
Anthem claims it is entitled to $i13 billion in additional pricing concessions over the remaining term of the agreement, as well as $i1.8
billion for one year following any contract termination by Anthem and $i150 million damages for service issues (“Anthem’s Allegations”). On April 19, 2016, in response to Anthem’s complaint, Express Scripts filed its answer denying Anthem’s Allegations in their entirety and asserting affirmative defenses and counterclaims against Anthem. The court subsequently granted Anthem’s motion to dismiss two of
six counts of Express Scripts’ amended counterclaims. The current scheduling order runs through the completion of summary judgment briefing in March 2021. There is no tentative trial date. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.
Regulatory Matters
Civil Investigative Demand. The U.S. Department of Justice (“DOJ”) is conducting an industry-wide investigation of Medicare Advantage organizations’ risk adjustment practices under Medicare Parts C and D including medical chart reviews and health exams. For certain other Medicare Advantage organizations, the investigation has resulted in litigation. The Company is currently responding to information requests (civil investigative
demands) received from the DOJ (U.S. Attorney’s Offices for the Eastern District of Pennsylvania and the Southern District of New York). We will continue to cooperate with the DOJ’s investigation.
Disability claims regulatory matter. The Company is subject to an agreement with the Departments of Insurance for Maine, Massachusetts, Pennsylvania, Connecticut and California (together, the “Lead States”), originally entered into in 2013, that relates to the Company’s long-term disability claims handling practices. The agreement provides for enhanced procedures related to documentation and disposition. Cigna has cooperated fully with the Lead States and we believe we have addressed the requirements of the agreement. The Lead States
initiated a re-examination of our practices. In April 2020, the re-examination was closed with a determination that the Company is in material compliance and no adverse regulatory action was, or is expected to be, taken.
48
Note 19 – iSegment
Information
See Note 1 for a description of our segments. iA description of our basis for reporting segment operating results is outlined below. Intersegment revenues primarily reflect pharmacy related transactions between the Health Services and Integrated Medical segments.
The Company uses “pre-tax adjusted income from operations” and “adjusted revenues” as its principal
financial measures of segment operating performance because management believes they best reflect the underlying results of business operations and permit analysis of trends in underlying revenue, expenses and profitability. Pre-tax adjusted income from operations is defined as income before taxes excluding realized investment results, amortization of acquired intangible assets, special items and, for periods prior to 2020, earnings contribution from transitioning clients Anthem Inc. and Coventry Health Care, Inc. (the “transitioning clients”). As of December 31, 2019, the transition of these clients was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our adjusted revenues and adjusted income from operations. Income or expense amounts that are excluded from adjusted income from operations because they are not indicative of underlying performance or
the responsibility of operating segment management include:
•Realized investment gains (losses) including changes in market values of certain financial instruments between balance sheet dates, as well as gains and losses associated with invested asset sales.
•Amortization of acquired intangible assets because these relate to costs incurred for acquisitions.
•Results of transitioning clients, for periods prior to 2020, because those results were not indicative of ongoing results.
•Special items, if any, that management believes are not representative of the underlying results of operations due to the nature or size of these matters.
The
Company does not report total assets by segment because this is not a metric used to allocate resources or evaluate segment performance.
Adjusted revenues is defined as revenues excluding: 1) revenue contribution from transitioning clients for periods prior to 2020; 2) the Company’s share of certain realized investment results of its joint ventures reported in the International Markets segment using the equity method of accounting; and 3) special items, if any.
i
The
following tables present the special items recorded by the Company for the three and six months ended June 30, 2020 and 2019.
Net
realized investment results from certain equity method investments
i—
i—
(i22)
i—
i—
(i22)
Adjusted
revenues
$
i45,997
$
i18,163
$
i2,783
$
i2,605
$
(i1,744)
$
i67,804
Income
(loss) before taxes
$
i2,050
$
i2,146
$
i417
$
i248
$
(i1,315)
$
i3,546
Pre-tax
adjustments to reconcile to adjusted income from operations
Adjustment for transitioning clients
(i1,315)
i—
i—
i—
i—
(i1,315)
(Income)
attributable to noncontrolling interests
(i1)
i—
(i8)
i—
i—
(i9)
Net
realized investment (gains)
i—
(i22)
(i15)
(i18)
i—
(i55)
Amortization
of acquired intangible assets
i1,422
i36
i19
i3
i—
i1,480
Special
items
Integration and transaction-related costs
i—
i—
i—
i—
i291
i291
Charges
associated with litigation matters
i—
i—
i—
i—
i81
i81
Pre-tax
adjusted income (loss) from operations
$
i2,156
$
i2,160
$
i413
$
i233
$
(i943)
$
i4,019
52
i
Revenue
from external customers includes pharmacy revenues, premiums and fees and other revenues. The following table presents these revenues by product, premium and service type for the three and six months ended June 30:
Three Months Ended June 30,
Six
Months Ended June 30,
(In millions)
2020
2019
2020
2019
Products (Pharmacy revenues) (ASC 606)
Network revenues
i13,090
i12,758
i25,232
i25,031
Home
delivery and specialty revenues
$
i12,183
$
i12,272
$
i23,897
$
i24,056
Other
i1,291
i1,258
i2,533
i2,380
Total
pharmacy revenues
i26,564
i26,288
i51,662
i51,467
Insurance
premiums (ASC 944)
Integrated Medical premiums
Commercial
Health Insurance
i3,090
i3,065
i6,551
i6,104
Stop
loss
i1,152
i1,067
i2,313
i2,136
Other
i283
i241
i572
i519
Government
Medicare
Advantage
i1,904
i1,610
i3,785
i3,217
Medicare
Part D
i420
i400
i882
i925
Other
i1,063
i1,013
i2,129
i2,078
Total
Integrated Medical premiums
i7,912
i7,396
i16,232
i14,979
International
Markets premiums
i1,344
i1,301
i2,719
i2,605
Domestic
disability, life and accident premiums
i1,124
i1,069
i2,240
i2,116
Other
premiums
i26
i37
i55
i74
Total
premiums
i10,406
i9,803
i21,246
i19,774
Services
(ASC 606)
Fees
i1,979
i2,376
i4,133
i4,766
Other
external revenues
i93
i12
i117
i72
Total
services
i2,072
i2,388
i4,250
i4,838
Total
revenues from external customers
$
i39,042
$
i38,479
$
i77,158
$
i76,079
/
The
Health Services segment may provide certain financial and performance guarantees, including a minimum level of discounts a client may receive, generic utilization rates and various service levels. Clients may be entitled to receive compensation if we fail to meet these guarantees. Actual performance is compared to the contractual guarantee for each measure throughout the period and the Company defers revenue for any estimated payouts within Accrued expenses and other liabilities (current). These estimates are adjusted at the end of the guarantee period. Historically, adjustments to original estimates have not been material. The performance guarantee liability was $i0.9
billion as of June 30, 2020 and $i1.0 billion as of December 31, 2019.
53
Item 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition as of June 30, 2020 compared with December 31, 2019 and our results of operations for the three and six months ended June 30, 2020 compared with the same periods last year and intended to help you understand the ongoing trends in our business. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), in particular the “Risk Factors” contained in Part I, Item 1A of that form as such Risk
Factors are supplemented by the information contained in Part II, Item 1A of our Form 10-Q for the quarter ended March 31, 2020.
Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). See Note 2 to the Consolidated Financial Statements in our 2019 Form 10-K for additional information regarding the Company’s significant accounting policies and Note 3 to the Consolidated Financial Statements in this Form 10-Q for updates to those accounting policies resulting from adopting new accounting guidance. The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors call for caution in estimating full-year
results based on interim results of operations.In some of our financial tables in this MD&A, we present either percentage changes or “N/M” when those changes are so large as to become not meaningful. Changes in percentages are expressed in basis points (“bps”).
In this MD&A, our consolidated measures “adjusted income from operations,” earnings per share on that same basis and “adjusted revenues” are not determined in accordance with GAAP and should not be viewed as substitutes for the most directly comparable GAAP measures of “shareholders’ net income,”“earnings per share” and “total revenues.” We also use pre-tax adjusted income from operations and adjusted revenues to measure the results of our segments.
We use adjusted income from operations as our principal financial measure
of operating performance because management believes it best reflects the underlying results of our business operations and permits analysis of trends in underlying revenue, expenses and profitability. We define adjusted income from operations as shareholders’ net
54
income (or income before taxes for the segment metric) excluding realized investment gains and losses, amortization of acquired intangible assets, special items, and for periods prior to 2020, results of Anthem, Inc. and Coventry Health Care Inc. (“Coventry”) (collectively, the “transitioning clients”) (see the “Key Transactions and Business Developments” section of the MD&A for further discussion of transitioning clients). Cigna’s share of certain realized investment results of its
joint ventures reported in the International Markets segment using the equity method of accounting are also excluded. Income or expense amounts excluded from adjusted income from operations because they are not indicative of underlying performance or the responsibility of operating segment management include:
•Realized investment gains (losses) including changes in market values of certain financial instruments between balance sheet dates, as well as gains and losses associated with invested asset sales.
•Amortization of acquired intangible assets because these relate to costs incurred for acquisitions.
•Resultsof transitioning clients, for periods prior to 2020,because those
results are not indicative of ongoing results.
•Special items, if any, that management believes are not representative of the underlying results of operations due to the nature or size of these matters.
The term "Adjusted revenues" is defined as total revenues excluding the following adjustments: revenue contribution from transitioning clients for periods prior to 2020, special items and Cigna’s share of certain realized investment results of its joint ventures reported in the International Markets segment using the equity method of accounting. We exclude these items from this measure because management believes they are not indicative of past or future underlying performance of the business.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on Cigna’s current expectations and projections about future trends, events and uncertainties. These statements are not historical facts. Forward-looking statements may include, among others, statements concerning future financial or operating performance, including our ability to deliver affordable, personalized and innovative solutions for our customers and clients, in light of the challenges presented by the COVID-19 pandemic; future growth, business strategy, strategic or operational initiatives, including our organizational efficiency plan; economic, regulatory or competitive environments, particularly with respect to the pace and extent of change in these areas; financing or capital deployment plans and amounts available for
future deployment; our prospects for growth in the coming years; strategic transactions, including the merger (“Merger”) with Express Scripts Holding Company and the sale of our U.S. Group Disability and Life business; our ongoing operational response to the COVID-19 pandemic; and other statements regarding Cigna’s future beliefs, expectations, plans, intentions, financial condition or performance. You may identify forward-looking statements by the use of words such as “believe,”“expect,”“plan,”“intend,”“anticipate,”“estimate,”“predict,”“potential,”“may,”“should,”“will” or other words or expressions of similar meaning, although not all forward-looking statements contain such terms.
Forward-looking statements are subject to risks and uncertainties, both known and unknown, that could cause actual results to differ materially from those
expressed or implied in forward-looking statements. Such risks and uncertainties include, but are not limited to: our ability to achieve our financial, strategic and operational plans or initiatives; our ability to predict and manage medical and pharmacy costs and price effectively; our ability to adapt to changes or trends in an evolving and rapidly changing industry; our ability to effectively differentiate our products and services from those of our competitors and maintain or increase market share; our ability to develop and maintain good relationships with physicians, hospitals, other health care providers, producers, consultants and pharmaceutical manufacturers; changes in the pharmacy provider marketplace or pharmacy networks; changes in
55
drug pricing; the impact
of modifications to our operations and processes; our ability to identify potential strategic transactions and realize the expected benefits (including anticipated synergies) of such transactions in full or within the anticipated time frame, including with respect to the Merger and the sale of our Group Disability and Life business, as well as our ability to integrate or separate operations, resources and systems; the substantial level of government regulation over our business and the potential effects of new laws or regulations or changes in existing laws or regulations; the outcome of litigation, regulatory audits, investigations, actions or guaranty fund assessments; uncertainties surrounding participation in government-sponsored programs such as Medicare; the effectiveness and security of our information technology and other business systems and those of our key suppliers or other third parties; the impact of our debt service obligations on the availability of funds
for other business purposes; unfavorable industry, economic or political conditions, including foreign currency movements; acts of civil unrest, war, terrorism, natural disasters or pandemics; reinsurance credit risk, the scale and scope of the COVID-19 pandemic and its potential impact on our business, operating results, cash flows and financial condition, as well as on our employees, clients, customers, suppliers and partners and on the U.S. and global economies, as well as more specific risks and uncertainties discussed in Part I, Item 1A – Risk Factors of our 2019 Form 10-K, as such Risk Factors are supplemented by information contained in Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2020, Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Form 10-K and this MD&A and as described from time to time in our future reports filed
with the Securities and Exchange Commission (the “SEC”).
You should not place undue reliance on forward-looking statements which speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Cigna undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.
EXECUTIVE OVERVIEW
Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,”
the “Company,”“we,”“our” or “us”) is a global health service organization with a mission of helping those we serve improve their health, well-being and peace of mind. We offer a differentiated set of pharmacy, medical, dental, disability, life and accident insurance and related products and services offered by our subsidiaries. For further information on our business and strategy, see Item 1, “Business” in our 2019 Form 10-K.
COVID-19 Update
The novel strain of coronavirus (“COVID-19”) was declared a pandemic by the World Health Organization in March 2020 because the virus had surfaced in nearly all regions around the world. From the onset of the COVID-19 pandemic, Cigna has focused on continuing to deliver peace of mind for the people and businesses
we serve, and our employees and their families. We’ve taken bold actions to drive affordability, reduce uncertainty, and make health care easier. To date, these actions throughout the United States and in many other parts of the world where we do business include:
Making Health Care Affordable
•Waiving customer out-of-pocket costs for COVID-19 related visits, testing and treatment delivered by any in-network provider anywhere – whether at an office, an urgent care center, emergency room or through virtual care.
•Protecting customers from surprise bills by out-of-network providers through the Customer Protection Program.
•Enabling customers to utilize free home delivery for maintenance medications.
•Helping
people temporarily without coverage access prescription savings through Parachute Rx.
56
•Providing employers tax-free financial assistance for employees for qualified disaster relief payments, such as medical payments, groceries, child care, and wellness services with the Cigna Care Card.
•Expanding financial relief to Cigna's dental and guaranteed cost medical clients by issuing premium credits.
Making Health Care Simple
•Encouraging use of virtual care through telehealth partners, including MDLIVE and Amwell.
•Encouraging
Cigna Dental customers to utilize Cigna Dental Virtual Care powered by The TeleDentists.
•Enabling Buoy Health (U.S.) and Infermedica (outside U.S.) tools to provide COVID-19 symptom checkers.
•Availability of digital mental health care tools including Happify, iPrevail and Talkspace, and SilverCloud Health.
•Expanding Employee Assistance Programs for customers and households and have seen a significant increase in consultations.
Making Health Care Predictable
•Partnering with Medocity to offer a digital solution that allows customers to track their COVID-19 symptoms, connect with care advocates and access
behavioral and emotional resources.
•Protecting prescription medication supply through quantity limits as needed.
•24/7 customer access to pharmacists.
•Waiving prior authorizations for patient transfers, emergency department visits and home health care services.
•Entitling customers to utilize virtual care for non-COVID-19 issues at the standard in-office benefit.
•Offering acute and advanced illness care offered at home.
Supporting Communities
•Cigna Foundation launched
Brave of Heart Fund with a $25 million grant to provide financial assistance to survivors of frontline U.S. workers who gave their lives in the COVID-19 fight, with Cigna providing emotional support at no cost.
•Providing free on-demand supportive resources for customers and the general public, such as online articles, podcasts, and webinars.
•24/7 free mental health support line for the public.
Supporting the Medical Community
•Making it easier for hospitals to transfer COVID-19 patients to long-term acute care hospitals and subacute facilities.
•Waiving prior authorizations for patient transfers, emergency
department visits, and home health care services.
•Donating medications to Washington University for a COVID-19 treatment clinical trial.
Supporting Our Workforce
•Enabling nearly 100% of employees who could work from home to do so, globally in less than 1 month.
•Granting employees 10 paid Emergency Time Off days for COVID-19 related absences.
•Lifting restriction on paid time-off use before accrual.
•20% pay premium for U.S. worksite-essential employees.
•Enhancing employee
recognition program.
•Introducing the Cigna COVID-19 Employee Assistance Fund to help offset extraordinary financial hardships.
•Ensuring workplace health through enhanced safety protocols, including personal protective equipment for frontline staff.
57
We have also taken actions to implement our business continuity plans over our operations. For example, the Company is mitigating risk associated with prescription drug supply through our ability to operate and leverage purchasing volume across
the pharmaceutical supply chain. Our continuity plans also include global office closures, reductions in operating hours, travel restrictions, changes in operating procedures and enhancements for employees that cannot work remotely. We did not incur significant disruptions to our operations during the three and six months ended June 30, 2020 from COVID-19.
The COVID-19 pandemic has pervasively impacted the economy, financial markets and the global health care delivery systems during the second quarter, including significant deferral of care of our customers. These impacts were most prominent in April 2020 and moderated throughout the quarter with utilization levels returning to nearly normal levels by the end of June 2020. These impacts were most significant in our Integrated Medical segment where results reflect higher quarterly earnings and a lower medical care ratio as
a result of the deferral of care significantly exceeding the incremental COVID-19 costs, partially offset by COVID-19 related actions including premium relief programs for clients as well as cost share waivers for customers. The Health Services segment quarterly earnings also reflected effects of the pandemic, specifically, a favorable mix of claims as a result of both the type of drugs dispensed as well as the distribution method used for dispensing and fulfilling, partially offset by lower non-specialty, 30-day retail script volume. Segment results are discussed further in the Segment Reporting section of this MD&A and discussion of the impact of COVID-19 on our investment portfolio and related considerations regarding our investment outlook can be found in Note 11 to the Consolidated Financial Statements and in the "Investment Assets" discussion of this MD&A, respectively.
While it is difficult to quantify
the impact of the COVID-19 pandemic on our results for the remainder of 2020 and beyond, we believe that such results may be impacted by, among other things, lower customer volumes due to rising unemployment levels, by higher medical costs to treat those affected by the virus, by the return of costs related to previously deferred care, or by the potential for continued deferral of care.
Additionally, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The direct impact of this new legislation was not material to the Company's results of operations for the three or six months ended June 30, 2020. As permitted by the CARES Act and COVID-19 related regulatory actions,
the Company deferred approximately $900 million in income and payroll tax payments during the second quarter of 2020. Approximately $825 million of the deferred tax payments will be made during the third quarter of 2020. The Company did not request any funding under the CARES Act. However, in April 2020 the Company received $41 million from the provider relief fund, all of which has been returned to the U.S. Department of Health and Human Services.
The Company has taken actions to enhance our liquidity that, combined with our other sources of liquidity described in the "Liquidity
and Capital Resources Outlook" below, and our current projections for operating cash flows, we believe are sufficient to support our operations and meet our obligations.
The situation surrounding COVID-19 remains fluid, and we are actively managing our response and assessing impacts to our financial position and operating results, as well as adverse developments in our business.
For further information regarding the potential impact of COVID-19 on the Company, please see “Risk Factors” contained in Part I, Item 1A of the 2019 Form 10-K as such Risk Factors are supplemented in Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2020.
See Note 1 to the Consolidated Financial Statements
for a description of our segments. Unless otherwise specified, the commentary provided below describes our results for the three and six months ended June 30, 2020 compared with the same periods in 2019.
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Summarized below are certain key measures of our performance by segment for the three and six months ended June 30, 2020 and 2019:
Financial
highlights by segment
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in millions, except per share amounts)
2020
2019
%
Change
2020
2019
% Change
Revenues
Adjusted revenues by segment
Health
Services
$
28,602
$
23,537
22
%
$
55,770
$
45,997
21
%
Integrated
Medical
9,237
8,968
3
19,097
18,163
5
International Markets
1,432
1,389
3
2,902
2,783
4
Group
Disability and Other
1,328
1,309
1
2,667
2,605
2
Corporate, net eliminations
(1,394)
(828)
(68)
(2,839)
(1,744)
(63)
Adjusted
revenues
39,205
34,375
14
77,597
67,804
14
Revenue contribution from transitioning clients
—
4,450
N/M
—
8,939
N/M
Net
realized investment results from certain equity method investments
60
(6)
N/M
50
22
127
Special items
—
—
N/M
87
—
N/M
Total
revenues
$
39,265
$
38,819
1
%
$
77,734
$
76,765
1
%
Shareholders’
net income
$
1,754
$
1,408
25
%
$
2,935
$
2,776
6
%
Adjusted
income from operations
$
2,152
$
1,640
31
%
$
3,910
$
3,138
25
%
Earnings
per share (diluted)
Shareholders’ net income
$
4.73
$
3.70
28
%
$
7.88
$
7.26
9
%
Adjusted
income from operations
$
5.81
$
4.30
35
%
$
10.49
$
8.20
28
%
Pre-tax
adjusted income from operations by segment
Health Services
$
1,249
$
1,162
7
%
$
2,331
$
2,156
8
%
Integrated
Medical
1,523
990
54
2,722
2,160
26
International Markets
319
207
54
601
413
46
Group
Disability and Other
132
149
(11)
209
233
(10)
Corporate, net of eliminations
(400)
(453)
12
(805)
(943)
15
Consolidated
pre-tax adjusted income from operations
2,823
2,055
37
5,058
4,019
26
Adjustment for transitioning clients
—
655
N/M
—
1,315
N/M
Income
attributable to noncontrolling interests
8
4
100
17
9
89
Realized investment gains (losses)
98
17
N/M
—
55
N/M
Amortization
of acquired intangible assets
(496)
(737)
33
(994)
(1,480)
33
Special items
(144)
(236)
39
(395)
(372)
(6)
Income
before income taxes
$
2,289
$
1,758
30
%
$
3,686
$
3,546
4
%
For
further analysis and explanation of each segment’s results, see the “Segment Reporting” section of this MD&A.
59
Consolidated
Results of Operations (GAAP basis)
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in millions)
2020
2019
%
Change
2020
2019
% Change
Pharmacy revenues
$
26,564
$
26,288
1
%
$
51,662
$
51,467
—
%
Premiums
10,406
9,803
6
21,246
19,774
7
Fees
and other revenues
2,072
2,388
(13)
4,250
4,838
(12)
Net investment income
223
340
(34)
576
686
(16)
Total
revenues
39,265
38,819
1
77,734
76,765
1
Pharmacy and other service costs
25,611
24,963
3
49,801
49,013
2
Medical
costs and other benefit expenses
7,112
7,576
(6)
15,434
15,196
2
Selling, general and administrative expenses
3,407
3,380
1
6,805
6,683
2
Amortization
of acquired intangible assets
496
737
(33)
994
1,480
(33)
Total benefits and expenses
36,626
36,656
—
73,034
72,372
1
Income
from operations
2,639
2,163
22
4,700
4,393
7
Interest expense and other
(374)
(428)
13
(765)
(880)
13
Debt
extinguishment costs
(14)
—
N/M
(199)
—
N/M
Net
realized investment gains (losses)
38
23
65
(50)
33
N/M
Income before income taxes
2,289
1,758
30
3,686
3,546
4
Total
income taxes
529
348
52
737
764
(4)
Net income
1,760
1,410
25
2,949
2,782
6
Less: net
income attributable to noncontrolling interests
6
2
200
14
6
133
Shareholders’ net income
$
1,754
$
1,408
25
%
$
2,935
$
2,776
6
%
Consolidated
effective tax rate
23.1
%
19.8
%
330
bps
20.0
%
21.5
%
(150)
bps
Medical customers (in thousands)
Integrated
Medical
15,415
15,408
—
%
International Markets
1,668
1,589
5
Total
17,083
16,997
1
%
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Reconciliation
of Shareholders’ Net Income (GAAP) to Adjusted Income from Operations
After-tax
adjustments required to reconcile to adjusted income from operations
Net realized investment (gains) losses
(88)
(13)
(11)
(51)
(0.24)
(0.03)
(0.03)
(0.13)
Amortization
of acquired intangible assets
376
572
685
1,136
1.02
1.49
1.84
2.96
Adjustment
for transitioning clients
—
(506)
—
(1,010)
—
(1.33)
—
(2.64)
Special
items
Debt extinguishment costs
11
—
151
—
0.03
—
0.41
—
Integration
and transaction-related costs
99
115
173
223
0.27
0.30
0.46
0.58
Charge
for organizational efficiency plan
—
—
24
—
—
—
0.06
—
Charges
associated with litigation matters
—
64
19
64
—
0.17
0.05
0.17
Contractual
adjustment for a former client
—
—
(66)
—
—
—
(0.18)
—
Total
special items
110
179
301
287
0.30
0.47
0.80
0.75
Adjusted
income from operations
$
2,152
$
1,640
$
3,910
$
3,138
$
5.81
$
4.30
$
10.49
$
8.20
Commentary: Three and Six Months Ended June 30, 2020 versus the same periods in 2019
Unless indicated otherwise, the commentary presented below, and in the segment discussions that follow, compare results for the three and six months ended June 30, 2020 with results for the three and six months ended June 30, 2019.
Earnings and Revenue
Shareholders’ net income increased, driven by significantly higher adjusted income from operations and lower amortization, partially offset by the absence of earnings from transitioning clients.
Adjusted income from operations increased significantly, primarily due to
higher earnings in Integrated Medical and International Markets segments driven by substantial declines in medical costs resulting from the deferral of care due to the COVID-19 pandemic.
Medical customers increased slightly as of June 30, 2020 compared with the same period last year primarily as a result of growth in the Select market segment, and, to a lesser extent, growth in International Markets and in our Medicare Advantage business, substantially offset by declines in the National Accounts market segment and increased disenrollment resulting from the economic impacts of the COVID-19 pandemic.
Pharmacy revenues increased, primarily reflecting the transition of Integrated Medical's customers to Health Services, higher claims volumes, primarily driven by the Health Services collaboration with
Prime Therapeutics, and an increase in pricing, primarily due to inflation on branded drugs. These factors were substantially offset by the
61
absence of revenues from the transitioning clients and, to a lesser extent, an increase in generic fill rate. See the Health Services segment section of this MD&A for further discussion of pharmacy revenues.
Premiums increased, primarily resulting from customer growth and rate increases reflecting expected medical cost inflation and the return of the health insurance industry tax. These factors were partially offset by the impact of premium relief programs implemented in the second quarter of 2020 in response to significantly lower
than historical utilization as individuals deferred care due to the COVID-19 pandemic.
Fees and Other Revenues decreased, primarily reflecting the impact of the transition of Integrated Medical’s commercial customers to Health Services’ retail pharmacy network in the third quarter of 2019. See section K of Note 2 to the Consolidated Financial Statements contained in our 2019 Form 10-K for further information. Additionally, the decreases resulted from lower cost containment program fees driven by lower claims volumes due to COVID-19.
Net investment income decreased, primarily driven by losses in certain securities partnership investments due to current economic conditions. See the Investment Asset section of this MD&A for further discussion.
Other
Components of Consolidated Results of Operations
•Pharmacy and other service costs increased, primarily reflecting the transition of Integrated Medical's customers to Health Services; higher claims volumes, primarily driven by the Health Services collaboration with Prime Therapeutics, and an increase in pricing, primarily due to inflation on branded drugs. These factors were substantially offset by the impact of the absence of the transitioning clients and, to a lesser extent, effective management of supply chain and the favorable impact of the mix of claims.
•Medical costs and other benefit expenses: For the three months, medical costs and other benefit expenses decreased substantially, driven by significantly lower medical utilization in the Integrated Medical and International Markets
segments resulting from the deferral of care due to COVID-19, partially offset by customer growth in the insured business. For the six months, the increase reflects customer growth in Integrated Medical and increased claims in Group and Other, offset by lower medical cost utilization in the Integrated Medical and International Markets segments due to COVID-19.
•Selling, general and administrative expenses increased, primarily due to the health insurance industry tax in 2020 that had been suspended in 2019, partially offset by a decrease in integration and transaction-related costs.
•Amortization of acquired intangible assets in 2020 primarily reflects lower amortization of customer-related intangibles associated with the transitioning clients.
•Consolidated
effective tax rate: For the three months, the consolidated effective tax rate increased, reflecting the return of the health insurance industry tax and the absence of certain state tax benefits recognized in the second quarter of 2019. For the six months, the consolidated effective tax rate declined, primarily due to recognizing incremental federal and state tax benefits in the first quarter of 2020, partially offset by the return of the nondeductible health insurance industry tax.
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Key Transactions and Business Developments
Merger with Express Scripts
As discussed in more detail in our 2019 Form 10-K, Cigna acquired Express Scripts on December
20, 2018 in a cash and stock transaction valued at $52.8 billion. We continue to incur costs related to this transaction, including costs to integrate the Cigna and Express Scripts operations. These costs are being reported in “integration and transaction-related costs” as a special item and excluded from adjusted income from operations because they are not indicative of future underlying performance of the business.
On January 30, 2019, Anthem exercised its early termination right and terminated its pharmacy benefit management services agreement with us, effective March 1, 2019. There was a twelve-month transition period that ended March 1, 2020. We excluded the results of Express Scripts’ contract
with Anthem (and also Coventry) from our non-GAAP reporting metrics “adjusted revenues” and “adjusted income from operations” for 2019 and refer to these clients as “transitioning clients.” As of December 31, 2019, the transition was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our reported adjusted revenues and adjusted income from operations.
Agreement to sell Group Disability and Life business
As discussed in Note 6 to the Consolidated Financial Statements, Cigna entered into a definitive agreement in December 2019 to sell the U.S. Group Disability and Life business to New York Life Insurance Company for $6.3 billion. The “Liquidity” section of this MD&A provides further discussion of the impact
of this pending divestiture on our liquidity and capital resources.
Organizational Efficiency Plan
Consistent with our commitment to affordability for our customers and clients, during the fourth quarter of 2019 the Company committed to a plan to increase our organizational alignment and operational efficiency and reduce costs. As a result, we recognized a charge in Selling, general and administrative expenses of $207 million, pre-tax ($162 million, after-tax) in the fourth quarter of 2019 and an additional charge of $31 million pre-tax ($24 million, after-tax) in the first quarter of 2020. We expect to realize annualized after-tax savings of approximately $200 million. A substantial portion of the savings is expected to be realized in 2020. See Note 15 to the
Consolidated Financial Statements for discussion.
Industry Developments and Other Matters
Our 2019 Form 10-K provides a detailed description of The Patient Protection and Affordable Care Act (“ACA”) provisions and other legislative initiatives that impact our health care and pharmacy services businesses, including regulations issued by the Centers for Medicare & Medicaid Services (“CMS”) and the Departments of the Treasury and Health and Human Services. The health care and pharmacy services businesses continue to operate in a dynamic environment, and the laws and regulations applicable to these businesses, including the ACA, continue to be subject to legislative, regulatory and judicial challenges. The following table provides an update on the expected impact of these items and other matters:
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Item
Description
Executive
Orders regarding Drug Pricing
On July 24, 2020, President Trump signed four Executive Orders addressing prescription drug importation; affordability of insulin and epinephrine purchased at federally qualified health centers through the Public Health Service Act Section 340B drug pricing program; drug rebates and favored-nation international pricing. The release of the favored-nation international pricing order, an approach to international reference pricing, was delayed thirty days. The remaining three orders call for subsequent policy action by the Department of Health and Human Services (HHS). They do not contain any policy changes that take effect immediately. The order covering rebate policy directs HHS to complete prior rulemaking which proposed changes to the federal anti-kickback safe harbor to exclude regulatory protection for rebates between drug manufacturers
and Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers. This order also requires that prior to taking such action, the Secretary confirm that the action is not projected to increase federal spending, Medicare beneficiary premiums or customers’ total out-of-pocket costs.
We do not believe the executive orders will have a material impact on our business.
COVID-19-related Regulatory Actions
In response to the COVID-19 public health emergency, U.S. federal and state governments have increasingly enacted new regulatory requirements, as well as provided additional flexibility to industry participants. These regulatory actions primarily provide for:
•client and customer premium relief to avoid the cancellation or non-renewal of policies;
•mandating
or requesting waiver of customer cost-sharing and other associated costs related to COVID-19 testing or treatment, as well as future vaccine immunizations;
•extending claims filing deadlines for providers, customers and facilities;
•mandating or encouraging waiver of customer cost-share related to telemedicine services, as well as requiring certain reimbursement levels for telemedicine providers to encourage its utilization;
•enacting coverage and reimbursement requirements at in-network levels for certain services received from out-of-network providers;
•revising or suspending the use of certain medical management procedures; and
•mandating
prescription drug benefit administration requirements primarily related to formulary exceptions and restrictions, and prior authorization and prescription drug refill limits.
We are diligently working with federal, state and local governments to deliver access to simple, affordable and predictable health care and continue to monitor developments.
Medicare Advantage ("MA")
MA Rates: Final MA reimbursement rates for 2021 were published by CMS in April 2020. We do not expect the new rates to have a material impact on our consolidated results of operations in 2021.
Risk Adjustment: As discussed in the “Regulation”
and “Risk Factors” sections of our 2019 Form 10-K, our MA business is subject to reviews, including risk adjustment data validation (“RADV”) audits by CMS and the Office of the Inspector General (“OIG”). We expect that CMS, OIG and other federal agencies will continue to closely scrutinize components of the Medicare program.
The “Regulation” section of the 2019 Form 10-K also discusses a proposed rule issued by CMS in 2018 for RADV audits of contract year 2011 and all subsequent years that included, among other things, extrapolation of the error rate related to RADV audit findings without applying the adjustment for underlying fee-for-service data errors as currently contemplated by CMS’ RADV audit methodology. RADV audits for our contract
years 2011 through 2015 are currently in process. CMS has announced its intent to use third-party auditors to audit all Medicare Advantage contracts by either a comprehensive or a targeted RADV review for each contract year. If the proposed rule is adopted in its current form, it could result in some combination of degraded plan benefits, higher monthly premiums and reduced choice for the population served by all MA insurers. The Company, along with other MA organizations and additional interested parties, submitted comments to CMS on the proposed rule as part of the notice-and-comment rulemaking process. The comment period concluded on August 28, 2019.
If CMS adopts the rule as proposed, there could be a material impact on the Company’s future results of operations, though we expect the rule would be subject to legal challenges. In addition, the Company is subject to OIG RADV audits that are in process. Certain OIG audit activities have been suspended for an indeterminate amount of time as a result of the COVID-19 public health emergency. Previously suspended CMS audit activities have either resumed or are expected to resume during the third quarter of 2020.
Also, as described in Note 18 to the Consolidated Financial Statements, the U.S. Department of Justice is currently conducting an industry-wide investigation of risk adjustment data submission practices
and business processes, which in the case of certain other MA organizations has resulted in litigation.
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Item
Description
ACA
Cost-Sharing Reduction Subsidies
The ACA provides for cost-sharing reductions that offset the amount that qualifying customers pay for deductibles, copays and coinsurance. The federal government stopped funding insurers for the cost-sharing reduction subsidies in 2017. Certain insurers have sued the federal government for failure to pay cost-sharing reduction subsidies and the matter remains unresolved. To date, judges in six of those actions have ruled in favor of the insurers, all of which are presently under appeal. The Court of Appeals for the Federal Circuit heard oral argument in the first set of consolidated appeals on January 9, 2020. As described in Note 18 to the Consolidated Financial Statements, as a result of the Supreme Court decision in April 2020, we filed a lawsuit in May 2020 against the federal government seeking payment of these subsidies.
Our premium rates for the 2019 and 2020 plan years reflected a lack of government funding for cost-sharing reduction subsidies.
Affordable Care Act
As described in the “Business - Regulation” section of our 2019 Form 10-K, a federal district court ruled that the “individual mandate” in the ACA is unconstitutional. On appeal, the Court of Appeals for the Fifth Circuit agreed that the “individual mandate” is unconstitutional but ordered the district court to reexamine whether the other provisions of the ACA can remain in effect, thereby leaving in doubt whether the entire ACA is unconstitutional until there is a final judicial determination on appeal. The California-led states and the U.S. House of Representatives filed petitions seeking to appeal the Fifth Circuit's ruling to the U.S. Supreme
Court. On March 2, 2020, the Supreme Court agreed to hear the appeals and we expect the case will be argued during the next court term which runs from October 2020 through June 2021.
Risk Mitigation Programs – Individual ACA Business
Risk Corridor. In 2016, we recorded an allowance for the balance of our ACA risk corridors receivable based on court decisions and the large program deficit. On April 27, 2020, the U.S. Supreme Court ruled that insurers are entitled to the full amount due under the risk corridors program. The Supreme Court remanded the cases before it to the lower courts for further proceedings consistent with its opinion. The decision does not order an immediate issuance of payment and the timing of any payments is unclear. As
of June 30, 2020, the Company has $120 million in uncollected risk corridors payments. As described in Note 18 to the Consolidated Financial Statements, we filed a lawsuit in May 2020 seeking payment of these funds.
Risk Adjustment. Following each program year, risk adjustment balances are subject to audit adjustment by CMS through the RADV program. RADV audits commenced with the 2017 benefit year. CMS published the final RADV transfers for the 2017 benefit year in 2019 along with guidance that the settlement will not take place until 2021. The 2018 benefit year data validation error rates were released by CMS in June 2020 and the RADV transfers are expected to be published by CMS in August 2020, subject to an appeals period with final settlement expected in 2022. Based on
the information currently available, we adjusted our risk adjustment balance to reflect the expected outcome of the RADV program.
The following table presents our balances associated with the risk adjustment program and RADV audit adjustments as of June 30, 2020 and December 31, 2019.
(1)Receivables, net of allowances, are reported in Accounts receivable, net in the Consolidated Balance Sheets.
(2)Payables are reported in Accrued expenses and other liabilities (current) in the Consolidated Balance Sheets.
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Risk adjustment program activity,
including any RADV adjustments, was favorable by $30 million pre-tax ($23 million after tax) for the three months and $15 million pre-tax ($11 million after tax) for the six months ended June 30, 2020 compared with charges of $76 million pre-tax ($58 million after tax) and $116 million pre-tax ($89 million after-tax) for the same periods in 2019.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We maintain liquidity at two levels: the subsidiary level and the parent company level.
Liquidity requirements at the subsidiary level generally consist of:
•pharmacy,
medical costs and other benefit payments;
•expense requirements, primarily for employee compensation and benefits, information technology and facilities costs;
•income taxes; and
•debt service.
Our subsidiaries normally meet their liquidity requirements by:
•maintaining appropriate levels of cash, cash equivalents and short-term investments;
•using cash flows from operating activities;
•matching investment durations to those estimated
for the related insurance and contractholder liabilities;
•selling investments; and
•borrowing from affiliates, subject to applicable regulatory limits.
Liquidity requirements at the parent company level generally consist of:
•debt service and dividend payments to shareholders;
•using proceeds from issuing debt and common stock; and
•borrowing from its subsidiaries, subject to applicable regulatory limits.
Dividends from our insurance, Health Maintenance Organization (“HMO”) and foreign subsidiaries are subject to regulatory restrictions. See Note 20 to the Consolidated Financial Statements in our 2019 Form
10-K for additional information regarding these restrictions. Most of Express Scripts' subsidiaries are not subject to regulatory restrictions regarding dividends and therefore provide significant financial flexibility to Cigna.
66
Cash flows for the six months ended June 30 were as follows:
Six
Months Ended June 30,
(In millions)
2020
2019
Operating activities
$
5,161
$
4,231
Investing activities
$
(506)
$
(159)
Financing
activities
$
(2,130)
$
(4,307)
The following discussion explains variances in the various categories of cash flows for the six months ended June 30, 2020 compared with the same period in 2019.
Operating activities
Cash flows from operating activities consist principally of cash receipts and disbursements for pharmacy revenues and costs, premiums, fees, investment income, taxes, benefit costs and other expenses.
Cash
flows from operating activities increased, primarily driven by higher pharmacy and services costs payable due to business growth and lower tax payments from the deferral of income and payroll tax payments as permitted under the CARES Act and COVID-19 related Regulatory actions, partially offset by an increase in accounts receivable due to business growth and collection timing and higher inventory purchases.
Investing and Financing activities
Cash used in investing activities increased, primarily due to lower net investment sales.
Cash used in finance activities decreased, primarily due to proceeds from issuance of new long-term debt and term loan, partially offset by the debt tender and redemption and repayment of commercial paper borrowing.
We maintain a share repurchase program authorized
by our Board of Directors. Under this program, we may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through open market purchases or privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, including through Rule 10b5-1 trading plans. The program may be suspended or discontinued at any time.
For the six months ended June 30, 2020, we repurchased 7.2 million shares for approximately $1.3 billion. From July 1, 2020 through July 31, 2020 we repurchased
1.2 million shares for approximately $210 million. Share repurchase authority was $4.4 billion as of July 31, 2020.
Capital Resources
Our capital resources (primarily cash flows from operating activities and proceeds from the issuance of debt and equity securities) provide protection for policyholders, furnish the financial strength to underwrite insurance risks and facilitate continued business growth.
67
In December 2019, Cigna entered into a definitive agreement to sell the U.S. Group Disability and Life business to New York Life Insurance Company for $6.3 billion. The sale is expected to close
in the third quarter of 2020 subject to applicable regulatory approvals and other customary closing conditions. Cigna estimates to receive approximately $5.3 billion of net after-tax proceeds from this transaction and expects to use these proceeds primarily for share repurchase and repayment of debt in 2020.
In 2018, Cigna entered into a $3.25 billion five-year revolving credit agreement and term loan credit agreement in financing the Express Scripts acquisition. Cigna had immaterial letters of credit outstanding under the revolving credit agreement as of June 30, 2020. The term loan was repaid in full and the agreement was terminated in the fourth quarter of 2019. In the fourth quarter of 2019, Cigna entered into an additional $1.0 billion 364-day revolving credit agreement that matures in October 2020.
On
April 1, 2020, the Company borrowed an aggregate principal amount of $1.4 billion under a new 364-day term loan credit agreement. The Company entered into this agreement to further enhance its liquidity position in light of disruption in the commercial paper market and used a portion of the proceeds to pay down amounts outstanding under its commercial paper facility. See Note 8 to the Consolidated Financial Statements for further information on our credit agreements.
At June 30, 2020, our debt-to-capitalization ratio was 43.5%, a decline from 45.2% at December 31, 2019. We have a near-term focus on accelerated
debt repayment and expect to continue to deleverage into the upper 30%s by the end of 2020 using cash flows from operating activities and a portion of the proceeds from the sale of the Group Disability and Life business.
Management, guided by regulatory requirements and rating agency capital guidelines, determines the amount of capital resources that we maintain. 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.
We prioritize our use of capital resources to:
•provide the capital necessary to support growth and maintain or improve the financial strength ratings of subsidiaries and
to fund pension obligations;
•consider acquisitions that are strategically and economically advantageous; and
•return capital to investors primarily through share repurchases.
Our capital management strategy to support the liquidity and regulatory capital requirements of our foreign operations and certain international growth initiatives is to retain overseas a significant portion of the earnings generated by our foreign operations. This strategy does not materially limit our ability to meet our liquidity and capital needs in the United States.
Liquidity and Capital Resources Outlook
We maintain sufficient liquidity to meet our cash needs through our cash and cash equivalents balances, cash flows from operations,
commercial paper program, credit agreements, and the issuance of long-term debt. As of June 30, 2020, we had $4.25 billion of undrawn committed capacity under our revolving credit agreements, $3.25 billion of remaining capacity under our commercial paper program, and approximately $7.6 billion in cash and short-term investments, approximately $1.7 billion of which was held by the parent company or certain nonregulated subsidiaries. We actively monitor our debt obligations and engage in issuance or redemption activities as needed in
68
accordance with our capital management strategy. A description of our outstanding debt can be found in Note
8 to the Consolidated Financial Statements.
We currently expect the required contributions for 2020 and 2021 under the Pension Protection Act of 2006 to be immaterial.
Our cash projections may not be realized and the demand for funds could exceed available cash if our ongoing businesses experience unexpected shortfalls in earnings or we experience material adverse effects from one or more risks or uncertainties described more fully in the Risk Factors section of our 2019 Form 10-K and Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2020. Though we believe we have adequate sources of liquidity, significant disruption or volatility in the capital and credit markets could affect our ability to access those markets for additional borrowings or increase costs. In addition
to the sources of liquidity discussed above, the parent company can borrow an additional $1.3 billion from its subsidiaries without further approvals as of June 30, 2020.
Guarantees and Contractual Obligations
We are contingently liable for various contractual obligations entered into in the ordinary course of business. See Note 18 to the Consolidated Financial Statements for discussion of various guarantees.
We have updated long-term debt obligations as of June 30, 2020 previously provided in our 2019 Form 10-K. There have been no material changes to the other information presented in our table of guarantees and contractual obligations as set forth
in our 2019 Form 10-K.
(In millions, on an undiscounted basis)
Total
2020
2021
to 2022
2023 to 2024
Thereafter
On-Balance Sheet
Long-term debt(1)
53,419
3,967
7,954
7,106
34,392
(1)Amounts
include scheduled interest payments, current maturities of long-term debt and term loan borrowing. Finance leases are included in long-term debt and primarily represent obligations for information technology network storage, servers and equipment. See Note 16 to the Consolidated Financial Statements for information regarding finance leases. See Note 8 to the Consolidated Financial Statements for information regarding our long-term debt.
CRITICAL ACCOUNTING ESTIMATES
The preparation of Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures in the Consolidated Financial Statements. Management considers an accounting
estimate to be critical if:
•it requires assumptions to be made that were uncertain at the time the estimate was made; and
•changes in the estimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition.
Management has discussed how critical accounting estimates are developed and selected with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented in our 2019 Form 10-K. We regularly evaluate items that may impact critical accounting estimates. Our most critical accounting estimates, as well as the effect of hypothetical changes in material assumptions used to develop each estimate, are described in the 2019 Form 10-K. As of June 30,
2020 there were no significant changes to the critical accounting estimates from what was reported in our 2019 Form 10-K.
69
SEGMENT
REPORTING
The following section of this MD&A discusses the results of each of our segments. See Note 1 to the Consolidated Financial Statements for a description of our segments.
In segment discussions, we present adjusted revenues and “pre-tax adjusted income from operations,” defined as income before taxes excluding realized investment gains (losses), amortization of acquired intangible assets, special items and, for periods prior to 2020, results of transitioning clients. Ratios presented in this segment discussion exclude the same items as pre-tax adjusted income from operations. See Note 19 to the Consolidated Financial Statements for additional discussion of these metrics and a reconciliation of income before income taxes to pre-tax adjusted income from operations, as well as a reconciliation of total revenues to adjusted revenues. Note 19 to the Consolidated Financial
Statements also explains that segment revenues include both external revenues and sales between segments that are eliminated in Corporate.
In these segment discussions, we also present “pre-tax adjusted margin,” defined as pre-tax adjusted income from operations divided by adjusted revenues.
Health Services Segment
The Health Services segment includes pharmacy benefit management, specialty pharmacy services, clinical solutions, home delivery and health management services. As described in the introduction to Segment Reporting, performance of the Health Services segment is measured using pre-tax adjusted income from operations.
The
key factors that impact Health Services revenues and costs of revenues are volume, mix of claims and price. These key factors are discussed further below. See Note 2 to the Consolidated Financial Statements included in our 2019 Form 10-K for additional information on revenue and cost recognition policies for this segment.
•As our clients’ claim volumes increase or decrease, our resulting revenues and cost of revenues correspondingly increase or decrease. Our gross profit could also increase or decrease as a result of changes in purchasing discounts.
•The mix of claims generally considers the type of drug and distribution method used for dispensing and fulfilling. Types of drugs can have an impact on our pharmacy revenues, pharmacy and other service costs and gross profit, including amounts payable under certain financial and performance
guarantees with our clients. In addition to the types of drugs, the mix of generic claims (i.e. generic fill rate), also impacts our gross profit. Generally, higher generic fill rates reduce revenues, as generic drugs are typically priced lower than the branded drugs they replace. However, as ingredient cost paid to pharmacies on generic drugs is incrementally lower than the price charged to our clients, higher generic fill rates generally have a favorable impact on our gross profit. The home delivery generic fill rate is currently lower than the network generic fill rate as fewer generic substitutions are available among maintenance medications (such as therapies for chronic conditions) commonly dispensed from home delivery pharmacies as compared to acute medications that are primarily dispensed by pharmacies in our retail networks. Furthermore, our gross profit differs among network, home delivery and specialty distribution methods and can impact our profitability.
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•Our
client contract pricing is impacted by our ongoing ability to negotiate supply chain contracts for pharmacy network, pharmaceutical and wholesaler purchasing, and manufacturer rebates. As we seek to improve the effectiveness of our integrated solutions for the benefit of our clients, we are continuously innovating and optimizing the supply chain. Our gross profit could also increase or decrease as a result of supply chain initiatives implemented. Inflation also impacts our pricing because most of our contracts provide that we bill clients and pay pharmacies based on a generally recognized price index for pharmaceuticals. Therefore, the rate of inflation for prescription drugs and our efforts to manage
this inflation for our clients can affect our revenues and cost of revenues.
In this MD&A, we present revenues and gross profit, as well as adjusted revenues and adjusted gross profit, consistent with our segment reporting metrics, which exclude special items and, for periods prior to 2020, contributions from transitioning clients. As of December 31, 2019, the transition of these clients was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our adjusted metrics. See the “Key Transactions and Business Developments” section of our 2019 Form 10-K MD&A for further discussion of transitioning clients and why we present this information.
Results of Operations
Financial
Summary
Three Months Ended June 30,
Change Favorable (Unfavorable)
Six Months Ended June 30,
Change Favorable (Unfavorable)
(In millions)
2020
2019
2020
2019
Total
revenues
$
28,602
$
27,987
2
%
$
55,857
$
54,936
2
%
Less: transitioning
clients
—
(4,450)
N/M
—
(8,939)
N/M
Less: contractual adjustment for a former client
—
—
N/M
(87)
—
N/M
Adjusted
revenues(1)
$
28,602
$
23,537
22
%
$
55,770
$
45,997
21
%
Gross
profit
$
1,781
$
2,325
(23)
%
$
3,482
$
4,439
(22)
%
Adjusted
gross profit(1)
$
1,781
$
1,611
11
%
$
3,395
$
3,007
13
%
Pre-tax
adjusted income from operations
$
1,249
$
1,162
7
%
$
2,331
$
2,156
8
%
Pre-tax
adjusted margin
4.4
%
4.9
%
(50)
bps
4.2
%
4.7
%
(50)
bps
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Three
Months Ended June 30,
Change Favorable (Unfavorable)
Six Months Ended June 30,
Change Favorable (Unfavorable)
(Dollars and adjusted scripts in millions)
2020
2019
2020
2019
Selected
Financial Information(1)
Pharmacy revenue by distribution channel
Adjusted
network revenues
$
13,866
$
9,758
42
%
$
26,657
$
19,026
40
%
Adjusted
home delivery and specialty revenues
12,407
11,507
8
%
24,412
22,548
8
%
Other
revenues
1,292
1,258
3
%
2,534
2,380
6
%
Total
adjusted pharmacy revenues
$
27,565
$
22,523
22
%
$
53,603
$
43,954
22
%
Pharmacy
script volume
Adjusted network scripts(2)
293
223
31
%
581
445
31
%
Adjusted
home delivery and specialty scripts(2)
71
71
—
%
143
141
1
%
Total
adjusted scripts(2)
364
294
24
%
724
586
24
%
Generic
fill rate
Network
88.4
%
87.7
%
70
bps
88.3
%
87.8
%
50
bps
Home
delivery
85.1
%
84.1
%
100
bps
85.0
%
84.2
%
80
bps
Overall generic
fill rate
88.0
%
87.2
%
80
bps
87.9
%
87.3
%
60
bps
(1)Amounts
exclude special items and, for periods prior to 2020, contributions from transitioning clients.
(2)Non-specialty network scripts filled through 90-day programs and home delivery scripts are multiplied by three. All other network and specialty scripts are counted as one script.
In the third quarter of 2019, Integrated Medical’s Commercial customers transitioned to Express Scripts’ retail pharmacy network. In the first quarter of 2020, Integrated Medical's Government segment customers transitioned to Express Scripts' retail pharmacy network.
Adjusted network revenues.
The increase reflected the transition of Integrated Medical’s customers; higher claims volume, primarily due to our collaboration with Prime Therapeutics; and increased prices primarily due to inflation on branded drugs. This increase was partially offset by claims mix, due to the increase in the generic fill rate.
Adjusted home delivery and specialty revenues.The increase reflected higher prices, primarily due to inflation on branded drugs. For the six months ended June 30, 2020, the increase was also due to higher home delivery and specialty claims volume. For both the three and six months ended June 30, 2020, these increases were partially offset by claims mix due to an increase in the generic fill rate.
Adjusted
gross profit. The increase reflected customer growth, higher adjusted pharmacy script volumes, benefits from the effective management of supply chain, and the favorable impact of claims mix as a result of the types of drugs dispensed, the distribution method used for dispensing and fulfilling, and an increase in the generic fill rate.
Pre-tax adjusted income from operations. The increase reflected customer growth, higher adjusted pharmacy scripts volumes, benefits from the effective management of supply chain, and the favorable impact of claims mix as a result of the types of drugs dispensed, the distribution method used for dispensing and fulfilling, and an increase in the generic fill rate, partially offset by an increase in operating expenses due to client transitions.
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Integrated
Medical Segment
Integrated Medical consists of a Commercial operating segment that includes our employer-sponsored medical coverage and a Government operating segment that includes Medicare offerings for seniors and individual insurance offerings both on and off the public health insurance exchanges. As described in the introduction to Segment Reporting, performance of the Integrated Medical segment is measured using pre-tax adjusted income from operations. Key factors affecting profitability for this segment include:
•customer growth;
•revenues from integrated specialty products, including pharmacy services sold to clients and customers across all funding solutions;
•percentage of Medicare Advantage customers
in plans eligible for quality bonus payments;
•benefit expenses as a percentage of premiums (medical care ratio or “MCR”) for our insured commercial and government businesses; and
•selling, general and administrative expense as a percentage of adjusted revenues (expense ratio).
Adjusted revenues. The increase for the three and six months ended June 30, 2020 compared with the same periods in 2019 reflects customer growth in our Commercial insured and Medicare Advantage businesses, as well as higher
73
premium rates due to anticipated underlying medical cost trend and the resumption of the health insurance industry tax. These increases were partially offset by the impact of premium relief programs for clients implemented in the second quarter of 2020
in response to significantly lower than historical utilization as individuals deferred care due to the COVID-19 pandemic.
Pre-tax adjusted income from operations. The significant increase for the three and six months ended June 30, 2020 compared with the same periods in 2019 reflects increased earnings from the Commercial and Government insured businesses due to significant deferral of care by our customers in response to the COVID-19 pandemic exceeding the cost of COVID-19 related care, partially offset by lower net investment income.
Medical care ratio. The medical care ratio reflects a significant decrease for the three and six months ended June 30, 2020 compared with the same periods in 2019 due to the COVID-19 pandemic effects of
significant deferred utilization exceeding incremental costs of care, partially offset by premium relief programs extended to employer clients.
Expense ratio. The expense ratio increased for the three and six months ended June 30, 2020 compared with the same periods in 2019, primarily reflecting the reinstatement of the health insurance industry tax in 2020, costs associated with operations-related litigation matters and the impact of premium relief programs, partially offset by higher insured revenues.
Other Items Affecting Integrated Medical Results
Unpaid Claims and Claim Expenses
Our unpaid claims and claim expenses liability was higher as of June 30, 2020 compared with
December 31, 2019, primarily due to seasonality in our stop loss products partially offset by the impact of deferred utilization in both April and May 2020 due to the COVID-19 pandemic.
Medical Customers
Our medical customer base was flat at June 30, 2020 compared with the same period in 2019, primarily reflecting growth in our Select segment and our Medicare Advantage business offset by a lower customer base in our National Accounts and increased disenrollment resulting from the economic impacts of the COVID-19 pandemic.
A medical customer is defined as a person meeting any one of the following criteria:
•is covered under a medical insurance policy, managed care arrangement
or service agreement issued by us;
•has access to our provider network for covered services under their medical plan; or
•has medical claims that are administered by us.
International Markets Segment
As described in the introduction to Segment Reporting, performance of the International Markets segment is measured using pre-tax adjusted income from operations. Key factors affecting pre-tax adjusted income from operations for this segment are:
74
•premium
growth, including new business and customer retention;
•benefit expenses as a percentage of premiums (loss ratio);
•selling, general and administrative expense and acquisition expense as a percentage of revenues (expense ratio and acquisition cost ratio); and
Adjusted revenues increased mainly due to business growth in Asia and Europe, partially offset by unfavorable foreign currency movements.
Pre-tax adjusted income from operations increased due to lower loss and acquisition ratios and business growth, primarily in Asia, partially offset by unfavorable foreign currency movements and lower net investment income.
The segment’s loss ratio was more favorable reflecting lower medical utilization due to the COVID-19 pandemic, partially offset by the absence of 2019 reserve updates.
The
acquisition costratio decreased reflecting an update to our commission deferral process and lower acquisition expenses in Asia.
The expense ratio (excluding acquisition costs) was essentially flat for the three months ended June 30, 2020. For the six months ended June 30, 2020, the decrease in the expense ratio was mainly driven by lower spend across markets.
Other Items Affecting International Markets Results
South Korea is the single largest geographic market for our International Markets segment. For the six months ended June 30, 2020, South Korea
generated 36% of the segment’s adjusted revenues and 50% of the segment’s pre-tax adjusted income from operations.
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Group Disability and Other
As described in the introduction of Segment Reporting, performance of Group Disability and Other is measured using pre-tax adjusted income from operations. Key factors affecting pre-tax adjusted income from operations are:
•premium growth, including new business and customer retention;
•net investment
income;
•benefit expenses as a percentage of premiums (loss ratio); and
•selling, general and administrative expense as a percentage of revenues excluding net investment income (expense ratio).
Adjusted revenues increased due to growth in disability, life and voluntary products, partially offset by lower investment income.
Pre-tax adjusted income from operationsand margin decreased due to unfavorable life claims experience related to COVID-19, lower investment income and lower interest rates, partially offset by favorable results in our voluntary products.
Corporate
Corporate reflects amounts not allocated to operating segments, including net
interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment and other operations), certain litigation matters, expense associated with our frozen pension plans, charitable contributions, severance, certain overhead and project costs and intersegment eliminations for products and services sold between segments.
Pre-tax adjusted loss from operations was lower, primarily reflecting lower interest expense.
INVESTMENT ASSETS
The following table presents our investment asset portfolio excluding separate account assets as of June 30, 2020 and December 31, 2019. Additional information regarding our investment assets is included in Notes 11, 12, 13 and 14 to the Consolidated Financial Statements.
Investments classified as assets of business held for sale (1)
$
(8,181)
$
(7,709)
Investments
per Consolidated Balance Sheets
$
22,528
$
22,479
(1) The table above includes $8.2 billion as of June 30, 2020 and $7.7 billion as of December 31, 2019 of investments associated with the U.S. Group Disability and Life business that are held for sale to New York Life. Under the terms of the definitive agreement, some of the assets currently associated with the Group Disability and Life business can be substituted for other assets. The assets that will transfer to New
York Life will be primarily debt securities and, to a lesser extent, commercial mortgage loans and short-term investments.
Debt Securities
Investments in debt securities include publicly-traded and privately-placed bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor. These investments are classified as available for sale and are carried at fair value on our balance sheet. Additional information regarding valuation methodologies, key inputs and controls is included in Note 12 to the Consolidated Financial Statements. More detailed information about debt securities by type of issuer and maturity dates is included in Note 11 to the Consolidated Financial Statements.
The following table reflects our portfolio of debt securities by type of issuer as of June 30,
2020 and December 31, 2019.
Our debt securities portfolio decreased during the first six
months of 2020 reflecting net sales and maturities, partially offset by an increase in valuations due to decreasing yields. As of June 30, 2020, $21.1 billion, or 89% of the debt securities in our investment portfolio were investment grade (Baa and above, or equivalent) and the remaining $2.5 billion were below investment grade. The majority of the bonds that are below investment grade are rated at the higher end of the non-investment grade spectrum. These quality characteristics have not materially changed from the prior year and are consistent with our investment strategy. Investments in debt securities are diversified by issuer, geography and industry as appropriate.On an aggregate basis, the debt securities portfolio continues to perform according to original investment expectations. However, due to the economic impacts of the COVID-19 pandemic, there are certain issuers,
particularly within the aviation, energy and hospitality sectors that are showing signs of distress, primarily in the form of requests for temporary covenant relief. There were no material unrealized losses in any of these sectors as of the reporting date. We continue to monitor the economic environment and its effect on our portfolio, and consider the impact of various factors in determining the allowance for credit losses on debt securities, which is discussed in Note 11 to the Consolidated Financial Statements.
Foreign government obligations are concentrated in Asia, primarily South Korea, consistent with our risk management practice and local regulatory requirements of our international business operations. Corporate debt securities include private placement assets of $7.6 billion. These investments are generally less marketable than publicly-traded bonds; however yields on these investments tend to be higher than yields
on publicly-traded bonds with comparable credit risk. We perform a credit analysis of each issuer and require financial and other covenants that allow us to monitor issuers for deteriorating financial strength and pursue remedial actions, if warranted.
In addition to amounts classified as debt securities in our Consolidated Balance Sheets, we participate in an insurance joint venture in China with a 50% ownership interest. This entity had an investment portfolio of approximately $9.5 billion supporting its business that is primarily invested in Chinese corporate and government debt securities. We account for this joint venture on the equity method of accounting and report it in Other assets. There were no investments with a material unrealized loss as of June 30, 2020.
Commercial Mortgage Loans
Our
commercial mortgage loans are fixed rate loans, diversified by property type, location and borrower. Loans are secured by high quality commercial properties, located in strong institutional markets, and are generally made at less than 65% of the property’s value at origination of the loan. Property value, debt service coverage, quality, building tenancy and stability of cash flows are all important financial underwriting considerations. We hold no direct residential mortgage loans and do not originate or service securitized mortgage loans.
Overall, commercial real estate capital market activity has been negatively impacted by COVID-19 with concentrated weakness in hotels and regional malls. Our mortgage loan portfolio is well diversified by property type and geography with no material exposure to hotels and no exposure to regional shopping malls.
As of June 30,
2020, the $1.9 billion commercial mortgage loan portfolio consisted of approximately 65 loans that are in good standing. We completed the annual in-depth review of our commercial mortgage loan portfolio during the second quarter of 2020. The results of the review were generally in line with the prior year and reconfirmed the strength of the overall portfolio. The average loan to value ratio increased slightly to 60% and the portfolio’s average debt service coverage ratio decreased slightly to 2.01. Given the quality and diversity of the underlying real estate, positive debt service coverage and significant borrower cash invested generally ranging between 30 and 40%, we remain confident that the vast majority of borrowers will continue to perform as expected under their contract terms. For further discussion of the results and changes in key loan metrics, see Note 11 to the
Consolidated Financial Statements.
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Other Long-term Investments
Other long-term investments of $2.9 billion as of June 30, 2020 included investments in securities limited partnerships and real estate limited partnerships, direct investments in real estate joint ventures, and other deposit activity that is required to support various insurance and health services businesses. The increase in other long term investments is driven by net new funding activity. Our approximately $2 billion of limited partnership entities typically invest in mezzanine debt or equity of privately-held companies (securities partnerships) and equity real estate. Given our subordinate
position in the capital structure of these underlying entities, we assume a higher level of risk for higher expected returns. To mitigate risk, these investments are diversified across approximately 170 separate partnerships and approximately 85 general partners who manage one or more of these partnerships. Also, the underlying investments are diversified by industry sector or property type and geographic region. No single partnership investment exceeded 4% of our securities and real estate partnership portfolio.
Income from our limited partnership investments is generally reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments. Accordingly, our net investment income in the second quarter reflects the underlying financial information from the first quarter of 2020, and is lower due to the economic impacts of COVID-19,
reflecting declines in fair value and some operating losses of the underlying investments. We could experience additional losses during the remainder of 2020 and into future periods. The magnitude of these losses, will depend in part on the length and extent of the economic disruption, the speed of the recovery, and the overall economic impacts.
Investment Outlook
The impact of COVID-19 on the economy, despite unprecedented monetary and fiscal support, and the uncertainty as to the strength and sustainability of the recovery prior to a widely available vaccine continue to dominate financial markets. Our investment outlook has not changed materially from last quarter and we expect continued pressure on net investment income for the balance of the year and potentially beyond. Second quarter valuations of mezzanine, private equity, and real estate fund asset holdings
and net investment income were negatively impacted by COVID-19 and the resulting economic and market conditions. The low interest rate environment is also pressuring income from both short-term and longer-term investments. U.S. treasury rates remain near all-time lows and the wider market credit spreads experienced during the beginning of the second quarter have meaningfully narrowed, resulting in historically low yields for investment grade assets. We continue to actively monitor the economic impact of the pandemic, as well as fiscal and monetary responses, and their potential impact on the portfolio. Our full year earnings projections reflect continued market volatility and portfolio impacts, particularly in certain sectors such as retail, hospitality, aviation and energy, as well as other areas most severely impacted by COVID-19 and the related shutdowns. Future realized and unrealized investment results will be driven largely by market conditions that exist when
a transaction occurs or at the reporting date. These future conditions are not reasonably predictable; however, we believe that the vast majority of our investments will continue to perform under their contractual terms. Based on our strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, we expect to hold a significant portion of these assets for the long-term. Although future impairment losses resulting from interest rate movements and credit deterioration due to both investment-specific and the global economic uncertainties discussed above remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity.
MARKET RISK
Financial Instruments
Our assets and liabilities include certain financial instruments
subject to the risk of potential losses from adverse changes in market rates and prices. Our primary market risk exposures are interest rate risk and foreign currency exchange rate risk. We encourage you to read this in conjunction with “Market Risk – Financial Instruments” included in the MD&A section of our 2019 Form 10-K. Given the transactions in our long-term debt further described in Note 8 to the Consolidated Financial Statements, in the event of a 100 basis point increase in interest
79
rates, the fair value of the Company's long-term debt would decrease approximately $3.0 billion at June 30, 2020, compared to approximately
$2.5 billion at December 31, 2019. Other than this, there were no material changes in our risk exposures from those reported in our 2019 Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information responsive to this item is contained under the caption “Market Risk” in Item 2 above, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference.
Item
4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of Cigna’s disclosure controls and procedures conducted under the supervision and with the participation of Cigna’s management (including Cigna’s Chief Executive Officer and Chief Financial Officer), Cigna's Chief Executive officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, Cigna’s disclosure controls and procedures are effective to ensure that information required to be disclosed by Cigna in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to Cigna’s management, including Cigna’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
During the period covered by this report, there have been no changes in Cigna’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Cigna’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information contained under “Litigation Matters” and “Regulatory Matters” in Note 18 to the Consolidated
Financial Statements is incorporated herein by reference.
Item 1A. RISK FACTORS
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 as such Risk Factors are supplemented by the information contained in Part II, Item 1A of our Form 10-Q for the quarter ended March
31, 2020. There have been no material changes to our previously reported Risk Factors.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about Cigna’s share repurchase activity for the quarter ended June 30, 2020:
Period
Total
# of shares purchased(1)
Average price paid per share
Total # of shares purchased as part of
publicly announced program(2)
Approximate dollar value of shares
that may yet be purchased as part
of publicly announced program (3)
April 1-30, 2020
476,671
$
167.03
475,000
$
2,903,570,181
May
1-31, 2020
563,876
$
190.44
533,100
$
2,802,107,025
June 1-30, 2020
851,987
$
193.00
850,985
$
2,637,861,789
Total
1,892,534
$
185.70
1,859,085
N/A
(1)Represents
shares tendered by employees under the Company’s equity compensation plans as follows: 1) payment of taxes on vesting of restricted stock (grants and units) and strategic performance shares and 2) payment of the exercise price and taxes for certain stock options exercised. Employees tendered 1,671 shares in April, 30,776 shares in May and 1,002 shares in June 2020.
(2)Additionally, the Company maintains a share repurchase program authorized by the Board of Directors. Under this program, the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased
will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through Rule 10b5-1 plans, open market purchases or privately negotiated transactions, each in compliance with Rule 10b-18 under the Exchange Act. The program may be suspended or discontinued at any time and does not have an expiration date. In July 2020, the Board increased repurchase authority by an additional $2 billion. From July 1, 2020 through July 31, 2020, the Company repurchased 1.2 million shares for approximately $210 million, leaving repurchase authority at $4.4 billion as of July 31, 2020.
(3)Approximate
dollar value of shares is as of the last date of the applicable month.
Financial statements from the quarterly report on Form 10-Q of Cigna Corporation for the quarter ended June 30, 2020 formatted in inline XBRL (eXtensible
Business Reporting Language): (i) the Consolidated Statements of Income; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Total Equity; (v) the Consolidated Statements of Cash Flow; and (vi) the Notes to the Consolidated Financial Statements
* Management contracts and compensatory
plans or arrangements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.