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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 September 30, 2015

 

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 October 15, 2015,  257,599,928 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)

 

 

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

42

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

66

Item 4.

Controls and Procedures

67

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

68

Item 1.A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 4.

Mine Safety Disclosures

70

Item 6.

Exhibits

71

SIGNATURE

72

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

Three Months Ended

September 30,

 

Unaudited

Nine Months Ended

September 30,

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

2015

 

2014

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,347

 

$

6,832

 

$

22,181

 

$

20,308

 

Fees and other revenues

 

1,104

 

1,027

 

3,359

 

3,060

 

Net investment income

 

285

 

292

 

858

 

863

 

Mail order pharmacy revenues

 

643

 

583

 

1,846

 

1,625

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Other than temporary impairments on debt securities

 

(58)

 

(9)

 

(73)

 

(10)

 

Other realized investment gains, net

 

68

 

32

 

177

 

140

 

Net realized investment gains

 

10

 

23

 

104

 

130

 

Total revenues

 

9,389

 

8,757

 

28,348

 

25,986

 

 

 

 

 

 

 

 

 

 

 

Benefits and Expenses

 

 

 

 

 

 

 

 

 

Global Health Care medical costs

 

4,539

 

4,153

 

13,720

 

12,403

 

Other benefit expenses

 

1,230

 

1,207

 

3,698

 

3,473

 

Mail order pharmacy costs

 

532

 

499

 

1,553

 

1,382

 

Other operating expenses

 

2,171

 

2,034

 

6,587

 

6,010

 

Amortization of other acquired intangible assets

 

39

 

46

 

122

 

146

 

Total benefits and expenses

 

8,511

 

7,939

 

25,680

 

23,414

 

Income before Income Taxes

 

878

 

818

 

2,668

 

2,572

 

Income taxes (benefits):

 

 

 

 

 

 

 

 

 

Current

 

282

 

289

 

965

 

928

 

Deferred

 

52

 

(2)

 

44

 

12

 

Total income taxes

 

334

 

287

 

1,009

 

940

 

Net Income

 

544

 

531

 

1,659

 

1,632

 

Less: Net Income (Loss) Attributable to Noncontrolling Interests

 

(3)

 

(3)

 

(9)

 

(3)

 

Shareholders’ Net Income

 

$

547

 

$

534

 

$

1,668

 

$

1,635

 

Shareholders’ Net Income Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.14

 

$

2.04

 

$

6.51

 

$

6.16

 

Diluted

 

$

2.10

 

$

2.01

 

$

6.40

 

$

6.05

 

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

Three Months Ended

September 30,

 

Unaudited

Nine Months Ended

September 30,

 

 

 

 

 

 

 

 

 

(In millions)

 

2015

 

 

2014

 

2015

 

 

2014

 

Shareholders’ net income

 

$

547

 

 

$

534

 

$

1,668

 

 

$

1,635

 

Shareholders’ other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net unrealized appreciation (depreciation), securities

 

8

 

 

(49)

 

(138)

 

 

140

 

Net unrealized appreciation, derivatives

 

3

 

 

6

 

15

 

 

6

 

Net translation of foreign currencies

 

(112)

 

 

(113)

 

(198)

 

 

(78)

 

Postretirement benefits liability adjustment

 

11

 

 

10

 

42

 

 

33

 

Shareholders’ other comprehensive income (loss)

 

(90)

 

 

(146)

 

(279)

 

 

101

 

Shareholders’ comprehensive income

 

457

 

 

388

 

1,389

 

 

1,736

 

Comprehensive income (loss) attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to redeemable noncontrolling interests

 

(1)

 

 

(2)

 

(2)

 

 

3

 

Net (loss) attributable to other noncontrolling interests

 

(2)

 

 

(1)

 

(7)

 

 

(6)

 

Other comprehensive (loss) attributable to redeemable noncontrolling interests

 

(9)

 

 

(6)

 

(21)

 

 

(6)

 

Other comprehensive income (loss) attributable to other noncontrolling interests

 

(1)

 

 

-

 

(1)

 

 

1

 

Total comprehensive income

 

$

444

 

 

$

379

 

$

1,358

 

 

$

1,728

 

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

 

 

 

September 30,

 

December 31,

 

(In millions, except per share amounts)

 

2015

 

2014

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $17,466; $17,278)

 

$

18,747

 

 

$

18,983

 

Equity securities, at fair value (cost, $192; $199)

 

184

 

 

189

 

Commercial mortgage loans

 

2,015

 

 

2,081

 

Policy loans

 

1,431

 

 

1,438

 

Other long-term investments

 

1,428

 

 

1,488

 

Short-term investments

 

94

 

 

163

 

Total investments

 

23,899

 

 

24,342

 

Cash and cash equivalents

 

2,381

 

 

1,420

 

Premiums, accounts and notes receivable, net

 

3,804

 

 

2,757

 

Reinsurance recoverables

 

6,846

 

 

7,080

 

Deferred policy acquisition costs

 

1,548

 

 

1,502

 

Property and equipment

 

1,483

 

 

1,502

 

Deferred tax assets, net

 

327

 

 

293

 

Goodwill

 

6,040

 

 

5,989

 

Other assets, including other intangibles

 

2,673

 

 

2,683

 

Separate account assets

 

7,908

 

 

8,328

 

Total assets

 

$

56,909

 

 

$

55,896

 

Liabilities

 

 

 

 

 

 

Contractholder deposit funds

 

$

8,418

 

 

$

8,430

 

Future policy benefits

 

9,482

 

 

9,642

 

Unpaid claims and claim expenses

 

4,538

 

 

4,400

 

Global Health Care medical costs payable

 

2,459

 

 

2,180

 

Unearned premiums

 

591

 

 

621

 

Total insurance and contractholder liabilities

 

25,488

 

 

25,273

 

Accounts payable, accrued expenses and other liabilities

 

6,454

 

 

6,264

 

Short-term debt

 

149

 

 

147

 

Long-term debt

 

5,056

 

 

5,005

 

Separate account liabilities

 

7,908

 

 

8,328

 

Total liabilities

 

45,055

 

 

45,017

 

Contingencies — Note 17

 

 

 

 

 

 

Redeemable noncontrolling interests

 

67

 

 

90

 

Shareholders’ Equity

 

 

 

 

 

 

Common stock (par value per share, $0.25; shares issued, 296; authorized, 600)

 

74

 

 

74

 

Additional paid-in capital

 

2,845

 

 

2,769

 

Accumulated other comprehensive loss

 

(1,215)

 

 

(936)

 

Retained earnings

 

11,706

 

 

10,289

 

Less treasury stock, at cost

 

(1,636)

 

 

(1,422)

 

Total shareholders’ equity

 

11,774

 

 

10,774

 

Noncontrolling interests

 

13

 

 

15

 

Total equity

 

11,787

 

 

10,789

 

Total liabilities and equity

 

$

56,909

 

 

$

55,896

 

Shareholders’ Equity Per Share

 

$

45.71

 

 

$

41.55

 

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 September 30, 2015

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2015

 

$

74

 

$

2,835

 

$

(1,125)

 

$

11,178

 

$

(1,672)

 

$

11,290

 

$

13

 

$

11,303

 

$

76

 

Effect of issuing stock for employee benefit plans

 

 

 

11

 

 

 

(19)

 

36

 

28

 

 

 

28

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(90)

 

 

 

 

 

(90)

 

(1)

 

(91)

 

(9)

 

Net income (loss)

 

 

 

 

 

 

 

547

 

 

 

547

 

(2)

 

545

 

(1)

 

Other transactions impacting noncontrolling interests

 

 

 

(1)

 

 

 

 

 

 

 

(1)

 

3

 

2

 

1

 

Balance at September 30, 2015

 

$

74

 

$

2,845

 

$

(1,215)

 

$

11,706

 

$

(1,636)

 

$

11,774

 

$

13

 

$

11,787

 

$

67

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the three months ended September 30, 2014

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2014

 

$

92

 

$

3,405

 

$

(273)

 

$

14,677

 

$

(6,964)

 

$

10,937

 

$

15

 

$

10,952

 

$

99

 

Effect of issuing stock for employee benefit plans

 

 

 

8

 

 

 

(15)

 

42

 

35

 

 

 

35

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(146)

 

 

 

 

 

(146)

 

 

 

(146)

 

(6)

 

Net income (loss)

 

 

 

 

 

 

 

534

 

 

 

534

 

(1)

 

533

 

(2)

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(199)

 

(199)

 

 

 

(199)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(4)

 

 

 

 

 

 

 

(4)

 

4

 

-

 

2

 

Balance at September 30, 2014

 

$

92

 

$

3,409

 

$

(419)

 

$

15,196

 

$

(7,121)

 

$

11,157

 

$

18

 

$

11,175

 

$

93

 

 

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 nine months ended September 30, 2015

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

 

$

74

 

$

2,769

 

$

(936)

 

$

10,289

 

$

(1,422)

 

$

10,774

 

$

15

 

$

10,789

 

$

90

 

Effect of issuing stock for employee benefit plans

 

 

 

80

 

 

 

(241)

 

304

 

143

 

 

 

143

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(279)

 

 

 

 

 

(279)

 

(1)

 

(280)

 

(21)

 

Net income (loss)

 

 

 

 

 

 

 

1,668

 

 

 

1,668

 

(7)

 

1,661

 

(2)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(518)

 

(518)

 

 

 

(518)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(4)

 

 

 

 

 

 

 

(4)

 

6

 

2

 

 

 

Balance at September 30, 2015

 

$

74

 

$

2,845

 

$

(1,215)

 

$

11,706

 

$

(1,636)

 

$

11,774

 

$

13

 

$

11,787

 

$

67

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

For the nine months ended September 30, 2014

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

57

 

 

 

(104)

 

172

 

125

 

 

 

125

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

101

 

 

 

 

 

101

 

1

 

102

 

(6)

 

Net income (loss)

 

 

 

 

 

 

 

1,635

 

 

 

1,635

 

(6)

 

1,629

 

3

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(11)

 

 

 

(11)

 

 

 

(11)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(1,256)

 

(1,256)

 

 

 

(1,256)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(4)

 

 

 

 

 

 

 

(4)

 

9

 

5

 

-

 

Balance at September 30, 2014

 

$

92

 

$

3,409

 

$

(419)

 

$

15,196

 

$

(7,121)

 

$

11,157

 

$

18

 

$

11,175

 

$

93

 

 

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

 

5



Table of Contents

 

Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

 

Unaudited

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,659

 

 

$

1,632

 

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

 

 

 

 

 

 

Depreciation and amortization

 

451

 

 

435

 

Realized investment gains

 

(104)

 

 

(130)

 

Deferred income taxes

 

44

 

 

12

 

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

 

 

 

 

 

 

Premiums, accounts and notes receivable

 

(1,051)

 

 

(574)

 

Reinsurance recoverables

 

61

 

 

49

 

Deferred policy acquisition costs

 

(145)

 

 

(138)

 

Other assets

 

(89)

 

 

(186)

 

Insurance liabilities

 

620

 

 

433

 

Accounts payable, accrued expenses and other liabilities

 

219

 

 

(39)

 

Current income taxes

 

36

 

 

53

 

Loss on extinguishment of debt

 

100

 

 

-

 

Other, net

 

(82)

 

 

(75)

 

Net cash provided by operating activities

 

1,719

 

 

1,472

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

 

Fixed maturities and equity securities

 

1,452

 

 

854

 

Investment maturities and repayments:

 

 

 

 

 

 

Fixed maturities and equity securities

 

1,018

 

 

1,285

 

Commercial mortgage loans

 

458

 

 

375

 

Other sales, maturities and repayments (primarily short-term and other long-term investments)

 

1,006

 

 

1,889

 

Investments purchased or originated:

 

 

 

 

 

 

Fixed maturities and equity securities

 

(2,686)

 

 

(4,027)

 

Commercial mortgage loans

 

(389)

 

 

(186)

 

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

 

(689)

 

 

(1,221)

 

Property and equipment purchases

 

(357)

 

 

(350)

 

Acquisitions, net of cash acquired

 

(110)

 

 

-

 

Other, net

 

-

 

 

(24)

 

Net cash used in investing activities

 

(297)

 

 

(1,405)

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

1,092

 

 

1,154

 

Withdrawals and benefit payments from contractholder deposit funds

 

(1,053)

 

 

(1,129)

 

Net change in short-term debt

 

(15)

 

 

(104)

 

Net proceeds on issuance of long-term debt

 

894

 

 

-

 

Repayment of long-term debt

 

(938)

 

 

-

 

Repurchase of common stock

 

(536)

 

 

(1,256)

 

Issuance of common stock

 

136

 

 

93

 

Other, net

 

(5)

 

 

18

 

Net cash used in financing activities

 

(425)

 

 

(1,224)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

(36)

 

 

(17)

 

Net increase / (decrease) in cash and cash equivalents

 

961

 

 

(1,174)

 

Cash and cash equivalents, January 1,

 

1,420

 

 

2,795

 

Cash and cash equivalents, September 30,

 

$

2,381

 

 

$

1,621

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

881

 

 

$

846

 

Interest paid

 

$

192

 

 

$

203

 

 

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

 

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Table of Contents

 

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1 — Basis of Presentation and Significant Events

 

 

Basis of Presentation

 

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”)  is a global health services organization dedicated to a mission of helping individuals improve their health, well-being and sense of security.  To execute on our mission, Cigna’s strategy is to “Go Deep”, “Go Global” and “Go Individual” with a differentiated set of 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 (e.g. 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 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 (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”).  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 2014 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.

 

Note 2 — Recent Accounting Changes

 

 

The Company’s 2014 Form 10-K includes discussion of significant recent accounting changes that either have impacted or may impact our financial statements in the future.  The following issuances of, and changes in, accounting pronouncements have occurred since the Company filed its 2014 Form 10-K.

 

Disclosures about Short-Duration Insurance Contracts (Accounting Standards Update (“ASU”) 2015-09).  In May 2015, the Financial Accounting Standards Board (“FASB”) issued final guidance to enhance disclosure requirements for short-duration insurance contracts. The disclosures are aimed at providing more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims.  The impact of adoption is limited to increased disclosures about short-duration insurance liabilities, primarily including most liabilities of the Global Health Care and Group Disability and Life segments.  The Company plans to adopt the new disclosures, as required, in its 2016 annual financial statements.

 

Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03).  In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs in financial statements.  The amendment requires debt issuance costs to be presented as a direct deduction from the associated debt liability, consistent with the presentation of a debt discount.  In addition, amortization of discount or premium is reported as interest expense.  This amendment is effective beginning January 1, 2016, with early adoption permitted, and shall be applied retrospectively.  The Company will reclassify debt issuance costs from Other assets, including other intangibles, to Long-term debt in the fourth quarter of 2015.  This reclassification is not expected to result in a material change to either of these balance sheet line items.

 

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Revenue from Contracts with Customers (ASU 2014-09).  In July 2015, the FASB deferred the effective date of this new guidance to January 1, 2018.  The Company continues to monitor developing implementation guidance and potential updates to the Standard and evaluate these new requirements for its non-insurance customer contracts to determine the method of implementation and any resulting estimated effects on the financial statements.

 

Note 3Mergers and Acquisitions

 

 

Proposed Merger

 

On July 23, 2015, the Company entered into an Agreement and Plan of Merger (the “Agreement”) among the Company, Anthem, Inc. (“Anthem”) and Anthem Merger Sub Corp. (“Merger Sub”), a direct wholly owned subsidiary of Anthem.  The Agreement provides (a) for the merger of the Company and Merger Sub, with the Company continuing as the surviving corporation and (b) if certain tax opinions relating to the qualification of the transaction under Section 368(a) of the Internal Revenue Code of 1986, as amended, are delivered, immediately following the consummation of the initial merger, for the surviving corporation to be merged with and into Anthem, with Anthem as the surviving corporation (collectively, the “merger”).  Subject to the terms, conditions, customary operating covenants and carve outs contained in the Agreement, each share of Cigna common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive (a) $103.40 in cash, without interest, and (b) 0.5152 of a share of Anthem common stock.  The closing price of Anthem common stock on November 5, 2015 was $136.04.

 

Consummation of the merger is subject to certain customary conditions, including certain required approvals by Cigna shareholders and Anthem shareholders, the receipt of certain necessary governmental and regulatory approvals, and the absence of a legal restraint prohibiting the consummation of the Merger.  Consummation of the merger is not subject to a financing condition.

 

The Agreement further provides that, upon termination under certain circumstances, including one party entering into a binding agreement for a superior proposal or due to a change in the board of director’s recommendation, such party may be required to pay to the other party a termination fee of $1.85 billion.  In the event that the Agreement is terminated by either Anthem or Cigna if (a) a regulatory restraint preventing the merger has become final or non-appealable or (b) the merger has not been consummated on or prior to January 31, 2017 (subject to extension to April 30, 2017 under certain circumstances) and at the time of such termination, the conditions to Anthem’s obligation to consummate the merger have been satisfied other than those that relate to a regulatory restraint or a regulatory approval, Cigna will be entitled to receive from Anthem a reverse termination fee of $1.85 billion.  If the Agreement is terminated because the shareholders of Cigna fail to approve the transaction or shareholders of Anthem fail to approve the stock issuance, that company must pay $600 million to the other party.

 

The transaction is expected to close in the latter half of 2016.

 

During the three months and nine months ended September 30, 2015, the Company incurred $35 million pre-tax ($29 million after-tax) in costs directly related to the proposed merger.  These costs primarily consisted of fees for financial advisory, legal and other professional services.

 

Acquisitions

 

The Company completed certain acquisitions during the nine months ended September 30, 2015, the results of which were not material to its results of operations, liquidity or financial condition.  In accordance with GAAP, the purchase price for each acquisition has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months.

 

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Note 4 — Earnings Per Share (“EPS”)

 

 

Basic and diluted earnings per share were computed as follows:

 

 

 

 

 

Effect of

 

 

 

(Shares in thousands, dollars in millions, except per share amounts)

 

Basic

 

Dilution

 

Diluted

 

Three Months Ended September 30,

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

Shareholders’ net income

 

$

547

 

 

 

$

547

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

256,070

 

 

 

256,070

 

Common stock equivalents

 

 

 

4,449

 

4,449

 

Total shares

 

256,070

 

4,449

 

260,519

 

EPS

 

$

2.14

 

$

(0.04)

 

$

2.10

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Shareholders’ net income

 

$

534

 

 

 

$

534

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

261,402

 

 

 

261,402

 

Common stock equivalents

 

 

 

4,489

 

4,489

 

Total shares

 

261,402

 

4,489

 

265,891

 

EPS

 

$

2.04

 

$

(0.03)

 

$

2.01

 

 

 

 

 

 

Effect of

 

 

 

(Shares in thousands, dollars in millions, except per share amounts)

 

Basic

 

Dilution

 

Diluted

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

Shareholders’ net income

 

$

1,668

 

 

 

$

1,668

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

256,166

 

 

 

256,166

 

Common stock equivalents

 

 

 

4,451

 

4,451

 

Total shares

 

256,166

 

4,451

 

260,617

 

EPS

 

$

6.51

 

$

(0.11)

 

$

6.40

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Shareholders’ net income

 

$

1,635

 

 

 

$

1,635

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

265,554

 

 

 

265,554

 

Common stock equivalents

 

 

 

4,507

 

4,507

 

Total shares

 

265,554

 

4,507

 

270,061

 

EPS

 

$

6.16

 

$

(0.11)

 

$

6.05

 

 

The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three months and nine months ended September 30, 2015 and 2014 because their effect was anti-dilutive.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions)

 

2015

 

2014

 

2015

 

2014

 

Anti-dilutive options

 

-

 

-

 

0.5

 

1.3

 

 

The Company held 38,553,358 shares of common stock in Treasury as of September 30, 2015, and 103,340,125 shares as of September 30, 2014.  In the fourth quarter of 2014, the Company retired 70 million shares of treasury stock.

 

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Note 5 — Global Health Care Medical Costs Payable

 

 

Medical costs 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 care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities, as follows:

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2015

 

2014

 

Incurred but not yet reported

 

$

1,876

 

$

1,777

 

Reported claims in process

 

474

 

288

 

Physician incentives and other medical care expenses and services payable

 

109

 

115

 

Global Health Care medical costs payable

 

$

2,459

 

$

2,180

 

 

Activity in medical costs payable was as follows:

 

 

 

For the period ended

 

 

September 30,

 

December 31,

 

(In millions)

 

2015

 

2014

 

Balance at January 1,

 

$

2,180

 

$

2,050

 

Less:  Reinsurance and other amounts recoverable

 

252

 

194

 

Balance at January 1, net

 

1,928

 

1,856

 

Incurred costs related to:

 

 

 

 

 

Current year

 

13,923

 

16,853

 

Prior years

 

(203)

 

(159)

 

Total incurred

 

13,720

 

16,694

 

Paid costs related to:

 

 

 

 

 

Current year

 

11,868

 

14,966

 

Prior years

 

1,552

 

1,656

 

Total paid

 

13,420

 

16,622

 

Ending Balance, net

 

2,228

 

1,928

 

Add:  Reinsurance and other amounts recoverable

 

231

 

252

 

Ending Balance

 

$

2,459

 

$

2,180

 

 

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 6 for additional information on reinsurance.  For the nine months ended September 30, 2015, actual experience differed from the Company’s key assumptions resulting in favorable incurred costs related to prior years’ medical costs payable of $203 million, or 1.2% of the current year incurred costs as reported for the year ended December 31, 2014.  Actual completion factors accounted for $56 million, or 0.3% of the favorability, actual medical cost trend resulted in $114 million, or 0.7%, and the remaining $33 million, or 0.2%, was primarily related to a change in 2014 reinsurance reimbursements under Health Care Reform.

 

For the year ended December 31, 2014, actual experience differed from the Company’s key assumptions, resulting in favorable incurred costs related to prior years’ medical costs payable of $159 million, or 1.0% of the current year incurred costs as reported for the year ended December 31, 2013. Actual completion factors accounted for $61 million, or 0.4% of favorability, while actual medical cost trend resulted in the remaining $98 million, or 0.6%.

 

The impact of prior year development on shareholders’ net income was $57 million for the nine months ended September 30, 2015 compared with $53 million for the nine months ended September 30, 2014.  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 costs related to prior years in the medical costs payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:

 

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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 medical loss ratio (“MLR”) and risk mitigation provisions of Health Care Reform, changes in medical cost estimates due to prior year development may be offset by a change in accruals related to Health Care Reform.

 

Third, changes in reserves for the Company’s retrospectively experience-rated business for accounts in surplus are generally offset by a change in the payment due to the policyholder (see page 3 of the Company’s 2014 Form 10-K).

 

The determination of liabilities for the Global Health Care medical costs payable requires the Company to make critical accounting estimates.  See Note 2(N) to the Consolidated Financial Statements in the Company’s 2014 Form 10-K.

 

Note 6 — 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

 

In 2013, the Company entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) to effectively exit the guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) businesses via a reinsurance transaction.  Berkshire reinsured 100% of the Company’s future claim payments in these businesses, net of other reinsurance arrangements existing at that time.  The Berkshire reinsurance agreement is subject to an overall limit with approximately $3.6 billion remaining.

 

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 GMDB 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.  As a result of the reinsurance transaction, reserve increases 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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Activity in the future policy benefit reserve for the GMDB business was as follows:

 

 

 

For the period ended

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2015

 

2014

 

Balance at January 1

 

$

1,270

 

$

1,396

 

Add: Unpaid claims

 

16

 

18

 

Less: Reinsurance and other amounts recoverable

 

1,186

 

1,317

 

Balance at January 1, net

 

100

 

97

 

Add: Incurred benefits

 

1

 

3

 

Less: Paid benefits

 

(3)

 

-

 

Ending balance, net

 

104

 

100

 

Less: Unpaid claims

 

17

 

16

 

Add: Reinsurance and other amounts recoverable

 

1,165

 

1,186

 

Ending balance

 

$

1,252

 

$

1,270

 

 

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

 

The death benefit coverage in force for GMDB contracts assumed by the Company was $3.1 billion as of September 30, 2015 and $2.8 billion as of December 31, 2014 assuming no reinsurance.  The death benefit coverage in force is the amount the Company would have to pay if all contract holders (approximately 330,000 as of September 30, 2015 and 354,000 as of December 31, 2014) died as of the specified date.  The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.  The aggregate value of the underlying mutual fund investments for these GMDB contracts was $11.3 billion as of September 30, 2015 and $13.1 billion as of December 31, 2014.

 

Effects of Reinsurance

 

In the Company’s Consolidated Statements of Income, premiums were reported net of amounts ceded to reinsurers and Global Health Care medical costs and other benefit expenses were reported net of reinsurance recoveries in the following amounts:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In millions)

 

2015 

 

2014 

 

2015 

 

2014 

 

Ceded premiums

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

$

38

 

$

38

 

$

121

 

$

127

 

Other

 

130

 

80

 

323

 

260

 

Total

 

$

168

 

$

118

 

$

444

 

$

387

 

Reinsurance recoveries

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

$

83

 

$

46

 

$

230

 

$

214

 

Other

 

113

 

122

 

313

 

292

 

Total

 

$

196

 

$

168

 

$

543

 

$

506

 

 

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Reinsurance Recoverables

 

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

 

(In millions)

 

Line of Business

 

Reinsurer(s)

 

September 30,
2015

 

December 31,
2014

 

Collateral and Other Terms
at September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

GMDB

 

Berkshire

 

$

1,124

 

 $

1,147

 

100% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

41

 

39

 

100% secured by assets in a trust or letter of credit.

 

 

 

 

 

 

 

 

 

 

 

Individual Life and Annuity (sold in 1998)

 

Lincoln National Life and Lincoln Life & Annuity of New York

 

3,724

 

3,817

 

Both companies’ ratings are sufficient to avoid triggering a contractual obligation to fully secure the outstanding balance.

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Business (sold in 2004)

 

Prudential Retirement Insurance and Annuity

 

1,014

 

1,092

 

100% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

Supplemental Benefits Business (2012 acquisition)

 

Great American Life

 

321

 

336

 

98% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

Global Health Care, Global Supplemental Benefits, Group Disability and Life

 

Various

 

537

 

561

 

Recoverables from approximately 80 reinsurers, including the U.S. Government, used in the ordinary course of business.  Excluding the recoverable from the U.S. Government of approximately $140 million, current balances range from less than $1 million up to $86 million, with 15% secured by assets in trusts or letters of credit. 

 

 

 

 

 

 

 

 

 

 

 

Other run-off reinsurance

 

Various

 

85

 

88

 

100% of this balance is secured by assets in trusts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total reinsurance recoverables

 

 

 

$

6,846

 

$

7,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over 90% of the Company’s reinsurance recoverables were from companies that are rated A or higher by Standard & Poor’s at September 30, 2015.  The Company reviews its reinsurance arrangements and establishes reserves against the recoverables if recovery is not considered probable.  As of September 30, 2015, the Company’s recoverables were net of a reserve of approximately $5 million.  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.

 

Note 7 — Organizational Efficiency Plan

 

 

The Company is regularly evaluating ways to deliver its products and services more efficiently and at a lower cost.  During the fourth quarter of 2013, the Company committed to a plan to increase its organizational efficiency and reduce costs through a series of actions that includes employee headcount reductions.  As a result, the Company recognized charges in other operating expenses of $60 million pre-tax ($40 million after-tax) in the fourth quarter of 2013, primarily for severance costs.  As of September 30, 2015, the remaining balance is approximately $10 million.

 

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Note 8 — Fair Value Measurements

 

 

The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives.  Other financial instruments are measured at fair value under certain conditions, such as when impaired.

 

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 may 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, as well as 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 completed by the Company and third-party pricing services include reviewing to ensure that prices do not become stale and whether changes from prior valuations are reasonable or require additional review.  The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates.  Exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations.

 

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Table of Contents

 

Financial Assets and Financial Liabilities Carried at Fair Value

 

The following tables provide information as of September 30, 2015 and December 31, 2014 about the Company’s financial assets and liabilities carried at fair value.  Separate account assets that are also recorded at fair value on the Company’s Consolidated Balance Sheets are reported separately under the heading “Separate account assets” as gains and losses related to these assets generally accrue directly to policyholders.

 

September 30, 2015
(In millions)

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

Financial assets at fair value:

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

Federal government and agency

 

$

258

 

$

603

 

$

-

 

$

861

State and local government

 

-

 

1,717

 

-

 

1,717

Foreign government

 

-

 

1,946

 

4

 

1,950

Corporate

 

-

 

13,299

 

325

 

13,624

Mortgage-backed

 

-

 

54

 

1

 

55

Other asset-backed

 

-

 

201

 

339

 

540

Total fixed maturities (1)

 

258

 

17,820

 

669

 

18,747

Equity securities

 

33

 

99

 

52

 

184

Subtotal

 

291

 

17,919

 

721

 

18,931

Short-term investments

 

-

 

94

 

-

 

94

GMIB assets (2)

 

-

 

-

 

961

 

961

Other derivative assets (3)

 

-

 

16

 

-

 

16

Total financial assets at fair value, excluding separate accounts

 

$

291

 

$

18,029

 

$

1,682

 

$

20,002

Financial liabilities at fair value: