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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, 2016

 

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, 2016,  256,738,638 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

45

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

Item 4.

Controls and Procedures

69

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

70

Item 1. A.

Risk Factors

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 4.

Mine Safety Disclosures

72

Item 6.

Exhibits

73

SIGNATURE

74

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)

 

2016 

 

2015

 

2016

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,605

 

$

7,347

 

$

23,005

 

$

22,181

 

Fees and other revenues

 

1,156

 

1,104

 

3,554

 

3,359

 

Net investment income

 

282

 

285

 

848

 

858

 

Mail order pharmacy revenues

 

762

 

643

 

2,207

 

1,846

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Other than temporary impairments on debt securities

 

(1)

 

(58)

 

(31)

 

(73)

 

Other realized investment gains, net

 

76

 

68

 

141

 

177

 

Net realized investment gains

 

75

 

10

 

110

 

104

 

Total revenues

 

9,880

 

9,389

 

29,724

 

28,348

 

 

 

 

 

 

 

 

 

 

 

Benefits and Expenses

 

 

 

 

 

 

 

 

 

Global Health Care medical costs

 

4,692

 

4,539

 

14,230

 

13,720

 

Other benefit expenses

 

1,343

 

1,230

 

4,125

 

3,698

 

Mail order pharmacy costs

 

638

 

532

 

1,842

 

1,553

 

Other operating expenses

 

2,428

 

2,171

 

7,038

 

6,587

 

Amortization of other acquired intangible assets, net

 

37

 

39

 

115

 

122

 

Total benefits and expenses

 

9,138

 

8,511

 

27,350

 

25,680

 

Income before Income Taxes

 

742

 

878

 

2,374

 

2,668

 

Income taxes:

 

 

 

 

 

 

 

 

 

Current

 

210

 

282

 

842

 

965

 

Deferred

 

80

 

52

 

63

 

44

 

Total income taxes

 

290

 

334

 

905

 

1,009

 

Net Income

 

452

 

544

 

1,469

 

1,659

 

Less: Net (Loss) Attributable to Noncontrolling Interests

 

(4)

 

(3)

 

(16)

 

(9)

 

Shareholders’ Net Income

 

$

456

 

$

547

 

$

1,485

 

$

1,668

 

Shareholders’ Net Income Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.78

 

$

2.14

 

$

5.82

 

$

6.51

 

Diluted

 

$

1.76

 

$

2.10

 

$

5.72

 

$

6.40

 

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)

 

2016

 

2015

 

2016

 

2015

 

Shareholders’ net income

 

$

456

 

$

547

 

$

1,485

 

$

1,668

 

Shareholders’ other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized appreciation (depreciation), securities

 

66

 

8

 

416

 

(138)

 

Net unrealized appreciation (depreciation), derivatives

 

(1)

 

3

 

(5)

 

15

 

Net translation of foreign currencies

 

55

 

(112)

 

96

 

(198)

 

Postretirement benefits liability adjustment

 

9

 

11

 

28

 

42

 

Shareholders’ other comprehensive income (loss)

 

129

 

(90)

 

535

 

(279)

 

Shareholders’ comprehensive income

 

585

 

457

 

2,020

 

1,389

 

Comprehensive income (loss) attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net (loss) attributable to redeemable noncontrolling interests

 

(1)

 

(1)

 

(4)

 

(2)

 

Net (loss) attributable to other noncontrolling interests

 

(3)

 

(2)

 

(12)

 

(7)

 

Other comprehensive (loss) attributable to redeemable noncontrolling interests

 

(3)

 

(9)

 

(1)

 

(21)

 

Other comprehensive (loss) attributable to other noncontrolling interests

 

-

 

(1)

 

-

 

(1)

 

Total comprehensive (loss) attributable to noncontrolling interests

 

(7)

 

(13)

 

(17)

 

(31)

 

Total comprehensive income

 

$

578

 

$

444

 

$

2,003

 

$

1,358

 

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)

 

2016

 

2015

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $19,392; $18,456)

 

$

21,244

 

$

19,455

 

Equity securities, at fair value (cost, $185; $190)

 

188

 

190

 

Commercial mortgage loans

 

1,822

 

1,864

 

Policy loans

 

1,442

 

1,419

 

Other long-term investments

 

1,408

 

1,404

 

Short-term investments

 

997

 

381

 

Total investments

 

27,101

 

24,713

 

Cash and cash equivalents

 

3,224

 

1,968

 

Premiums, accounts and notes receivable, net

 

3,577

 

3,694

 

Reinsurance recoverables

 

6,539

 

6,813

 

Deferred policy acquisition costs

 

1,876

 

1,659

 

Property and equipment

 

1,561

 

1,534

 

Deferred tax assets, net

 

110

 

379

 

Goodwill

 

6,007

 

6,019

 

Other assets, including other intangibles

 

2,611

 

2,476

 

Separate account assets

 

8,156

 

7,833

 

Total assets

 

$

60,762

 

$

57,088

 

Liabilities

 

 

 

 

 

Contractholder deposit funds

 

$

8,470

 

$

8,443

 

Future policy benefits

 

10,043

 

9,479

 

Unpaid claims and claim expenses

 

4,889

 

4,574

 

Global Health Care medical costs payable

 

2,550

 

2,355

 

Unearned premiums

 

1,179

 

629

 

Total insurance and contractholder liabilities

 

27,131

 

25,480

 

Accounts payable, accrued expenses and other liabilities

 

6,374

 

6,493

 

Short-term debt

 

271

 

149

 

Long-term debt

 

4,780

 

5,020

 

Separate account liabilities

 

8,156

 

7,833

 

Total liabilities

 

46,712

 

44,975

 

Contingencies — Note 16

 

 

 

 

 

Redeemable noncontrolling interests

 

68

 

69

 

Shareholders’ Equity

 

 

 

 

 

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

 

74

 

74

 

Additional paid-in capital

 

2,884

 

2,859

 

Accumulated other comprehensive loss

 

(715)

 

(1,250)

 

Retained earnings

 

13,487

 

12,121

 

Less treasury stock, at cost

 

(1,756)

 

(1,769)

 

Total shareholders’ equity

 

13,974

 

12,035

 

Other noncontrolling interests

 

8

 

9

 

Total equity

 

13,982

 

12,044

 

Total liabilities and equity

 

$

60,762

 

$

57,088

 

Shareholders’ Equity Per Share

 

$

54.43

 

$

46.91

 

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

 

 

 

 

 

 

 

Other Non-

 

 

 

Non-

 

For the three months ended September 30, 2016

 

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, 2016

 

$

74

 

$

2,879

 

$

(844)

 

$

13,046

 

$

(1,799)

 

$

13,356

 

$

8

 

$

13,364

 

$

71

 

Effect of issuing stock for employee benefit plans

 

 

 

7

 

 

 

(15)

 

43

 

35

 

 

 

35

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

129

 

 

 

 

 

129

 

 

 

129

 

(3)

 

Net income (loss)

 

 

 

 

 

 

 

456

 

 

 

456

 

(3)

 

453

 

(1)

 

Other transactions impacting noncontrolling interests

 

 

 

(2)

 

 

 

 

 

 

 

(2)

 

3

 

1

 

1

 

Balance at September 30, 2016

 

$

74

 

$

2,884

 

$

(715)

 

$

13,487

 

$

(1,756)

 

$

13,974

 

$

8

 

$

13,982

 

$

68

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

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

 

 

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

 

 

 

 

 

 

 

Other non-

 

 

 

Non-

 

For the nine months ended September 30, 2016

 

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, 2016

 

$

74

 

$

2,859

 

$

(1,250)

 

$

12,121

 

$

(1,769)

 

$

12,035

 

$

9

 

$

12,044

 

$

69

 

Effect of issuing stock for employee benefit plans

 

 

 

38

 

 

 

(109)

 

123

 

52

 

 

 

52

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

535

 

 

 

 

 

535

 

 

 

535

 

(1)

 

Net income (loss)

 

 

 

 

 

 

 

1,485

 

 

 

1,485

 

(12)

 

1,473

 

(4)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(110)

 

(110)

 

 

 

(110)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(13)

 

 

 

 

 

 

 

(13)

 

11

 

(2)

 

4

 

Balance at September 30, 2016

 

$

74

 

$

2,884

 

$

(715)

 

$

13,487

 

$

(1,756)

 

$

13,974

 

$

8

 

$

13,982

 

$

68

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

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

 

 

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)

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,469

 

 

$

1,659

 

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

 

 

 

 

 

 

Depreciation and amortization

 

460

 

 

451

 

Realized investment (gains)

 

(110)

 

 

(104)

 

Deferred income taxes

 

63

 

 

44

 

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

 

 

 

 

 

 

Premiums, accounts and notes receivable

 

184

 

 

(1,051)

 

Reinsurance recoverables

 

132

 

 

61

 

Deferred policy acquisition costs

 

(167)

 

 

(145)

 

Other assets

 

(32)

 

 

(89)

 

Insurance liabilities

 

1,098

 

 

620

 

Accounts payable, accrued expenses and other liabilities

 

9

 

 

219

 

Current income taxes

 

(57)

 

 

36

 

Loss on extinguishment of debt

 

-

 

 

100

 

Other, net (1)

 

25

 

 

(4)

 

Net cash provided by operating activities (1)

 

3,074

 

 

1,797

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

 

Fixed maturities and equity securities

 

1,012

 

 

1,452

 

Investment maturities and repayments:

 

 

 

 

 

 

Fixed maturities and equity securities

 

1,178

 

 

1,018

 

Commercial mortgage loans

 

117

 

 

458

 

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

 

904

 

 

1,006

 

Investments purchased or originated:

 

 

 

 

 

 

Fixed maturities and equity securities

 

(2,894)

 

 

(2,686)

 

Commercial mortgage loans

 

(121)

 

 

(389)

 

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

 

(1,317)

 

 

(689)

 

Property and equipment purchases

 

(362)

 

 

(357)

 

Acquisitions, net of cash acquired

 

(5)

 

 

(110)

 

Other

 

(101)

 

 

-

 

Net cash (used in) investing activities

 

(1,589)

 

 

(297)

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

1,133

 

 

1,092

 

Withdrawals and benefit payments from contractholder deposit funds

 

(1,042)

 

 

(1,053)

 

Net change in short-term debt

 

(143)

 

 

(15)

 

Net proceeds on issuance of long-term debt

 

-

 

 

894

 

Repayment of long-term debt

 

-

 

 

(938)

 

Repurchase of common stock

 

(139)

 

 

(536)

 

Issuance of common stock

 

23

 

 

136

 

Other, net (1)

 

(87)

 

 

(83)

 

Net cash (used in) financing activities (1)

 

(255)

 

 

(503)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

26

 

 

(36)

 

Net increase in cash and cash equivalents

 

1,256

 

 

961

 

Cash and cash equivalents, January 1,

 

1,968

 

 

1,420

 

Cash and cash equivalents, September 30,

 

$

3,224

 

 

$

2,381

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

904

 

 

$

881

 

Interest paid

 

$

192

 

 

$

192

 

 

(1) As required by the adoption of ASU 2016-09, the Company retrospectively reclassified $78 million of cash payments from operating to financing activities for the nine months ended September 30, 2015.  These payments were related to employee tax obligations associated with stock compensation.  The comparable amount reported in financing activities for the nine months ended September 30, 2016 was $69 million.  See Note 2 for further discussion.

 

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

 

 

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 insurance and other 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.  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.  See Note 2 for further discussion.

 

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 2015 Annual Report on Form 10-K (“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 Pronouncements

 

 

The Company’s 2015 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.  The following issuances of, and changes in, accounting pronouncements that apply to the Company have occurred since the Company filed its 2015 Form 10-K.

 

Recently Adopted Accounting Guidance

 

Improvements to Employee Share-Based Payment Accounting (Accounting Standards Update (“ASU”) 2016-09).  In March 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance that changes the accounting for certain aspects of share-based payments to employees.  The new guidance requires excess tax benefits or deficiencies to be recorded in the income statement when the awards vest or are settled, requires cash flows related to the excess tax benefits to be classified as an operating activity in the statement of cash flows, permits repurchasing more than was previously allowed of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares are to be presented as a financing activity in the statement of cash flows and provides an accounting policy election to account for forfeitures as they occur.  In addition, the new guidance changes the calculation of common stock equivalents for earnings per share purposes.  The new standard is required to be adopted as of January 1, 2017.

 

As permitted, the Company elected to early adopt the new guidance effective January 1, 2016, which resulted in $25 million of tax benefits recorded in net income (in Corporate) during the nine months ended September 30, 2016 that previously would have been reported in additional paid-in capital.  The change in the calculation of common stock equivalents added approximately one million weighted average shares for the diluted earnings per share calculations for the nine months ended September 30, 2016.  The Company applied these provisions prospectively.

 

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The Company retrospectively applied the provisions related to the presentation of employee taxes paid for withheld shares and reclassified $78 million of tax withholding from operating to financing activities in its Consolidated Statement of Cash Flows for the nine months ended September 30, 2015.  For the nine months ended September 30, 2016, the Company reflected $69 million of tax withholding in financing activities.  The ability under the new guidance to repurchase more employee shares for tax withholding purposes had no impact on the Company’s financial statements because no changes have been made to the Company’s withholding practices.  The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

 

Amendments to the Consolidation Analysis (ASU 2015-02).  The Company adopted this new consolidation guidance effective January 1, 2016 with no material effect on its financial statements.  Among other provisions, the guidance defines limited partnerships as variable interest entities unless substantive kick-out rights or participating rights exist.  See Note 10 for additional disclosures about various real estate and security limited partnerships that are newly identified as variable interest entities for which the Company is not the primary beneficiary.

 

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07).  This amendment removed the requirement to categorize all investments within the fair value hierarchy for which fair value is measured using the practical expedient of net asset value (“NAV”) per share.  The Company adopted this new guidance effective January 1, 2016.  Upon adoption, the Company began to separately disclose certain separate account investments and provided comparable prior period disclosure.  See Note 7 for this separate disclosure information.

 

Recently Issued Accounting Guidance Not Yet Adopted

 

Except as noted below, there were no other new accounting pronouncements that were issued or became effective since the issuance of the Company’s 2015 Annual Report on Form 10-K that had, or are expected to have, a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory (ASU 2016-16).  In October 2016, the FASB issued this new standard that requires entities to recognize the tax impacts of all intra-entity sales of assets other than inventory even though the pre-tax effects of those transactions are eliminated in consolidation.  The new standard is required to be adopted as of January 1, 2018, with early adoption permitted as of January 1, 2017.  The new standard is required to be adopted in a modified retrospective approach, with a cumulative-effect adjustment recorded in retained earnings to write off any unamortized tax expense previously deferred and record any previously unrecognized net deferred tax assets.  The Company is evaluating the impact of this new standard on its financial statements and disclosures.

 

Statement of Cash Flows (ASU 2016-15).  In August 2016, the FASB issued this new standard that is a consensus of the FASB’s Emerging Issues Task Force.  The standard provides new guidance on how certain transactions should be classified in the statement of cash flows.  The new standard is required to be adopted as of January 1, 2018, with early adoption permitted as of January 1, 2017.  Upon adoption, the effects of the new guidance must be applied retrospectively to all prior periods presented.  The Company is evaluating its implementation timing options as well as the impact of this new standard on its financial statements and disclosures.

 

Financial Instruments — Credit Losses (ASU 2016-13).  In June 2016, the FASB issued this new standard that introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses.  It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The ASU will be effective January 1, 2020, and early adoption is permitted on January 1, 2019.  The Company is evaluating the impact of this new standard on its financial statements and disclosures.

 

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01).  As previously disclosed in the Company’s 2015 Form 10-K, in January 2016 the FASB issued guidance that will require entities to measure equity investments at fair value in net income if they are not consolidated or accounted for under the equity method.  The new standard will be effective January 1, 2018 and its effect will be recognized as a cumulative effect adjustment to the beginning balance of retained earnings.  The Company has identified certain limited partnership interests carried at cost that are subject to the requirements of this new standard.  If adopted as of September 30, 2016, the impact of this new guidance would have resulted in a cumulative effect increase to retained earnings of approximately $60 million after-tax.  The actual cumulative effect adjustment will depend on the portfolio and market conditions as of the date of implementation.

 

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Revenue from Contracts with Customers (ASU 2014-09).  The FASB issued three new ASUs in 2016 further clarifying the broader revenue guidance:

 

·      “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (ASU 2016-08) that clarifies the definition of principals and agents.

·      “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (ASU 2016-10) that clarifies guidance and adds examples to help companies properly identify performance obligations.  This ASU also illustrates when a license provides a customer with a right to use (point in time) versus a right to access (over time) benefit.

·      “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients” (ASU 2016-12) that clarifies certain aspects of the previously-issued guidance, including the objective of the collectability criterion in the new revenue model.

 

These clarifications, together with the broader revenue recognition guidance within ASU 2014-09, are required to be adopted beginning January 1, 2018, with early adoption permitted as of January 1, 2017.  The Company does not plan to early adopt this new guidance but continues to monitor developing implementation guidance and evaluate these new requirements for its non-insurance customer contracts to determine its method of implementation and any resulting estimated effects on its financial statements.

 

Note 3 — Mergers and Acquisitions

 

 

Proposed Merger

 

On July 23, 2015, the Company entered into a merger agreement with Anthem, Inc. (“Anthem”) and Anthem Merger Sub Corp. (“Merger Sub”), a direct wholly-owned subsidiary of Anthem.

 

The merger 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 are delivered, immediately following the completion of the initial merger, for the surviving corporation to be merged with and into Anthem, with Anthem continuing as the surviving corporation (collectively, the “merger”).  Subject to certain terms, conditions, and customary operating covenants, each share of Cigna common stock issued and outstanding immediately prior to the effective time of the merger would 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 2, 2016 was $122.99.

 

At special shareholders’ meetings held in December 2015, Cigna shareholders approved the merger and Anthem shareholders approved the issuance of shares of Anthem common stock in connection with the merger.  Completing the merger remains subject to certain customary conditions, including the receipt of certain necessary governmental and regulatory approvals and the absence of a legal restraint prohibiting the merger.  Completing the merger is not subject to a financing condition.

 

On July 21, 2016, the U.S. Department of Justice (“DOJ”) and certain state attorneys general filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia seeking to block the merger.  Trial is scheduled to begin on November 21, 2016.  The Company will continue to defend itself in this matter.  In light of the DOJ litigation, Cigna does not believe the transaction will close in 2016 and the earliest it could close is 2017, if at all.

 

If the merger agreement is terminated under certain circumstances, Anthem will be required to pay Cigna a termination fee of $1.85 billion.  Anthem’s obligation to pay the termination fee arises if the merger agreement is terminated because:  (1) a governmental entity, such as the Department of Justice or a state Department of Insurance, has prevented the merger for regulatory reasons and that decision is final and non-appealable; or (2) the merger has not closed by January 31, 2017 (subject to extension to April 30, 2017 under certain circumstances) only because all necessary regulatory approvals have not been received.

 

The merger agreement contains customary covenants, including covenants that Cigna conduct its business in the ordinary course during the period between entering into the merger agreement and closing.  In addition, Cigna’s ability to take certain actions prior to closing without Anthem’s consent is subject to certain limitations.  These limitations relate to, among other matters, the payment of dividends, capital expenditures, the payment or retirement of indebtedness or the incurrence of new indebtedness, settlement of material claims or proceedings, mergers or acquisitions, and certain employment-related matters.

 

The Company incurred $49 million pre-tax ($46 million after-tax) for the three months and $123 million pre-tax ($108 million after-tax) for the nine months ended September 30, 2016 in costs directly related to the proposed merger.  Comparable merger-related costs for the three months and nine months ended September 30, 2015 were $35 million pre-tax ($29 million after-tax).  These costs primarily consisted of fees for legal, advisory and other professional services.  If the merger is consummated, most of the merger-related costs are not deductible for federal income tax purposes.

 

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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,

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

Shareholders’ net income

 

$

456

 

 

 

$

456

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

255,519

 

 

 

255,519

 

Common stock equivalents

 

 

 

4,235

 

4,235

 

Total shares

 

255,519

 

4,235

 

259,754

 

EPS

 

$

1.78

 

$

(0.02)

 

$

1.76

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Effect of

 

 

 

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

 

Basic

 

Dilution

 

Diluted

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

Shareholders’ net income

 

$

1,485

 

 

 

$

1,485

 

Shares:

 

 

 

 

 

 

 

Weighted average

 

255,242

 

 

 

255,242

 

Common stock equivalents

 

 

 

4,326

 

4,326

 

Total shares

 

255,242

 

4,326

 

259,568

 

EPS

 

$

5.82

 

$

(0.10)

 

$

5.72

 

 

 

 

 

 

 

 

 

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

 

 

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, 2016 and 2015 because their effect was anti-dilutive.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions)

 

2016

 

2015

 

2016

 

2015

 

Anti-dilutive options

 

2.6

 

-

 

2.2

 

0.5

 

 

The Company held 39,425,208 shares of common stock in Treasury as of September 30, 2016, and 38,553,358 shares as of September 30, 2015.

 

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Table of Contents

 

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)

 

2016

 

2015

 

Incurred but not yet reported

 

$

1,947

 

$

1,757

 

Reported claims in process

 

475

 

470

 

Physician incentives and other medical care expenses and services payable

 

128

 

128

 

Global Health Care medical costs payable

 

$

2,550

 

$

2,355

 

 

Activity in medical costs payable was as follows:

 

 

 

For the period ended

 

 

September 30,

 

December 31,

 

(In millions)

 

2016

 

2015

 

Balance at January 1,

 

$

2,355

 

$

2,180

 

Less:  Reinsurance and other amounts recoverable

 

243

 

252

 

Balance at January 1, net

 

2,112

 

1,928

 

Incurred costs related to:

 

 

 

 

 

Current year

 

14,318

 

18,564

 

Prior years

 

(88)

 

(210)

 

Total incurred

 

14,230

 

18,354

 

Paid costs related to:

 

 

 

 

 

Current year

 

12,285

 

16,588

 

Prior years

 

1,783

 

1,582

 

Total paid

 

14,068

 

18,170

 

Ending Balance, net

 

2,274

 

2,112

 

Add:  Reinsurance and other amounts recoverable

 

276

 

243

 

Ending Balance

 

$

2,550

 

$

2,355

 

 

Reinsurance and other amounts recoverable includes amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business where the Company administers the plan benefits but the right of offset does not exist.  See Note 6 for additional information on reinsurance.  For the nine months ended September 30, 2016, actual experience differed from the Company’s key assumptions resulting in favorable incurred costs related to prior years’ medical costs payable of $88 million, or 0.5% of the current year incurred costs as reported for the year ended December 31, 2015.  Of the favorability, actual completion factors accounted for 0.3%, and actual medical cost trend resulted in 0.2%.

 

For the year ended December 31, 2015, actual experience differed from the Company’s key assumptions, resulting in favorable incurred costs related to prior years’ medical costs payable of $210 million, or 1.3% of the current year incurred costs as reported for the year ended December 31, 2014.  Actual completion factors accounted for 0.4% of favorability, while actual medical cost trend resulted in 0.7%.  The remaining 0.2% was related to an increase in the 2014 reinsurance reimbursement rate from the Centers for Medicare and Medicaid Services (“CMS”) under The Patient Protection and Affordable Care Act (“Health Care Reform”).

 

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The impact of prior year development on shareholders’ net income for the nine months ended September 30, 2016 was not significant compared with $57 million for the nine months ended September 30, 2015.  The favorable effect of prior year development in a given period primarily reflects lower than expected utilization of medical services.  Incurred costs related to prior years in the table above do not directly correspond to an increase or decrease to shareholders’ net income.  The primary reason for the difference is that decreases to prior year incurred costs reflecting a release of the liability for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.  The determination of liabilities for 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 2015 Form 10-K for further information about the assumptions and estimates used to establish this liability.

 

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 concentrations of its 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”) business via a reinsurance transaction.  Berkshire reinsured 100% of the Company’s future claim payments in this business, net of other reinsurance arrangements existing at that time.  The Berkshire reinsurance agreement is subject to an overall limit with approximately $3.5 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 for the methods and assumptions used to determine GMDB assets and liabilities.

 

GMDB

 

The Company estimates this liability with an internal model based on its 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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Table of Contents

 

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

 

 

 

For the period ended

 

 

September 30,

 

December 31,

 

(In millions)

 

2016

 

2015

 

Balance at January 1

 

$

1,252

 

$

1,270

 

Add: Unpaid claims

 

18

 

16

 

Less: Reinsurance and other amounts recoverable

 

1,164

 

1,186

 

Balance at January 1, net

 

106

 

100

 

Add: Incurred benefits

 

4

 

3

 

Less: Paid benefits

 

(1)

 

(3)

 

Ending balance, net

 

111

 

106

 

Less: Unpaid claims

 

18

 

18

 

Add: Reinsurance and other amounts recoverable

 

1,132

 

1,164

 

Ending balance

 

$

1,225

 

$

1,252

 

 

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

 

The table below presents the account value, net amount at risk and number of underlying contractholders for guarantees assumed by the Company in the event of contractholder deaths.  The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date.  Unless the Berkshire limit is exceeded, the Company should be reimbursed in full for these payments.

 

(Dollars in millions, excludes impact of reinsurance ceded)

 

September 30, 2016

 

December 31, 2015

 

Account value

 

$

10,752

 

$

11,355

 

Net amount at risk

 

$

2,530

 

$

2,870

 

Number of contractholders

 

292,000

 

324,000

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions)

 

2016

 

2015

 

2016

 

2015

 

Ceded premiums

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

  $

37

 

  $

38

 

  $

118

 

  $

121

 

Other

 

94

 

130

 

262

 

323

 

Total

 

  $

131

 

  $

168

 

  $

380

 

  $

444

 

Reinsurance recoveries

 

 

 

 

 

 

 

 

 

Individual life insurance and annuity business sold

 

  $

77

 

  $

83

 

  $

211

 

  $

230

 

Other

 

8

 

113

 

209

 

313

 

Total

 

  $

85

 

  $

196

 

  $

420

 

  $

543

 

 

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Table of Contents

 

Reinsurance Recoverables

 

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

 

(In millions)

Line of Business

 

Reinsurer(s)

 

September 30,
2016

 

December 31,
2015

 

Collateral and Other Terms
at September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

GMDB

 

Berkshire

 

$

1,089

 

 $

1,123

 

100% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

43

 

41

 

99% 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

 

3,612

 

3,705

 

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

 

944

 

995

 

100% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

Supplemental Benefits Business (2012 acquisition)

 

Great American Life

 

301

 

315

 

100% secured by assets in a trust.

 

 

 

 

 

 

 

 

 

 

 

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

 

Various

 

475

 

553

 

Recoverables arising in the ordinary course of business from approximately 80 reinsurers including the U.S. Government.  Excluding the recoverable from the U.S. Government of approximately $58 million, current balances range from less than $1 million up to $96 million, with 19% secured by assets in trusts or letters of credit. 

 

 

 

 

 

 

 

 

 

 

 

Other run-off reinsurance

 

Various

 

75

 

81

 

99% secured by assets in trusts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total reinsurance recoverables

 

 

 

$

6,539

 

$

6,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over 90% of the Company’s reinsurance recoverables were from companies that were rated A or higher by Standard & Poor’s at September 30, 2016.  The Company reviews its reinsurance arrangements and establishes reserves against the recoverables if recovery is not considered probable.  As of September 30, 2016, the Company’s recoverables were net of a reserve of approximately $4 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.

 

14



Table of Contents

 

Note 7 — 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 only 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 designating the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs.  The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates.  The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value.  The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations.  The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates.  The minimal exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations.  Annually, we conduct an on-site visit of the most significant pricing service to review their processes, methodologies and controls.  This on-site review includes a walk-through of inputs of a sample of securities held across various asset types to validate the documented pricing process.

 

Financial Assets and Financial Liabilities Carried at Fair Value

 

The following tables provide information as of September 30, 2016 and December 31, 2015 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.

 

15


 


Table of Contents

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

 

(In millions)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

Financial assets at fair value:

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

Federal government and agency

 

$

180

 

$

570

 

$

-

 

$

750

State and local government

 

-

 

1,508

 

-

 

1,508

Foreign government

 

-

 

2,278

 

44

 

2,322

Corporate

 

-

 

15,714

 

451

 

16,165

Mortgage-backed

 

-

 

36

 

-

 

36

Other asset-backed

 

-

 

299

 

164

 

463

Total fixed maturities (1)

 

180

 

20,405

 

659

 

21,244

Equity securities

 

4

 

110

 

74

 

188

Subtotal

 

184

 

20,515

 

733

 

21,432

Short-term investments

 

-

 

997

 

-

 

997

GMIB assets (2)

 

-

 

-

 

931

 

931

Other derivative assets

 

-

 

7

 

-

 

7

Total financial assets at fair value, excluding separate accounts

 

$

184

 

$

21,519

 

$

1,664

 

$

23,367