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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2014

 

OR

 

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

 

for the transition period from            to           

 

Commission file number 1-08323

 

Cigna Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1059331

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

900 Cottage Grove Road Bloomfield, Connecticut

 

06002

(Address of principal executive offices)

 

(Zip Code)

(860) 226-6000

Registrant’s telephone number, including area code

(860) 226-6741

Registrant’s facsimile number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark

 

YES

 

NO

 

· 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.

 

R

 

o

 

· whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

R

 

o

 

· whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer R

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company o

 

· whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

o

 

 

R

 

As of July 15, 2014,  263,817,071 shares of the issuer’s common stock were outstanding.

 



Table of Contents

 

Cigna Corporation

 

INDEX

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Consolidated Statements of Income

1

 

Consolidated Statements of Comprehensive Income

2

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Changes in Total Equity

4

 

Consolidated Statements of Cash Flows

6

 

Notes to the Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

64

Item 4.

Controls and Procedures

65

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

66

Item 1.A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 4.

Mine Safety Disclosures

68

Item 6.

Exhibits

69

SIGNATURE

70

INDEX TO EXHIBITS

E-1

 

 

As used herein, “Cigna” or the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.

 



Table of Contents

 

 

 

 

 

Part I.   FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.   FINANCIAL STATEMENTS

 

 

Cigna Corporation

Consolidated Statements of Income

 

 

 

 

Unaudited

 

Unaudited

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In millions, except per share amounts)

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums and fees

 

$

 7,758

     

$

 7,172

 

$

15,374

 

$

14,486

 

Net investment income

 

294

 

289

 

571

 

576

 

Mail order pharmacy revenues

 

547

 

437

 

1,042

 

862

 

Other revenues

 

69

 

56

 

135

 

74

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments on fixed maturities

 

(1)

 

(8)

 

(1)

 

(8)

 

Other realized investment gains, net

 

66

 

34

 

108

 

173

 

Total realized investment gains, net

 

65

 

26

 

107

 

165

 

Total revenues

 

8,733

 

7,980

 

17,229

 

16,163

 

Benefits and Expenses

 

 

 

 

 

 

 

 

 

Global Health Care medical claims expense

 

4,219

 

3,904

 

8,250

 

7,951

 

Other benefit expenses

 

1,100

 

997

 

2,266

 

2,859

 

Mail order pharmacy costs

 

469

 

362

 

883

 

706

 

Other operating expenses

 

2,044

 

1,950

 

4,076

 

3,806

 

Total benefits and expenses

 

7,832

 

7,213

 

15,475

 

15,322

 

Income before Income Taxes

 

901

 

767

 

1,754

 

841

 

Income taxes:

 

 

 

 

 

 

 

 

 

Current

 

329

 

181

 

639

 

80

 

Deferred

 

-

 

80

 

14

 

196

 

Total income taxes

 

329

 

261

 

653

 

276

 

Net Income

 

572

 

506

 

1,101

 

565

 

Less: Net Income (Loss) Attributable to Noncontrolling Interests

 

(1)

 

1

 

-

 

3

 

Shareholders’ Net Income

 

$

 573

 

$

 505

 

$

1,101

 

$

562

 

Shareholders’ Net Income Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

 2.16

 

$

 1.79

 

$

4.11

 

$

1.99

 

Diluted

 

$

 2.12

 

$

 1.76

 

$

4.05

 

$

1.95

 

Dividends Declared Per Share

 

$

 -

 

$

 -

 

$

0.04

 

$

0.04

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

1



Table of Contents

 

Cigna Corporation

Consolidated Statements of Comprehensive Income

 

 

 

 

Unaudited

 

Unaudited

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2014

 

 

2013

 

2014

 

 

2013

 

Shareholders’ net income

 

$

 573

 

 

$

505

 

$

 1,101

 

 

$

 562

 

Shareholders’ other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net unrealized appreciation (depreciation) on securities:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

103

 

 

(269)

 

190

 

 

(341)

 

Equity securities

 

-

 

 

-

 

(1)

 

 

2

 

Net unrealized appreciation (depreciation), on securities

 

103

 

 

(269)

 

189

 

 

(339)

 

Net unrealized appreciation, derivatives

 

-

 

 

6

 

-

 

 

9

 

Net translation of foreign currencies

 

46

 

 

(16)

 

35

 

 

(74)

 

Postretirement benefits liability adjustment

 

11

 

 

21

 

23

 

 

61

 

Shareholders’ other comprehensive income (loss)

 

160

 

 

(258)

 

247

 

 

(343)

 

Shareholders’ comprehensive income

 

733

 

 

247

 

1,348

 

 

219

 

Comprehensive income attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to redeemable noncontrolling interests

 

2

 

 

1

 

5

 

 

3

 

Net (loss) attributable to other noncontrolling interest

 

(3)

 

 

-

 

(5)

 

 

-

 

Other comprehensive income (loss) attributable to redeemable noncontrolling interests

 

3

 

 

(6)

 

-

 

 

(9)

 

Other comprehensive income attributable to other noncontrolling interest

 

-

 

 

-

 

1

 

 

-

 

Total comprehensive income

 

$

 735

 

 

$

242

 

$

 1,349

 

 

$

 213

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

2



Table of Contents

 

Cigna Corporation

Consolidated Balance Sheets

 

 

 

 

Unaudited

 

 

 

As of

 

As of

 

(In millions, except per share amounts)

 

June 30,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $16,598; $15,273)

 

 

 

$

 18,321

 

 

 

$

16,486

 

Equity securities, at fair value (cost, $136; $146)

 

 

 

131

 

 

 

141

 

Commercial mortgage loans

 

 

 

2,217

 

 

 

2,252

 

Policy loans

 

 

 

1,453

 

 

 

1,485

 

Real estate

 

 

 

62

 

 

 

97

 

Other long-term investments

 

 

 

1,336

 

 

 

1,273

 

Short-term investments

 

 

 

232

 

 

 

631

 

Total investments

 

 

 

23,752

 

 

 

22,365

 

Cash and cash equivalents

 

 

 

1,967

 

 

 

2,795

 

Accrued investment income

 

 

 

245

 

 

 

247

 

Premiums, accounts and notes receivable, net

 

 

 

2,657

 

 

 

1,991

 

Reinsurance recoverables

 

 

 

7,132

 

 

 

7,299

 

Deferred policy acquisition costs

 

 

 

1,510

 

 

 

1,395

 

Property and equipment

 

 

 

1,498

 

 

 

1,464

 

Deferred tax assets, net

 

 

 

-

 

 

 

92

 

Goodwill

 

 

 

6,033

 

 

 

6,029

 

Other assets, including other intangibles

 

 

 

2,492

 

 

 

2,407

 

Separate account assets

 

 

 

8,643

 

 

 

8,252

 

Total assets

 

 

 

$

55,929

 

 

 

$

54,336

 

Liabilities

 

 

 

 

 

 

 

 

 

Contractholder deposit funds

 

 

 

$

8,459

 

 

 

$

8,470

 

Future policy benefits

 

 

 

9,583

 

 

 

9,306

 

Unpaid claims and claim expenses

 

 

 

4,389

 

 

 

4,298

 

Global Health Care medical claims payable

 

 

 

2,276

 

 

 

2,050

 

Unearned premiums and fees

 

 

 

625

 

 

 

580

 

Total insurance and contractholder liabilities

 

 

 

25,332

 

 

 

24,704

 

Accounts payable, accrued expenses and other liabilities

 

 

 

5,726

 

 

 

5,456

 

Short-term debt

 

 

 

121

 

 

 

233

 

Long-term debt

 

 

 

5,022

 

 

 

5,014

 

Deferred tax liabilities, net

 

 

 

34

 

 

 

-

 

Separate account liabilities

 

 

 

8,643

 

 

 

8,252

 

Total liabilities

 

 

 

44,878

 

 

 

43,659

 

Contingencies — Note 16

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

99

 

 

 

96

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Common stock (par value per share, $0.25; shares issued, 366; authorized, 600)

 

 

 

92

 

 

 

92

 

Additional paid-in capital

 

 

 

3,405

 

 

 

3,356

 

Net unrealized appreciation, fixed maturities

 

$

663

 

 

 

$

473

 

 

 

Net unrealized appreciation, equity securities

 

3

 

 

 

4

 

 

 

Net unrealized depreciation, derivatives

 

(19)

 

 

 

(19)

 

 

 

Net translation of foreign currencies

 

117

 

 

 

82

 

 

 

Postretirement benefits liability adjustment

 

(1,037)

 

 

 

(1,060)

 

 

 

Accumulated other comprehensive loss

 

 

 

(273)

 

 

 

(520)

 

Retained earnings

 

 

 

14,677

 

 

 

13,676

 

Less treasury stock, at cost

 

 

 

(6,964)

 

 

 

(6,037)

 

Total shareholders’ equity

 

 

 

10,937

 

 

 

10,567

 

Noncontrolling interest

 

 

 

15

 

 

 

14

 

Total equity

 

 

 

10,952

 

 

 

10,581

 

Total liabilities and equity

 

 

 

$

55,929

 

 

 

$

54,336

 

Shareholders’ Equity Per Share

 

 

 

$

41.32

 

 

 

$

38.35

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

3



Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

Unaudited

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the three months ended June 30, 2014

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interest

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2014

 

$

92

 

$

 3,392

 

$

(433)

 

$

14,136

 

$

(6,631)

 

$

 10,556

 

$

13

 

$

10,569

 

$

 96

 

Effect of issuing stock for employee benefit plans

 

 

 

13

 

 

 

(32)

 

81

 

62

 

 

 

62

 

 

 

Other comprehensive income

 

 

 

 

 

160

 

 

 

 

 

160

 

-

 

160

 

3

 

Net income (loss)

 

 

 

 

 

 

 

573

 

 

 

573

 

(3)

 

570

 

2

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(414)

 

(414)

 

 

 

(414)

 

 

 

Capital contribution by noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

5

 

2

 

Distribution to redeemable noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4)

 

Balance at June 30, 2014

 

$

92

 

$

 3,405

 

$

(273)

 

$

14,677

 

$

(6,964)

 

$

 10,937

 

$

15

 

$

10,952

 

$

 99

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the three months ended June 30, 2013

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interest

 

Equity

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2013

 

$

92

 

$

3,305

 

$

(756)

 

$

12,328

 

$

(5,309)

 

$

9,660

 

$

-

 

$

9,660

 

$

113

 

Effect of issuing stock for employee benefit plans

 

 

 

21

 

 

 

(27)

 

81

 

75

 

 

 

75

 

 

 

Other comprehensive loss

 

 

 

 

 

(258)

 

 

 

 

 

(258)

 

 

 

(258)

 

(6)

 

Net income

 

 

 

 

 

 

 

505

 

 

 

505

 

 

 

505

 

1

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(207)

 

(207)

 

 

 

(207)

 

 

 

Distribution to redeemable noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

 

Balance at June 30, 2013

 

$

92

 

$

 3,326

 

$

(1,014)

 

$

12,806

 

$

(5,435)

 

$

9,775

 

$

-

 

$

9,775

 

$

101

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

4



Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

Unaudited

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the six months ended June 30, 2014

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interest

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

 

$

92

 

$

 3,356

 

$

(520)

 

$

13,676

 

$

(6,037)

 

$

 10,567

 

$

14

 

$

10,581

 

$

 96

 

Effect of issuing stock for employee benefit plans

 

 

 

49

 

 

 

(89)

 

130

 

90

 

 

 

90

 

 

 

Other comprehensive income

 

 

 

 

 

247

 

 

 

 

 

247

 

1

 

248

 

-

 

Net income (loss)

 

 

 

 

 

 

 

1,101

 

 

 

1,101

 

(5)

 

1,096

 

5

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(11)

 

 

 

(11)

 

 

 

(11)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(1,057)

 

(1,057)

 

 

 

(1,057)

 

 

 

Capital contribution by noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

5

 

2

 

Distribution to redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4)

 

Balance at June 30, 2014

 

$

92

 

$

3,405

 

$

(273)

 

$

14,677

 

$

(6,964)

 

$

10,937

 

$

15

 

$

10,952

 

$

99

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the six months ended June 30, 2013

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interest

 

Equity

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

$

92

 

$

3,295

 

$

(671)

 

$

12,330

 

$

(5,277)

 

$

9,769

 

$

-

 

$

9,769

 

$

114

 

Effect of issuing stock for employee benefit plans

 

 

 

31

 

 

 

(75)

 

146

 

102

 

 

 

102

 

 

 

Other comprehensive loss

 

 

 

 

 

(343)

 

 

 

 

 

(343)

 

 

 

(343)

 

(9)

 

Net income

 

 

 

 

 

 

 

562

 

 

 

562

 

 

 

562

 

3

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(11)

 

 

 

(11)

 

 

 

(11)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(304)

 

(304)

 

 

 

(304)

 

 

 

Distribution to redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

 

Balance at June 30, 2013

 

$

92

 

$

3,326

 

$

(1,014)

 

$

12,806

 

$

(5,435)

 

$

9,775

 

$

-

 

$

9,775

 

$

101

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

 

Unaudited

 

 

 

Six Months Ended June 30,

 

(In millions)

 

2014

 

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,101

 

 

$

565

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

289

 

 

299

 

Realized investment gains

 

(107)

 

 

(165)

 

Deferred income taxes

 

14

 

 

196

 

Gains on sale of businesses

 

(7)

 

 

(8)

 

Net changes in assets and liabilities, net of non-operating effects:

 

 

 

 

 

 

Premiums, accounts and notes receivable

 

(660)

 

 

(192)

 

Reinsurance recoverables

 

67

 

 

356

 

Deferred policy acquisition costs

 

(100)

 

 

(140)

 

Other assets

 

(98)

 

 

251

 

Insurance liabilities

 

359

 

 

779

 

Accounts payable, accrued expenses and other liabilities

 

78

 

 

(359)

 

Current income taxes

 

100

 

 

(89)

 

Cash used to effectively exit run-off reinsurance business

 

-

 

 

(2,196)

 

Other, net

 

(34)

 

 

(20)

 

Net cash provided by / (used in) operating activities

 

1,002

 

 

(723)

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

 

Fixed maturities

 

476

 

 

1,269

 

Equity securities

 

34

 

 

3

 

Other (primarily short-term and other long-term investments)

 

1,404

 

 

411

 

Investment maturities and repayments:

 

 

 

 

 

 

Fixed maturities

 

898

 

 

821

 

Equity securities

 

-

 

 

18

 

Commercial mortgage loans

 

214

 

 

298

 

Investments purchased or originated:

 

 

 

 

 

 

Fixed maturities

 

(2,575)

 

 

(914)

 

Equity securities

 

(8)

 

 

(28)

 

Commercial mortgage loans

 

(183)

 

 

(22)

 

Other (primarily short-term and other long-term investments)

 

(868)

 

 

(460)

 

Property and equipment purchases

 

(236)

 

 

(209)

 

Other, net

 

12

 

 

(40)

 

Net cash (used in) / provided by investing activities

 

(832)

 

 

1,147

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

790

 

 

738

 

Withdrawals and benefit payments from contractholder deposit funds

 

(758)

 

 

(669)

 

Change in cash overdraft position

 

15

 

 

29

 

Net change in short-term debt

 

(96)

 

 

(48)

 

Repurchase of common stock

 

(1,029)

 

 

(277)

 

Issuance of common stock

 

80

 

 

91

 

Common dividends paid

 

(11)

 

 

(11)

 

Other, net

 

2

 

 

(7)

 

Net cash used in financing activities

 

(1,007)

 

 

(154)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

9

 

 

(39)

 

Net (decrease) / increase in cash and cash equivalents

 

(828)

 

 

231

 

Cash and cash equivalents, January 1,

 

2,795

 

 

2,978

 

Cash and cash equivalents, June 30,

 

$

1,967

 

 

$

3,209

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

514

 

 

$

154

 

Interest paid

 

$

132

 

 

$

130

 

 

The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1 — Basis of Presentation

 

 

Cigna Corporation and its subsidiaries (either individually or collectively referred to as “Cigna”, “the Company”, “we”, or “our”) is a global health services organization with a mission to help its customers improve their health, well-being and sense of security.  Its insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations). Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets.  In addition to its ongoing operations described above, Cigna also has certain run-off operations.

 

The Consolidated Financial Statements include the accounts of Cigna Corporation and its 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 valuation, 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.  Certain reclassifications have been made to prior year amounts to conform to the current presentation.

 

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 Company’s 2013 Form 10-K.  The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates.  This and certain other factors, including the seasonal nature of portions of the health care and related benefits business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.

 

Beginning in the first quarter of 2014, the Company combined the results of its run-off reinsurance business with Other Operations for segment reporting purposes.  Prior year information has been conformed to the current year presentation. See Note 15 for additional information.

 

Note 2 — Recent Accounting Changes

 

 

Accounting for Health Care Reform’s Risk Mitigation Programs.  Beginning in 2014, as prescribed by the Patient Protection and Affordable Care Act (referred to as “Health Care Reform”), three programs went into effect to reduce the risk for participating health insurance companies selling coverage on the public exchanges.

 

·                  A three-year (2014-2016) reinsurance program is designed to provide reimbursement to insurers for high cost individual business sold on or off the public exchanges.  The reinsurance entity established by the U.S. Department of Health and Human Services (“HHS”) is funded by a per-customer reinsurance fee assessed on all commercial medical plans, including self-insured group health plans.  Only non-grandfathered individual plans are eligible for recoveries if claims exceed a specified threshold, up to a reinsurance cap.  Reinsurance contributions associated with non-grandfathered individual plans are reported as a reduction in premium revenue, and estimated reinsurance recoveries are established with an offsetting reduction in Global Health Care medical claims expense.  Reinsurance fee contributions for other insured business are reported in other operating expenses.  The Company currently does not administer reinsurance fee contributions on behalf of its self-insured employer clients.

·                  A permanent risk adjustment program reallocates funds from insurers with lower risk populations to insurers with higher risk populations based on the relative risk scores of participants in non-grandfathered plans in the individual and small group markets, both on and off the exchanges.  Based on the risk of our members compared to the risk of other members in the same state and market, considering data obtained from industry studies, we estimate our year-to-date risk adjustment.  The Company records a risk adjustment receivable or payable, with an offsetting adjustment to premium revenue when the amounts are reasonably estimable and collection is reasonably assured.

·                  A three year (2014-2016) risk corridor program is designed to limit insurer gains and losses by comparing allowable medical costs to a target amount as defined by HHS.  This program applies to individual and small group qualified health plans,

 

 

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operating on and off the exchanges.  Variances from the target amount exceeding certain thresholds may result in amounts due to or due from HHS.  The Company records a risk corridor receivable or payable as an adjustment to premium revenue based on our year-to-date experience when the amounts are reasonably estimable and collection is reasonably assured.

 

Revenue from Contracts with Customers (Accounting Standards Update (“ASU”) 2014-09).   In May 2014, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance that will apply to various contracts with customers to provide goods or services, including the Company’s non-insurance, administrative services contracts.   It will not apply to certain contracts within the scope of other GAAP, such as insurance contracts.  This new guidance introduces a model that requires companies to estimate and allocate the expected contract revenue among distinct goods or services in the contract based on relative standalone selling prices.  Revenue is recognized as goods or services are delivered.  This new method replaces the current GAAP approach of recognizing revenue that is fixed and determinable primarily based on contract terms.  In addition, extensive new disclosures will be required including the presentation of additional categories of revenues and information about related contract assets and liabilities.  This new guidance must be implemented on January 1, 2017; early adoption is not permitted.  The Company may choose to adopt these changes through retrospective restatement with or without using certain practical expedients or with a cumulative effect adjustment on adoption.  The Company is currently evaluating these new requirements for its noninsurance customer contracts to determine the method of implementation and any resulting estimated effects on the financial statements.

 

Fees Paid to the Federal Government by Health Insurers (ASU 2011-06).  Effective January 1, 2014, the Company adopted the FASB’s accounting guidance for the health insurance industry assessment (the “fee”) mandated by Health Care Reform.  This non-deductible fee is being levied based on a ratio of an insurer’s net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total.  Based on a preliminary assessment from the Internal Revenue Service for the 2014 fee, the Company adjusted its liability reported in accounts payable, accrued expenses and other liabilities to $245 million during the second quarter of 2014.  The corresponding deferred cost, recorded in other assets, including other intangibles was also adjusted.  Through June 30, 2014, $122 million of the deferred cost was recognized in other operating expenses; the remainder will be recognized on a straight-line basis over the balance of 2014.  The Company expects to be notified of and pay the final 2014 assessment in the third quarter.

 

Investment Company Accounting (ASU 2013-08).   Effective January 1, 2014, the Company adopted FASB’s amended accounting guidance to change the criteria for reporting as an investment company, clarify the fair value measurement used by an investment company and require additional disclosures.  This guidance also confirms that parent company accounting for an investment company should reflect fair value accounting.  While this guidance applies to certain of the Company’s security and real estate partnership investments, its adoption did not have a material impact on the Company’s financial statements.

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”) (ASU 2013-02).   Effective January 1, 2013, the Company adopted new requirements to disclose the effect of items reclassified out of AOCI into net income for each individual line item impacted in the statement of income.  See Note 13 for the Company’s disclosures.

 

Disclosures about Offsetting Assets and Liabilities (ASU 2011-11).  The FASB’s new requirements to disclose information related to certain investments on both a gross and net basis became effective January 1, 2013.   The Company had no transactions or arrangements subject to these new disclosure requirements.

 

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Note 3Earnings Per Share (“EPS”)

 

 

Basic and diluted earnings per share were computed as follows:

 

 

 

 

 

Effect of

 

 

 

(Dollars in millions, except per share amounts)

 

Basic

 

Dilution

 

Diluted

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Shareholders’ net income

 

$

573

 

 

 

$

573

 

Shares (in thousands):

 

 

 

 

 

 

 

Weighted average

 

265,377

 

 

 

265,377

 

Common stock equivalents

 

 

 

4,544

 

4,544

 

Total shares

 

265,377

 

4,544

 

269,921

 

EPS

 

$

2.16

 

$

(0.04)

 

$

2.12

 

2013 

 

 

 

 

 

 

 

Shareholders’ net income

 

$

505

 

 

 

$

505

 

Shares (in thousands):

 

 

 

 

 

 

 

Weighted average

 

282,043

 

 

 

282,043

 

Common stock equivalents

 

 

 

5,043

 

5,043

 

Total shares

 

282,043

 

5,043

 

287,086

 

EPS

 

$

1.79

 

$

(0.03)

 

$

1.76

 

 

 

 

 

 

Effect of

 

 

 

(Dollars in millions, except per share amounts)

 

Basic

 

Dilution

 

Diluted

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Shareholders’ net income

 

$

1,101

 

 

 

$

1,101

 

Shares (in thousands):

 

 

 

 

 

 

 

Weighted average

 

267,665

 

 

 

267,665

 

Common stock equivalents

 

 

 

4,516

 

4,516

 

Total shares

 

267,665

 

4,516

 

272,181

 

EPS

 

$

4.11

 

$

(0.06)

 

$

4.05

 

2013 

 

 

 

 

 

 

 

Shareholders’ net income

 

$

562

 

 

 

$

562

 

Shares (in thousands):

 

 

 

 

 

 

 

Weighted average

 

282,919

 

 

 

282,919

 

Common stock equivalents

 

 

 

5,248

 

5,248

 

Total shares

 

282,919

 

5,248

 

288,167

 

EPS

 

$

1.99

 

$

(0.04)

 

$

1.95

 

 

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The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2014 and 2013 because their effect was anti-dilutive.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In millions)

 

2014

 

2013

 

2014

 

2013

 

Antidilutive options

 

2.0

 

1.8

 

2.0

 

1.8

 

 

The Company held 101,424,330 shares of common stock in Treasury as of June 30, 2014, and 82,496,367 shares as of June 30, 2013.

 

Note 4 — Global Health Care Medical Claims Payable

 

 

Medical claims payable for the Global Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not yet reported, those that have been reported but not yet paid (reported claims in process), and other medical expenses payable that is primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities, as follows:

 

 

 

June 30,

 

December 31,

 

(In millions)

 

2014

 

2013

 

Incurred but not yet reported

 

$

1,842

 

$

1,615

 

Reported claims in process

 

310

 

355

 

Physician incentives and other medical expense payable

 

124

 

80

 

Medical claims payable

 

$

2,276

 

$

2,050

 

 

Activity in medical claims payable was as follows:

 

 

 

For the period ended

 

 

 

June 30,

 

December 31,

 

(In millions)

 

2014

 

2013

 

Balance at January 1,

 

$

2,050

 

$

1,856

 

Less: Reinsurance and other amounts recoverable

 

194

 

242

 

Balance at January 1, net

 

1,856

 

1,614

 

 

 

 

 

 

 

Incurred claims related to:

 

 

 

 

 

Current year

 

8,390

 

16,049

 

Prior years

 

(140)

 

(182)

 

Total incurred

 

8,250

 

15,867

 

Paid claims related to:

 

 

 

 

 

Current year

 

6,606

 

14,267

 

Prior years

 

1,469

 

1,358

 

Total paid

 

8,075

 

15,625

 

Ending Balance, net

 

2,031

 

1,856

 

Add: Reinsurance and other amounts recoverable

 

245

 

194

 

Ending Balance

 

$

2,276

 

$

2,050

 

 

Reinsurance and other amounts recoverable includes amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist.  See Note 5 for additional information on reinsurance.  For the six months ended June 30, 2014, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $140 million, or 0.9% of the current year incurred claims as reported for the year ended December 31, 2013. Actual completion factors accounted for $51 million, or 0.3% of the favorability while actual medical cost trend resulted in the remaining $89 million, or 0.6%.

 

For the year ended December 31, 2013, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $182 million, or 1.3% of the current year incurred claims as reported for the year ended December 31, 2012. Actual completion factors accounted for $74 million, or 0.5% of favorability while actual medical cost trend resulted in the remaining $108 million, or 0.7%.

 

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The impact of prior year development on shareholders’ net income was $46 million for the six months ended June 30, 2014 compared with $68 million for the six months ended June 30, 2013.  The favorable effect of prior year development for both years primarily reflects low utilization of medical services.  The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:

 

First, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice that require the liabilities be adequate under moderately adverse conditions.  As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions.  When a portion of the development relates to a release of the prior year’s provision for moderately adverse conditions, the Company does not consider that amount as  impacting  shareholders’ net income to the extent that it is offset by an increase determined appropriate to address moderately adverse conditions for the current year incurred claims.

 

Second, as a result of the MLR provisions of Health Care Reform, changes in medical claim estimates due to prior year development may be offset by a change in the MLR rebate accrual.

 

Third, changes in reserves for the Company’s retrospectively experience-rated business for accounts in surplus do not usually impact shareholders’ net income because such amounts are generally offset by a change in the liability to the policyholder.  An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges. For additional information regarding the Company’s retrospectively experience-rated business, see page 3 of the Company’s 2013 Form 10-K.

 

The determination of liabilities for the Global Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2013 Form 10-K.

 

Note 5 — Reinsurance

 

 

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses.  Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability.  The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

 

Effective Exit of GMDB and GMIB Business

 

On February 4, 2013, the Company entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) to effectively exit the GMDB and GMIB business via a reinsurance transaction.  Berkshire reinsured 100% of the Company’s future claim payments in these businesses, net of retrocessional arrangements existing at that time.  The reinsurance agreement is subject to an overall limit of approximately $3.8 billion.

 

This transaction resulted in an after-tax charge to shareholders’ net income in the first quarter of 2013 of $507 million ($781 million pre-tax reported as follows:  $727 million in other benefits expense; $45 million in GMIB fair value loss; and $9 million in other operating expenses). The payment to Berkshire under the agreement was $2.2 billion and was funded from the sale of investment assets, tax benefits related to the transaction and available parent cash.

 

Because this effective exit was accomplished via a reinsurance contract, the amounts related to the reinsured GMDB and GMIB contracts cannot be netted, so the gross assets and liabilities must continue to be measured and reported.  The following disclosures provide further context to the methods and assumptions used to determine these assets and liabilities.

 

GMDB

 

The Company estimates this liability with an internal model based on the Company’s experience and future expectations over an extended period, consistent with the long-term nature of this product.  Because the product is premium deficient, the Company records increases to the reserve if it is inadequate based on the model.  Prior to the reinsurance transaction with Berkshire, any such reserve increases were recorded as a charge to shareholders’ net income.  Reserve increases after the reinsurance transaction are expected to have a corresponding increase in the recorded reinsurance recoverable, provided the increased recoverable remains within the overall Berkshire limit (including the GMIB assets).

 

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The Company’s dynamic hedge programs were discontinued during the first quarter of 2013 due to the Berkshire reinsurance transaction.  These hedge programs generated losses (included in other revenues) of $32 million for the six months ended June 30, 2013.

 

Activity in the future policy benefit reserve for the GMDB business was as follows:

 

 

 

For the period ended

 

 

 

June 30,

 

December 31,

 

(In millions)

 

2014

 

2013

 

Balance at January 1

 

$

1,396

 

$

1,090

 

Add: Unpaid claims

 

18

 

24

 

Less: Reinsurance and other amounts recoverable

 

1,317

 

42

 

Balance at January 1, net

 

97

 

1,072

 

Add: Incurred benefits

 

2

 

699

 

Less: Paid benefits (including the $1,647 payment in 2013 for the Berkshire reinsurance transaction)

 

-

 

1,674

 

Ending balance, net

 

99

 

97

 

Less: Unpaid claims

 

19

 

18

 

Add: Reinsurance and other amounts recoverable

 

1,234

 

1,317

 

Ending balance

 

$

1,314

 

$

1,396

 

 

Benefits paid and incurred are net of ceded amounts.  The ending net retained reserve is to cover ongoing administrative expenses, as well as claims retained by the Company.

 

The death benefit coverage in force for GMDB contracts assumed by the Company was $2.8 billion as of June 30, 2014 and $3.0 billion as of December 31, 2013 assuming no reinsurance.  The death benefit coverage in force is the amount the Company would have to pay if all contract holders (approximately 373,000 as of June 30, 2014 and 390,000 as of December 31, 2013) died as of the specified date.  Unless the Berkshire reinsurance limit is exceeded, the Company would be reimbursed in full for these payments.  The aggregate value of the underlying mutual fund investments for these GMDB contracts was $13.8 billion as of June 30, 2014 and $14.1 billion as of December 31, 2013.

 

GMIB

 

As discussed further in Note 7, because GMIB contracts are without significant life insurance risk, they are not accounted for as insurance products.  Instead, the Company reports GMIB liabilities and assets as derivatives at fair value.  The GMIB assets are classified in other assets, including other intangibles, and the GMIB liabilities are classified in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheet.  Disclosures related to fair value are included in Note 7 and derivatives are further described in Note 9.

 

GMIB assets included $401 million as of June 30, 2014 and $352 million as of December 31, 2013 from Berkshire, and were 100% secured by assets in a trust.  GMIB assets also included $462 million as of June 30, 2014 and $399 million as of December 31, 2013 from two other retrocessionaires, and 40% were secured by assets in a trust.

 

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Effects of Reinsurance

 

In the Company’s Consolidated Statements of Income, Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In millions)

 

2014

 

2013

 

2014

 

2013

 

Ceded premiums and fees

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

$

44

 

$

45

 

$

89

 

$

91

 

Other

 

84

 

104

 

180

 

183

 

Total

 

$

128

 

$

149

 

$

269

 

$

274

 

Reinsurance recoveries

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

$

69

 

$

94

 

$

168

 

$

182

 

Other

 

88

 

68

 

170

 

(194)

 

Total

 

$

157

 

$

162

 

$

338

 

$

(12)

 

 

As noted in the GMDB section above, recoveries for the six months ended June 30, 2013 are net of a decrease in reinsurance recoverables from a change in the growth rate assumption, due to discontinuing the hedge programs after the reinsurance transaction with Berkshire.

 

Reinsurance Recoverables

 

Components of the Company’s reinsurance recoverables are presented below:

 

(In millions)

Line of Business

 

Reinsurer(s)

 

June 30, 2014

 

December 31,
2013

 

Collateral and Other Terms
at June 30, 2014