Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported) August 8, 2012

 

Cigna Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

1-08323

 

06-1059331

(State or other jurisdiction of
incorporation)

 

(Commission File Number)

 

(IRS Employer
Identification No.)

 

900 Cottage Grove Road

Bloomfield, Connecticut 06002

(Address of principal executive offices)  (Zip Code)

 

Registrant’s telephone number, including area code: (860) 226-6000

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Index

 

Description

 

Page

 

 

 

 

 

Item 8.01

 

Other events

 

1

Item 9.01

 

Financial Statements and exhibits

 

3

Signature

 

 

 

4

EX-99.1

 

Selected Financial Data

 

5

EX-99.2

 

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

 

7

EX-99.3

 

Financial Statements and Supplementary Data

 

53

EX-12

 

Computation of Earnings to Fixed Charges

 

139

EX-23

 

Consent of Independent Registered Accounting Firm

 

140

EX-101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T

 

 

 

2



Table of Contents

 

ITEM 8.01 OTHER EVENTS

 

Cigna Corporation is a holding company and is not an insurance company.  Its subsidiaries conduct various businesses described in its Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”).  As used in this document, “Cigna” or “the Company” may refer to Cigna Corporation itself, one or more of its subsidiaries, or Cigna Corporation and its consolidated subsidiaries.  The Company  is filing this Current Report on Form 8-K (“Form 8-K”) to update its 2011 Form 10-K for the changes noted below.

 

Except for matters described below, no other information in the 2011 Form 10-K is being updated in this Form 8-K for events or developments that occurred subsequent to the filing of the 2011 Form 10-K on February 23, 2012.

 

This document should be read in conjunction with and as a supplement to information contained in the 2011 Form 10-K (except for items updated herein). For significant developments since the filing of the 2011 Form 10-K on February 23, 2012, refer to Cigna’s subsequent 2012 Quarterly Reports on Form 10-Q and other relevant Securities and Exchange Commission filings.

 

Change in Accounting for Deferred Policy Acquisition Costs

 

Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance (ASU 2010-26) on accounting for costs to acquire or renew insurance contracts via retrospective adjustment of prior periods.  This guidance requires certain sales compensation and telemarketing costs related to unsuccessful efforts and any indirect costs of contract acquisition to be expensed as incurred.  The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its International segment.

 

The effect on the Company’s shareholders’ equity, shareholders’ net income, and shareholders’ net income per share is summarized below.

 

At December 31,

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, except per share amounts)

 

2011

 

2010

 

2009

 

2008

 

2007

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

8,344

 

$

6,645

 

$

5,417

 

$

3,592

 

$

4,748

 

Effect of amended accounting guidance

 

(350

)

(289

)

(219

)

(200

)

(181

)

As currently reported

 

$

7,994

 

$

6,356

 

$

5,198

 

$

3,392

 

$

4,567

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity per share

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

29.22

 

$

24.44

 

$

19.75

 

$

13.25

 

$

16.98

 

Effect of amended accounting guidance

 

(1.22

)

(1.06

)

(0.80

)

(0.74

)

(0.65

)

As currently reported

 

$

28.00

 

$

23.38

 

$

18.95

 

$

12.51

 

$

16.33

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, except per share amounts)

 

2011

 

2010

 

2009

 

2008

 

2007

 

Segment earnings - International

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

286

 

$

243

 

$

183

 

$

182

 

$

176

 

Effect of amended accounting guidance

 

(67

)

(66

)

(10

)

(35

)

(38

)

As currently reported

 

$

219

 

$

177

 

$

173

 

$

147

 

$

138

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

1,327

 

$

1,345

 

$

1,301

 

$

288

 

$

1,120

 

Effect of amended accounting guidance

 

(67

)

(66

)

(10

)

(35

)

(38

)

As currently reported

 

$

1,260

 

$

1,279

 

$

1,291

 

$

253

 

$

1,082

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ income from continuing operations per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

4.90

 

$

4.93

 

$

4.75

 

$

1.04

 

$

3.91

 

Effect of amended accounting guidance

 

(0.25

)

(0.24

)

(0.04

)

(0.13

)

(0.13

)

As currently reported

 

$

4.65

 

$

4.69

 

$

4.71

 

$

0.91

 

$

3.78

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

As previously reported

 

$

4.84

 

$

4.89

 

$

4.73

 

$

1.03

 

$

3.86

 

Effect of amended accounting guidance

 

(0.25

)

(0.24

)

(0.04

)

(0.12

)

(0.13

)

As currently reported

 

$

4.59

 

$

4.65

 

$

4.69

 

$

0.91

 

$

3.73

 

 

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Table of Contents

 

Implementation of this amended guidance does not have an impact on the underlying economic value, or cash flows of Cigna’s businesses, or on Cigna’s liquidity or the statutory surplus of its insurance subsidiaries.

 

Presentation of Comprehensive Income

 

Effective January 1, 2012, the Company also adopted the FASB’s amended guidance (ASU 2011-05) that requires presenting net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements.  This amended guidance is required to be adopted retrospectively for all periods presented.   The adoption of this amended accounting guidance resulted in providing a separate statement of comprehensive income, but did not have any effect on Cigna’s consolidated financial condition, results of operation or cash flows.

 

Exhibits

 

Exhibits filed with this Form 8-K and incorporated in this Item 8.01 by reference revise the following sections in the 2011 Form 10-K for all applicable periods presented:

 

Exhibit 12 —

Computation of Ratios of Earnings to Fixed Charges

 

 

Exhibit 99.1 —

Item 6. Selected Financial Data

 

 

Exhibit 99.2 —

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Exhibit 99.3 —

Item 8. Financial Statements and Supplementary Data, and Item 15. Financial Statement Schedules

 

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Table of Contents

 

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

 

(d) Exhibits

 

12

 

Computation of Ratios of Earnings to Fixed Charges updated for the adoption of the amended accounting guidance for deferred policy acquisition costs.

23

 

Consent of PricewaterhouseCoopers LLP.

99.1

 

Selected Financial Data updated for the adoption of the amended accounting guidance for deferred policy acquisition costs.

99.2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations updated for the adoption of the amended accounting guidance for deferred policy acquisition costs.

99.3

 

Financial Statements and Supplementary Data updated for the adoption of the amended accounting guidance for deferred policy acquisition costs and the presentation of comprehensive income.

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheet as of December 31, 2011 and December 31, 2010, (ii) the Consolidated Statement of Operations for the years ended December 31, 2011, 2010 and 2009 (iii) the Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009 (iv) the Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010 and 2009 (v) the Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009 and (vi) the Notes to the Consolidated Financial Statements.

 

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Table of Contents

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

CIGNA CORPORATION

 

 

 

 

Date: August  8 , 2012

By:

/s/ Ralph J. Nicoletti

 

Ralph J. Nicoletti

 

Executive Vice President

 

and Chief Financial Officer

 

4



Exhibit 99.1

 

Item 6. SELECTED FINANCIAL DATA

 

The Selected Financial Data reflects changes described in Item 8.01 of this Current Report on Form 8-K, and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.

 

Highlights

 

(Dollars in millions, except per share amounts)

 

2011

 

2010

 

2009

 

2008

 

2007

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Premiums and fees and other revenues

 

$

19,333

 

$

18,647

 

$

16,157

 

$

17,002

 

$

15,375

 

Net investment income

 

1,146

 

1,105

 

1,014

 

1,063

 

1,114

 

Mail order pharmacy revenues

 

1,447

 

1,420

 

1,282

 

1,204

 

1,118

 

Realized investment gains (losses)

 

62

 

75

 

(43

)

(170

)

16

 

Total revenues

 

$

21,988

 

$

21,247

 

$

18,410

 

$

19,099

 

$

17,623

 

Results of Operations:

 

 

 

 

 

 

 

 

 

 

 

Health Care

 

$

991

 

$

861

 

$

731

 

$

664

 

$

679

 

Disability and Life

 

287

 

291

 

284

 

273

 

254

 

International

 

219

 

177

 

173

 

147

 

138

 

Run-off Reinsurance

 

(183

)

26

 

185

 

(646

)

(11

)

Other Operations

 

89

 

85

 

86

 

87

 

109

 

Corporate

 

(184

)

(211

)

(142

)

(162

)

(97

)

Realized investment gains (losses), net of taxes and noncontrolling interest

 

41

 

50

 

(26

)

(110

)

10

 

Shareholders’ income from continuing operations

 

1,260

 

1,279

 

1,291

 

253

 

1,082

 

Income from continuing operations attributable to noncontrolling interest

 

1

 

4

 

3

 

2

 

3

 

Income from continuing operations

 

1,261

 

1,283

 

1,294

 

255

 

1,085

 

Income (loss) from discontinued operations, net of taxes

 

 

 

1

 

4

 

(5

)

Net income

 

$

1,261

 

$

1,283

 

$

1,295

 

$

259

 

$

1,080

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ income per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.65

 

$

4.69

 

$

4.71

 

$

0.91

 

$

3.78

 

Diluted

 

$

4.59

 

$

4.65

 

$

4.69

 

$

0.91

 

$

3.73

 

Shareholders’ net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.65

 

$

4.69

 

$

4.71

 

$

0.93

 

$

3.76

 

Diluted

 

$

4.59

 

$

4.65

 

$

4.69

 

$

0.92

 

$

3.71

 

Common dividends declared per share

 

$

0.04

 

$

0.04

 

$

0.04

 

$

0.04

 

$

0.04

 

Total assets

 

$

50,697

 

$

45,393

 

$

42,794

 

$

41,206

 

$

39,884

 

Long-term debt

 

$

4,990

 

$

2,288

 

$

2,436

 

$

2,090

 

$

1,790

 

Shareholders’ equity

 

$

7,994

 

$

6,356

 

$

5,198

 

$

3,392

 

$

4,567

 

Per share

 

$

28.00

 

$

23.38

 

$

18.95

 

$

12.51

 

$

16.33

 

Common shares outstanding (in thousands)

 

285,533

 

271,880

 

274,257

 

271,036

 

279,588

 

Shareholders of record

 

8,178

 

8,568

 

8,888

 

9,014

 

8,696

 

Employees

 

31,400

 

30,600

 

29,300

 

30,300

 

26,600

 

 

Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate.  Prior periods were not restated.  The effect on prior periods was not material.

 

In 2008, the Company recorded significant charges related to the guaranteed minimum income benefits and guaranteed minimum death benefits businesses as well as an after-tax litigation charge of $52 million in Corporate related to the Cigna pension plan.

 

See Note 2 to the Consolidated Financial Statements for further discussion on changes to reported amounts as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010, and 2009  resulting from the retrospective adoption of amended accounting guidance for deferred policy acquisition costs.

 

Adoption of the amended accounting guidance for deferred policy acquisition costs resulted in a reduction in both assets and shareholders’ equity of $219 million as of December 31, 2009.

 

The following table represents changes to reported amounts for the years ended December 31, 2008 and 2007.

 

5



 

Condensed Selected Financial Data

Year ended December 31, 2008

Highlights

 

 

 

 

 

Effect of

 

 

 

 

 

 

 

amended

 

As

 

 

 

As previously

 

accounting

 

retrospectively

 

(Dollars in millions, except per share data)

 

reported

 

guidance

 

adjusted

 

Revenues

 

 

 

 

 

 

 

Premiums and fees and other revenues

 

$

17,004

 

$

(2

)

$

17,002

 

Total revenues

 

$

19,101

 

$

(2

)

$

19,099

 

Results of Operations:

 

 

 

 

 

 

 

International

 

$

182

 

$

(35

)

$

147

 

Shareholders’ income from continuing operations

 

$

288

 

$

(35

)

$

253

 

Income from continuing operations

 

$

290

 

$

(35

)

$

255

 

Net Income

 

$

294

 

$

(35

)

$

259

 

Shareholders’ income per share from continuing operations:

 

 

 

 

 

 

 

Basic

 

$

1.04

 

$

(0.13

)

$

0.91

 

Diluted

 

$

1.03

 

$

(0.12

)

$

0.91

 

Shareholders’ net income per share:

 

 

 

 

 

 

 

Basic

 

$

1.05

 

$

(0.13

)

$

0.92

 

Diluted

 

$

1.05

 

$

(0.13

)

$

0.92

 

Total assets

 

$

41,406

 

$

(200

)

$

41,206

 

Shareholders’ equity

 

$

3,592

 

$

(200

)

$

3,392

 

Per share

 

$

13.25

 

$

(0.74

)

$

12.51

 

 

Condensed Selected Financial Data

Year ended December 31, 2007

Highlights

 

 

 

 

 

Effect of

 

 

 

 

 

 

 

amended

 

As

 

 

 

As previously

 

accounting

 

retrospectively

 

(Dollars in millions, except per share data)

 

reported

 

guidance

 

adjusted

 

Revenues

 

 

 

 

 

 

 

Premiums and fees and other revenues

 

$

15,376

 

$

(1

)

$

15,375

 

Total revenues

 

$

17,624

 

$

(1

)

$

17,623

 

Results of Operations:

 

 

 

 

 

 

 

International

 

$

176

 

$

(38

)

$

138

 

Shareholders’ income from continuing operations

 

$

1,120

 

$

(38

)

$

1,082

 

Income from continuing operations

 

$

1,123

 

$

(38

)

$

1,085

 

Net Income

 

$

1,118

 

$

(38

)

$

1,080

 

Shareholders’ income per share from continuing operations:

 

 

 

 

 

 

 

Basic

 

$

3.91

 

$

(0.13

)

$

3.78

 

Diluted

 

$

3.86

 

$

(0.13

)

$

3.73

 

Shareholders’ net income per share:

 

 

 

 

 

 

 

Basic

 

$

3.89

 

$

(0.13

)

$

3.76

 

Diluted

 

$

3.84

 

$

(0.13

)

$

3.71

 

Total assets

 

$

40,065

 

$

(181

)

$

39,884

 

Shareholders’ equity

 

$

4,748

 

$

(181

)

$

4,567

 

Per share

 

$

16.98

 

$

(0.65

)

$

16.33

 

 

6



Exhibit 99.2

 

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INDEX

 

Introduction

 

7

 

Consolidated Results of Operations

 

14

 

Critical Accounting Estimates

 

18

 

Segment Reporting

 

 

 

Health Care

 

22

 

Disability and Life

 

27

 

International

 

29

 

Run-off Reinsurance

 

32

 

Other Operations

 

36

 

Corporate

 

37

 

Liquidity and Capital Resources

 

38

 

Investment Assets

 

45

 

Cautionary Statement

 

50

 

 

REVISIONS

 

Cigna Corporation is a holding company and is not an insurance company.  Its subsidiaries conduct various businesses, that are described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“2011 Form 10-K”).  As used in this document, “Cigna” and the “Company” may refer to Cigna Corporation itself, one or more of its subsidiaries, or Cigna Corporation and its consolidated subsidiaries.

 

The information contained herein revises selected sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) as previously presented in Item 7 of Part II of the Company’s 2011 Form 10-K.  As more fully described in Item 8.01 of this Current Report on Form 8-K, sections of the 2011 MD&A are being revised to reflect the following:

 

Changes in Accounting for Deferred Policy Acquisition Costs

 

    Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance (ASU 2010-26) on accounting for costs to acquire or renew insurance contracts via retrospective adjustment of prior periods.  This guidance requires certain sales compensation and telemarketing costs related to unsuccessful efforts and any indirect costs of contract acquisition to be expensed as incurred.  The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its International segment.

 

Implementation of this amended guidance has no impact on the underlying economic value or cash flows of the Company’s businesses, nor does it impact the Company’s liquidity or the statutory surplus of its insurance subsidiaries.  The effect on the Company’s shareholders’ equity, shareholders’ net income, and adjusted income from operations is summarized below.

 

7



 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Adjusted income from operations - International

 

 

 

 

 

 

 

As previously reported

 

$

289

 

$

243

 

$

182

 

Effect of amended accounting guidance

 

(67

)

(66

)

(10

)

As currently reported

 

$

222

 

$

177

 

$

172

 

 

 

 

 

 

 

 

 

Adjusted income from operations - Consolidated

 

 

 

 

 

 

 

As previously reported

 

$

1,428

 

$

1,277

 

$

1,097

 

Effect of amended accounting guidance

 

(67

)

(66

)

(10

)

As currently reported

 

$

1,361

 

$

1,211

 

$

1,087

 

 

 

 

 

 

 

 

 

Shareholders’ income from continuing operations

 

 

 

 

 

 

 

As previously reported

 

$

1,327

 

$

1,345

 

$

1,301

 

Effect of amended accounting guidance

 

(67

)

(66

)

(10

)

As currently reported

 

$

1,260

 

$

1,279

 

$

1,291

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

As previously reported

 

$

8,344

 

$

6,645

 

$

5,417

 

Effect of amended accounting guidance

 

(350

)

(289

)

(219

)

As currently reported

 

$

7,994

 

$

6,356

 

$

5,198

 

 

The sections of the MD&A as previously reported in Item 7 of the Company’s 2011 Form 10-K that are being revised in whole or in part to reflect the retrospective adoption of the amended accounting guidance for deferred policy acquisition costs are as follows:

 

·                  Introduction — Overview of 2011 Results

·                  Consolidated Results of Operations

·                  Segment reporting — International Segment

·                  Liquidity and Capital Resources—Discussion of 2011 and 2010 cash flows from operating activities.  While there is no overall change in cash flows from operating activities, the components change.

 

With the exception of Market Risk, sections of the MD&A as previously reported in Item 7 of the Company’s 2011 Form 10-K that are not being revised are included  in order to provide context.

 

INTRODUCTION

 

Cigna is a global health services organization with insurance subsidiaries that are major providers of medical, dental, disability, life and accident insurance and related products and services.  In the U.S., the majority of these products and services are offered through employers and other groups (e.g. unions and associations) and, in selected international markets, Cigna offers supplemental health, life and accident insurance products and international health care coverage and services to businesses, governmental and non-governmental organizations and individuals.  In addition to its ongoing operations described above, the Company also has certain run-off operations, including a Run-off Reinsurance segment.

 

In this filing and in other marketplace communications, the Company makes certain forward-looking statements relating to its financial condition and results of operations, as well as to trends and assumptions that may affect the Company.  Generally, forward-looking statements can be identified through the use of predictive words (e.g. “Outlook for 2012”).  Actual results may differ from the Company’s predictions.  Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis (“MD&A”), including in the Cautionary Statement beginning on page 50.  The forward-looking statements contained in this filing represent management’s current estimate as of the date of this filing.  Management does not assume any obligation to update these estimates.

 

The following discussion addresses the financial condition of the Company as of December 31, 2011, compared with December 31, 2010, and a comparison of results of operations for the years ended December 31, 2011, 2010 and 2009.

 

Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States (“GAAP”).  Certain reclassifications have been made to prior period amounts to conform to the presentation of 2011 amounts.   See Note 2 to the Consolidated Financial Statements for additional information.

 

8



 

Overview of 2011 Results

 

Summarized below are the key highlights for 2011.  For additional information, see the remaining sections of this MD&A, which discuss both consolidated and segment results in more detail.

 

Key Consolidated Financial Data

 

(Dollars in millions) 

 

2011

 

2010

 

2009

 

Revenues

 

$

21,988

 

$

21,247

 

$

18,410

 

Medical membership (in thousands)(1)

 

12,680

 

12,473

 

11,669

 

Shareholders’ income from continuing operations

 

$

1,260

 

$

1,279

 

$

1,291

 

Adjusted income from operations (2)

 

$

1,361

 

$

1,211

 

$

1,087

 

Cash flows from operating activities

 

$

1,491

 

$

1,743

 

$

745

 

Shareholders’ equity

 

$

7,994

 

$

6,356

 

$

5,198

 

 


(1)  Includes medical members of the Company’s Health Care segment as well as the International health care business, including global health benefits.

(2)  For a definition of adjusted income from operations, see the “Consolidated Results of Operations” section of this MD&A beginning on page 14.

 

Consolidated Results of Operations

 

·                       Revenues rose 3% in 2011, reflecting solid growth in the Company’s strategically targeted domestic and international customer segments of its ongoing health care, disability and life, and international businesses.  In addition, the increase in revenue reflects the effect of the programs to hedge equity and growth interest rate exposures in the run-off reinsurance operations. See the Run-off Reinsurance section of this MD&A beginning on page 32 for additional information.  These increases were partially offset by the exit from certain non-strategic markets, primarily the Medicare Advantage Individual Private Fee For Service (“Medicare IPFFS”) business.

·                       Medical membership increased 2%, reflecting growth in targeted markets, primarily the middle and select market segments domestically as well as growth in the global health benefits business. These increases were partially offset by exits from certain non-strategic markets, primarily Medicare IPFFS.

·                       Shareholders’ income from continuing operations decreased 1% in 2011, reflecting higher losses in the GMIB business substantially offset by higher overall earnings from the Company’s ongoing businesses.

·                       Adjusted income from operations increased 12% in 2011, continuing to demonstrate the value of the Company’s diversified portfolio of businesses, resulting in strong earnings contributions from each of the Company’s ongoing businesses.  These results were achieved primarily as a result of continued growth, effective execution of the Company’s business strategy and low medical services utilization trend in the health care business.

·                       Cash flows from operating activities in 2011 reflected the strong earnings contributions from the ongoing businesses, partially offset by pension plan contributions and claim run-out from the Medicare IPFFS business.

 

Liquidity and Financial Condition

 

During 2011, the Company entered into several transactions to strengthen its liquidity and financial condition as well as to strategically deploy its capital as follows:

 

·                       entered into an agreement to acquire HealthSpring, Inc. (“HealthSpring”) for approximately $3.8 billion in cash and Cigna stock awards.  The transaction closed on January 31, 2012;

·                       the HealthSpring acquisition was financed in part by the issuance of $2.1 billion of debt and 15.2 million shares of common stock for $650 million ($629 million net of underwriting discount and fees) in the fourth quarter of 2011.  As a result of these transactions, cash at the parent company was approximately $3.8 billion at December 31, 2011;

·                       acquired FirstAssist for approximately $115 million in the fourth quarter of 2011;

·                       contributed $250 million to its domestic qualified pension plans;

·                       repurchased 5.3 million shares of stock for $225 million; and

·                       entered into a new five-year revolving credit and letter of credit agreement for $1.5 billion, that permits up to $500 million to be used for letters of credit.  The credit agreement includes options to increase the commitment amount to $2.0 billion and to extend the term past June 2016.

 

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Shareholders’ equity increased substantially during 2011, reflecting strong shareholders’ net income, increased invested asset values (primarily fixed maturities) reflecting lower market yields (largely due to lower interest rates), and the impact of the fourth quarter common stock issuance.  Those favorable items were partially offset by the unfavorable effects of the pension plan liability on shareholders’ equity due to a 100 basis point decline in the discount rate and  lower than expected asset returns.

 

Business Strategy

 

Cigna’s mission is to improve the health, well-being and sense of security of the individuals it serves around the world. Key to our mission and strategy is our customer-centric approach; we seek to engage our U.S.-based and global customers in maintaining and improving their health, well-being and sense of security by offering effective, easy-to-understand insurance, health and wellness products and programs that meet their unique individual needs.  We do this by providing access to relevant information to ensure informed buying decisions, partnering with physicians and care providers in the U.S. and around the world, and delivering a highly personalized customer experience.  This approach aims to deliver high quality care at lower costs for each of our stakeholders:  individuals, employers and government payors.

 

Cigna’s long-term growth strategy is based on: (1) repositioning the portfolio for growth in targeted geographies, product lines, buying segments and distribution channels; (2) improving its strategic and financial flexibility; and (3) pursuing additional opportunities in high-growth markets with particular focus on individuals.

 

Our mission is carried out through our enterprise growth strategy, which has the following three tenets:

 

·                  GO DEEP: Cigna seeks to drive scale by increasing presence and brand strength in key geographic areas, growing in targeted segments or capabilities, and deepening its relationships with current customers.

 

·                  GO GLOBAL: Cigna delivers a range of differentiated products and superior service to meet the distinct needs of a growing global middle class and a globally mobile workforce through expansion in existing international markets as well as extension of the Company’s business model to new geographic areas.

 

·                  GO INDIVIDUAL: Cigna strives to establish a deep understanding of its customers’ unique needs and to be a highly customer-centric organization through simplifying the buying process by providing choice, transparency of information, and a personalized customer experience. The Company’s goal is to build long-term relationships with each of the individuals it serves and meet their needs throughout the stages of their lives.

 

Cigna is also focused on improving its strategic and financial flexibility by driving further cost reductions in its Health Care operating expenses, improving its medical cost competiveness in targeted markets and effectively managing balance sheet exposures. For further discussion of the Company’s actions to manage its balance sheet exposures, see the section on “Run-off Operations” discussed below.

 

Key to the Company’s strategy is effectively deploying capital in  pursuing additional opportunities in high-growth markets.  Consistent with this objective, Cigna achieved a significant milestone with the acquisition of HealthSpring, Inc. in January 2012.  HealthSpring, a leading provider of medical benefits to the 65+ population through the Medicare Advantage program, strengthens Cigna’s ability to serve individuals across their life stages as well as deepens Cigna’s presence in a number of geographic markets. The addition of HealthSpring brings industry leading physician partnership capabilities and creates the opportunity to deepen Cigna’s existing client and customer relationships, as well as facilitates a broader deployment of Cigna’s range of health and wellness capabilities and product offerings.

 

For additional information on the Company’s business strategy, see the “Strategy” section of this Form 10-K beginning on page 2.

 

The Company’s ability to increase revenue, shareholders’ net income and operating cash flows from ongoing operations is directly related to progress in executing its strategy as well as other key factors, including the Company’s ability to:

 

·               profitably price products and services at competitive levels that reflect emerging experience;

·               effectively underwrite its product offerings and manage risk;

·               cross sell its various health and related benefit products;

·               invest available cash at attractive rates of return for appropriate durations; and

·               effectively deploy capital.

 

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In addition to the Company-specific factors cited above, overall results are influenced by a range of economic and other factors, especially:

 

·                  cost trends and inflation for medical and related services;

·                  utilization patterns of medical and other services;

·                  employment levels;

·                  the tort liability system;

·                  developments in the political environment both domestically and internationally, including U.S. Health Care Reform;

·                  interest rates, equity market returns, foreign currency fluctuations and credit market volatility, including the availability and cost of credit in the future; and

·                  federal, state and international regulation.

 

The Company regularly monitors the trends impacting operating results from the above mentioned key factors to appropriately respond to economic and other factors affecting its operations, both in its ongoing and run-off operations.

 

Run-off Operations

 

The Company’s run-off reinsurance operations have significant exposures, primarily from its guaranteed minimum death benefits (“GMDB”, also known as “VADBe”) and guaranteed minimum income benefits (“GMIB”) products.  As part of its strategy to effectively manage these exposures, the Company operates an equity hedge program to substantially reduce the impact of equity market movements on the liability for the GMDB business.  In February 2011, the Company implemented additional hedges designed to offset a portion of the equity market risk for GMIB contracts and a portion of the interest rate risks related to GMDB and GMIB contracts. The Company actively monitors the performance of and will continue to evaluate further adjustments for these hedging programs.

 

These products are also influenced by a range of economic and behavioral factors that were not hedged or only partially hedged as of December 31, 2011, including:

 

·                       a portion of equity market risk for GMIB contracts;

·                       a portion of interest rate risks;

·                       future partial surrender impacts for GMDB contracts, including equity market risk and election rates;

·                       annuity election rates for GMIB contracts;

·                       mortality and lapse rates; and

·                       the collection of amounts recoverable from retrocessionaires.

 

In order to manage these factors, the Company

 

·                       actively studies policyholder behavior experience and adjusts future expectations based on the results of the studies, as warranted;

·                       actively monitors the hedging programs and will continue to evaluate further adjustments to the hedging programs;

·                       performs regular audits of ceding companies to ensure compliance with agreements as well as to help maximize the collection of receivables from retrocessionaires; and

·                       monitors the financial strength and credit standing of its retrocessionaires and establishes or collects collateral when warranted.

 

In the first quarter of 2011, the Company contributed $150 million to its subsidiary, Cigna Arbor Life Insurance Company (“Arbor”).  With the impact of declining interest rates during 2011, Arbor’s statutory surplus  at December 31, 2011 was approximately $275 million, which remains in excess of minimum risk-based capital requirements and the Company’s internal guidelines.

 

11



 

Health Care Reform

 

In the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (“Health Care Reform”) were signed into law.  Certain of the law’s provisions that affected the Company became effective during 2010 and 2011 and others will take effect from 2012 to 2018.

 

Commercial minimum medical loss ratio requirements became effective in January 2011, requiring payment of premium rebates beginning in 2012 to employers and customers covered under the Company’s comprehensive commercial medical insurance if certain annual minimum loss ratios (MLR) are not met.  The Company recorded its rebate accrual based on estimated medical loss ratios calculated as prescribed by Health Care Reform using full-year premium and claim information by state and market segment for each legal entity that issues comprehensive medical insurance.    For the year ended December 31, 2011, the Company accrued an estimated rebate of $63 million pre-tax ($41 million after-tax).

 

In 2011, the Department of Health and Human Services (“HHS”) provided a special methodology for calculating the MLR for limited benefit and global health benefit plans.   This special methodology, which resulted in no premium rebates being due in 2011 for these businesses, has been extended through 2014 for limited benefit plans and indefinitely for global health benefit plans.

 

Health Care Reform also changed tax laws related to certain future retiree benefit and compensation-related payments earned after 2009 that resulted in after-tax charges of approximately $8 million in 2011 and $10 million in 2010.  In addition, the Company incurred after-tax costs of approximately $17 million in 2011 and $15 million in 2010 related to Health Care Reform to build the infrastructure necessary to comply with the provisions of Health Care Reform that became effective in 2011.  These costs represent the estimated cost of internal staff redeployed to work on Health Care Reform initiatives.

 

Certain fees, including the annual health insurer fee, become effective in 2013 and 2014 for Cigna and others to help fund the additional insurance benefits and coverages provided by this legislation. Payment of these fees will result in charges to the Company’s financial results in future periods.  In addition, since these fees will generally not be tax deductible, the Company’s effective tax rate is expected to be adversely impacted in future periods.  However, the Company is unable to estimate the amount of these fees or the impact on the effective tax rate because guidance for these calculations has not been finalized.

 

Health Care Reform also impacts Cigna’s Medicare Advantage and Medicare Part D prescription drug plan businesses acquired with HealthSpring in a variety of additional ways, including reduced Medicare premium rates (which began with the 2011 contract year), transition of Medicare Advantage “benchmark” rates to Medicare fee-for-service parity, reduced enrollment periods and limitations on disenrollment, and providing “quality bonuses” for Medicare Advantage plans with a rating for four or five stars from CMS.  Funding for Medicare Advantage plans has been and may continue to be altered by federal legislation.

 

Management is currently unable to estimate the full impact of Health Care Reform on the Company’s future results of operations, and its financial condition and liquidity due to uncertainties related to interpretation, implementation and timing of its many provisions.  It is possible; however, that this impact could be material to future results of operations.  The Company’s strengths and the capabilities of its broad health and wellness portfolio are expected to help leverage potential business opportunities resulting from Health Care Reform.   Management, through its internal task force, continues to closely monitor implementation of the law, report on the Company’s compliance with Health Care Reform, actively engage with regulators to assist with the ongoing conversion of legislation to regulation and assess potential opportunities arising from Health Care Reform.

 

For additional information regarding Health Care Reform, see the “Regulation” section of the Company’s 2011 Form 10-K beginning on page 26.

 

Acquisitions and Dispositions

 

In line with its growth strategy, the Company has strengthened its market position and reduced balance sheet exposures through the following acquisition and disposition transactions.

 

Acquisition of  HealthSpring, Inc.

 

On January 31, 2012, the Company acquired all of the outstanding shares of HealthSpring, Inc. (“HealthSpring”) for $55 per share in cash and Cigna stock awards, representing an estimated cost of approximately $3.8 billion.  HealthSpring provides Medicare Advantage coverage in 11 states and the District of Columbia as well as a large, national stand-alone Medicare prescription drug business.  The Company funded the acquisition with internal cash resources that included $2.1 billion of additional debt, approximately $650 million of new equity ($629 million net of underwriting discount and fees) issued during the fourth quarter of 2011 and net proceeds from its issuance of commercial paper.

 

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Acquisition of FirstAssist

 

On November 30, 2011, the Company acquired FirstAssist Group Holdings Limited (“FirstAssist”) for approximately $115 million. FirstAssist is based in the United Kingdom, (“U.K.”) and provides travel and protection insurance services that the Company expects will enhance its supplemental health, life and accident business around the world.  The Company used available cash on hand for the purchase.

 

Reinsurance of Run-off Workers’ Compensation and Personal Accident Business

 

On December 31, 2010, the Company essentially exited from its workers’ compensation and personal accident reinsurance business by purchasing retrocessional coverage from a Bermuda subsidiary of Enstar Group Limited and transferring administration of this business to the reinsurer. See Note 3 to the Consolidated Financial Statements for additional information.

 

Sale of Workers’ Compensation and Case Management Business

 

On December 1, 2010 the Company completed the sale of its workers’ compensation and case management business to GENEX Holdings, Inc.  The Company recognized an after-tax gain on sale of $11 million ($18 million before tax) which was reported in other revenues in the Disability and Life segment. See Note 3 to the Consolidated Financial Statements for additional information.

 

Acquisition of Vanbreda International

 

On August 31, 2010, the Company acquired 100% of the voting stock of Vanbreda International NV (“Vanbreda International”), based in Antwerp, Belgium for a cash purchase price of $412 million.  See Note 3 to the Consolidated Financial Statements for additional information about the acquisition of Vanbreda International.

 

13



 

CONSOLIDATED RESULTS OF OPERATIONS

 

The Company measures the financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations before after-tax realized investment results.  Adjusted income from operations is defined as consolidated segment earnings (loss) excluding special items (defined below) and the results of the GMIB business.  Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the Company’s businesses and permits analysis of trends in underlying revenue, expenses and shareholders’ net income.  This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is shareholders’ income from continuing operations.

 

Summarized below is a reconciliation between shareholders’ income from continuing operations and adjusted income from operations.

 

(In millions)

 

 

 

 

 

 

 

Financial Summary

 

2011

 

2010

 

2009

 

Premiums and fees

 

$

19,089

 

$

18,393

 

$

16,041

 

Net investment income

 

1,146

 

1,105

 

1,014

 

Mail order pharmacy revenues

 

1,447

 

1,420

 

1,282

 

Other revenues

 

244

 

254

 

116

 

Realized investment gains (losses)

 

62

 

75

 

(43

)

Total revenues

 

21,988

 

21,247

 

18,410

 

Benefits and expenses

 

20,112

 

19,445

 

16,557

 

Income from continuing operations before taxes

 

1,876

 

1,802

 

1,853

 

Income taxes

 

615

 

519

 

559

 

Income from continuing operations

 

1,261

 

1,283

 

1,294

 

Less: income from continuing operations attributable to noncontrolling interest

 

1

 

4

 

3

 

Shareholders’ income from continuing operations

 

1,260

 

1,279

 

1,291

 

Less: realized investment gains (losses), net of taxes

 

41

 

50

 

(26

)

Segment earnings

 

1,219

 

1,229

 

1,317

 

Less: adjustments to reconcile to adjusted income from operations:

 

 

 

 

 

 

 

Results of GMIB business (after-tax):

 

(135

)

(24

)

209

 

Special items (after-tax):

 

 

 

 

 

 

 

Costs associated with acquisitions

 

(31

)

 

 

Resolution of a federal tax matter (See Note 19 to the Consolidated Financial Statements)

 

 

101

 

 

Loss on early extinguishment of debt (See Note 15 to the Consolidated Financial Statements)

 

 

(39

)

 

Loss on reinsurance transaction (See Note 3 to the Consolidated Financial Statements)

 

 

(20

)

 

Curtailment gain (See Note 9 to the Consolidated Financial Statements)

 

 

 

30

 

Cost reduction charges

 

 

 

(29

)

Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)

 

24

 

 

20

 

Adjusted income from operations

 

$

1,361

 

$

1,211

 

$

1,087

 

 

Summarized below is adjusted income from operations by segment:

 

(In millions)

 

 

 

 

 

 

 

Adjusted Income (Loss) From Operations

 

2011

 

2010

 

2009

 

Health Care

 

$

990

 

$

861

 

$

729

 

Disability and Life

 

282

 

291

 

279

 

International

 

222

 

177

 

172

 

Run-off Reinsurance

 

(48

)

(27

)

(24

)

Other Operations

 

85

 

85

 

85

 

Corporate

 

(170

)

(176

)

(154

)

Total

 

$

1,361

 

$

1,211

 

$

1,087

 

 

14



 

Overview of 2011 Consolidated Results of Operations

 

Shareholders’ income from continuing operations decreased 1% in 2011 compared with 2010, due to significantly higher GMIB losses principally reflecting lower interest rates, substantially offset by higher adjusted income from operations as explained further below.  See the Run-off Reinsurance section of the MD&A beginning on page 32 for additional information on GMIB results.

 

Adjusted income from operations increased 12% in 2011 compared with 2010 primarily due to higher earnings contributions from the Company’s Health Care and International segments.  These results reflect solid business growth in strategically targeted markets and continued low medical services utilization trend.  See the individual segment sections of this MD&A for further discussion.

 

Overview of 2010 Consolidated Results of Operations

 

Shareholders’ income from continuing operations decreased 1% in 2010 compared with 2009, reflecting a loss in the GMIB business in 2010 compared with a significant gain in 2009, partially offset by strong growth in adjusted income from operations as well as significant improvement in realized investment results.

 

Adjusted income from operations increased 11% in 2010 compared with 2009 primarily due to strong earnings growth in the ongoing business segments (Health Care, Disability and Life and International), reflecting focused execution of the Company’s strategy, which includes a growing global customer base as well as higher net investment income reflecting improved economic conditions and asset growth.

 

Special Items and GMIB

 

Management does not believe that the special items noted in the table above are representative of the Company’s underlying results of operations.  Accordingly, the Company excluded these special items from adjusted income from operations in order to facilitate an understanding and comparison of results of operations and permit analysis of trends in underlying revenue, expenses and shareholders’ income from continuing operations.

 

Special items for 2011 included:

 

·                       after-tax costs incurred in the fourth quarter of 2011 associated with the January 2012 acquisition of HealthSpring and the November 2011 acquisition of FirstAssist; and

·                       tax benefits associated with the completion of the 2007 and 2008 IRS examinations (see Note 19 to the Consolidated Financial Statements for additional information regarding this special item).

 

Special items for 2010 included:

 

·                       a gain resulting from the resolution of a federal income tax matter, consisting of a $97 million release of a deferred tax valuation allowance and $4 million of accrued interest. See Note 19 to the Consolidated Financial Statements for further information;

·                       a loss on the extinguishment of debt resulting from the decision of certain holders of the Company’s 8.5% Notes due 2019 and 6.35% Notes due 2018 to accept the Company’s tender offer to redeem these Notes for cash.  See Note 15 to the Consolidated Financial Statements for further information; and

·                       a loss on reinsurance of the run-off workers’ compensation and personal accident reinsurance businesses to Enstar.  See Note 3 to the Consolidated Financial Statements for further information.

 

Special items for 2009 included a curtailment gain resulting from the decision to freeze the pension plan (see Note 9 to the Consolidated Financial Statements for additional information), cost reduction charges related to the 2008 cost reduction program, and benefits resulting from the completion of the 2005 and 2006 IRS examinations (see Note 19 to the Consolidated Financial Statements for additional information).

 

The Company also excludes the results of the GMIB business, including the results of the related hedges starting in 2011, from adjusted income from operations because the fair value of GMIB assets and liabilities must be recalculated each quarter using updated capital market assumptions.  The resulting changes in fair value, which are reported in shareholders’ net income, are volatile and unpredictable.  See the Critical Accounting Estimates section of the MD&A beginning on page 18 of this Form 8-K for more information on the effects of capital market assumption changes on shareholders’ net income.  Because of this volatility, and since the GMIB business is in run-off, management does not believe that its results are meaningful in assessing underlying results of operations.

 

15



 

Outlook for 2012

 

The Company expects 2012 consolidated adjusted income from operations to be higher than  2011 results. This outlook reflects strong organic growth, an expected increase in medical services utilization and contributions from the HealthSpring acquisition.  This outlook assumes break-even results for  GMDB (also known as “VADBe”) for 2012, which assumes that actual experience, including capital market performance, will be consistent with long-term reserve assumptions.  See Note 6 to the Consolidated Financial Statements as well as the Critical Accounting Estimates section of the MD&A beginning on page 18 of this Form 8-K for more information on the effects of capital market and other reserve assumption changes on shareholders’ net income.

 

Information is not available for management to reasonably estimate the future results of the GMIB business or realized investment results due in part to interest rate and stock market volatility and other internal and external factors.  In addition, the Company is not able to identify or reasonably estimate the financial impact of special items in 2012, however they will include potential adjustments associated with HealthSpring, Inc. acquisition costs, and may include litigation and assessment-related items.

 

The Company’s outlook for 2012 is subject to the factors cited above and in the Cautionary Statement beginning on page 50 of this Form 8-K and the sensitivities discussed in the Critical Accounting Estimates section of the MD&A beginning on page 18 of this Form 8-K.  If unfavorable equity market and interest rate movements occur, the Company could experience losses related to investment impairments and the GMIB and GMDB businesses.  These losses could adversely impact the Company’s consolidated results of operations and financial condition and liquidity by potentially reducing the capital of the Company’s insurance subsidiaries and reducing their dividend-paying capabilities.

 

Revenues

 

Total revenues increased by 3% in 2011, compared with 2010, and 15% in 2010 compared with 2009.  Changes in the components of total revenue are described more fully below.

 

Premiums and Fees

 

Premiums and fees increased by 4% in 2011, compared with 2010, primarily reflecting business growth in the Company’s targeted market segments, partially offset by the Company’s exit from the Medicare IPFFS business beginning in 2011.  Excluding this business, premiums and fees increased by 9% in 2011 compared with 2010.

 

Premiums and fees increased by 15% in 2010, compared with 2009, principally due to membership growth in the Health Care segment’s risk businesses as well as growth in the International segment. Premiums and fees increased by 10% in 2010 compared with 2009 after excluding the Medicare IPFFS Individual business.

 

Net Investment Income

 

Net investment income increased by 4% in 2011, compared with 2010. The key factors causing the increase were higher investment assets and improved results from real estate investments, partially offset by lower reinvestment yields.

 

Net investment income increased by 9% in 2010, compared with 2009, predominantly due to improved results from security partnerships and real estate investments and higher assets due to business growth, partially offset by lower reinvestment yields.

 

Mail Order Pharmacy Revenues

 

Mail order pharmacy revenues increased by 2% in 2011, compared with 2010, due in large part to price increases offset by a decline in volume and by 11% in 2010, compared with 2009, resulting from increases in volume and, to a lesser extent, price increases.

 

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Other Revenues

 

Other revenues included pre-tax losses of $4 million in 2011 compared with $157 million in 2010 and $282 million in 2009 related to futures and swaps entered into as part of a dynamic hedge program to manage equity and growth interest rate risks in the Company’s run-off reinsurance operations.   See the Run-off Reinsurance section of the MD&A beginning on page 32 for more information on this program.  Excluding the impact of these swaps and futures contracts, Other revenues declined 40% in 2011, compared with 2010.  The decline primarily reflects the absence of revenue in 2011 from the workers’ compensation and case management business, which was sold in 2010 as well as lower revenues in 2011 from Cigna Government Services, which was sold in the second quarter of 2011.

 

Excluding the impact of the futures contracts associated with the GMDB equity hedge program, Other revenues increased 3% in 2010, compared with 2009 primarily reflecting the pre-tax gain on the sale of the workers’ compensation and case management business of $18 million.

 

Realized Investment Results

 

Realized investment results in 2011 were lower than in 2010 primarily due to higher impairment losses on fixed maturities and valuation declines on hybrid securities, partially offset by higher gains on sales of real estate properties held in joint ventures.

 

Realized investment results in 2010 were significantly higher than in 2009 primarily due to:

 

·                  lower impairments on fixed maturities and real estate funds in 2010;

·                  increased prepayment fees on fixed maturities received in 2010 as a result of favorable market conditions and issuer specific business circumstances; and

·                  gains on sales of real estate held in joint ventures and other investments in 2010.

 

These favorable effects were partially offset by an increase in commercial mortgage loan impairments recorded in 2010, reflecting continued weakness in the commercial real estate market.

 

See Note 14 to the Consolidated Financial Statements for additional information.

 

17



 

CRITICAL ACCOUNTING ESTIMATES

 

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

 

·                  it requires assumptions to be made that were uncertain at the time the estimate was made; and

·                  changes in the estimate or different estimates that could have been selected could have a material effect on the Company’s consolidated results of operations or financial condition.

 

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the disclosures presented below.

 

In addition to the estimates presented in the following table, there are other accounting estimates used in the preparation of the Company’s consolidated financial statements, including estimates of liabilities for future policy benefits other than those identified in the following table, as well as estimates with respect to goodwill, unpaid claims and claim expenses, postemployment and postretirement benefits other than pensions, certain compensation accruals, and income taxes.

 

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

 

See Note 2 to the Consolidated Financial Statements for further information on significant accounting policies that impact the Company.

 

Balance Sheet Caption /
Nature of Critical Accounting Estimate

 

Effect if Different Assumptions Used

Future policy benefits — Guaranteed minimum death benefits (“GMDB” also known as “VADBe”)

 

These liabilities are estimates of the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received.  The amounts to be paid represent the excess of the guaranteed death benefit over the values of contractholders’ accounts.  The death benefit coverage in force at December 31, 2011 (representing the amount payable if all of approximately 480,000 contractholders had submitted death claims as of that date) was approximately $5.4 billion.

 

Liabilities for future policy benefits for these contracts as of December 31 were as follows (in millions):

 

·                  2011 – $1,170

·                  2010 $1,138

 

Current assumptions and methods used to estimate these liabilities are detailed in Note 6 to the Consolidated Financial Statements.

 

Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur.  If these unfavorable assumption changes were to occur, the approximate after-tax decrease in shareholders’ net income would be as follows:

 

·                  5% increase in claim mortality rates $30 million

·                  10% decrease in lapse rates $20 million

·                  10% increase in election rates for future partial surrenders $2 million

·                  50 basis point decrease in interest rates:

·      Unhedged Mean Investment Performance $20 million

·      Discount Rate $30 million

·                  10% increase in volatility $20 million

 

As of December 31, 2011, if contractholder account values invested in underlying equity mutual funds declined by 10% due to equity market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the unhedged provision for partial surrenders would be approximately $5 million.

 

As of December 31, 2011, if contractholder account values invested in underlying bond/money market mutual funds declined by 3% due to bond/money market performance, the after-tax decrease in shareholders’ net income resulting from an increase in the provision for partial surrenders and an increase in unhedged exposure would be approximately $10 million.

 

The amounts would be reflected in the Run-off Reinsurance segment.

 

18



 

Balance Sheet Caption /
Nature of Critical Accounting Estimate

 

Effect if Different Assumptions Used

Accounts payable, accrued expenses and other liabilities, and Other assets, including other intangibles - Guaranteed minimum income benefits

 

These net liabilities are calculated with an internal model using many scenarios to determine the fair value of amounts estimated to be paid, less the fair value of net future premiums estimated to be received, adjusted for risk and profit charges that the Company anticipates a hypothetical market participant would require to assume this business.  The amounts estimated to be paid represent the excess of the anticipated value of the income benefit over the value of the annuitants’ accounts at the time of annuitization.

 

The assets associated with these contracts represent receivables in connection with reinsurance that the Company has purchased from two external reinsurers, which covers 55% of the exposures on these contracts.

 

Liabilities related to these contracts as of December 31, were as follows (in millions):

 

·                  2011 – $1,333

·                  2010 $903

 

As of December 31, estimated amounts receivable related to these contracts from two external reinsurers, were as follows (in millions):

 

·                  2011 – $712

·                  2010 $480

 

Current assumptions and methods used to estimate these liabilities are detailed in Note 10 to the Consolidated Financial Statements. 

 

The Company’s results of operations are expected to be volatile in future periods because most capital market assumptions will be based largely on market-observable inputs at the close of each period including interest rates and market-implied volatilities.

 

Based on current and historical market, industry and Company-specific experience and management’s judgment, the Company believes that it is reasonably likely that the unfavorable changes in the key assumptions and/or conditions described below could occur.  If these unfavorable assumption changes were to occur, the approximate after-tax decrease in shareholders’ net income, net of estimated amounts receivable from reinsurers, would be as follows:

 

·                       50 basis point decrease in interest rates (rates aligned with LIBOR) used for projecting market returns and discounting, net of the impact of hedging programs $20 million

·                       50 basis point decrease in interest rates used for projecting claim exposure (7-year Treasury rates) $20 million

·                       20% increase in volatility $5 million

·                       5% decrease in mortality $1 million

·                       10% increase in annuity election rates $2 million

·                       10% decrease in lapse rates $5 million

·                       10% increase to the risk and profit charges — $5 million

 

Market declines expose the Company to a larger net liability.  Decreases in annuitants’ account values resulting from a 10% equity market decline could decrease shareholders’ net income by approximately $15 million, net of the impact of hedging programs.  Decreases in annuitants’ account values resulting from a 3% decline due to bond/money market performance could decrease shareholders’ net income by approximately $2 million.

 

If credit default swap spreads used to evaluate the nonperformance risk of the Company were to narrow or the credit rating of its principal life insurance subsidiary were to improve, it would cause a decrease in the discount rate of the GMIB liability, resulting in an unfavorable impact to earnings.  If the discount rate decreased by 25 basis points due to this, the decrease in shareholders’ net income would be approximately $15 million.

If credit default swap spreads used to evaluate the nonperformance risk of the Company’s GMIB retrocessionaires were to widen or the retrocessionaires’ credit ratings were to weaken, it would cause an increase in the discount rate of the GMIB asset, resulting in an unfavorable impact to earnings.  If the discount rate increased by 25 basis points due to this, the decrease in shareholders’ net income would be approximately $5 million.

 

All of these estimated impacts due to unfavorable changes in assumptions and/or conditions could vary from quarter to quarter depending on actual reserve levels, the actual market conditions or changes in the anticipated view of a hypothetical market participant as of any future valuation date.

 

The amounts would be reflected in the Run-off Reinsurance segment.

 

19



 

Balance Sheet Caption /
Nature of Critical Accounting Estimate

 

Effect if Different Assumptions Used

Accounts payable, accrued expenses and other liabilities — pension liabilities

 

These liabilities are estimates of the present value of the qualified and nonqualified pension benefits to be paid (attributed to employee service to date) net of the fair value of plan assets. The accrued pension benefit liability as of December 31 was as follows (in millions):

 

·                  2011 – $1,769

·                  2010 – $1,528

 

See Note 9 to the Consolidated Financial Statements for assumptions and methods used to estimate pension liabilities.

 

Using past experience, the Company expects that it is reasonably possible that a favorable or unfavorable change in assumptions for the discount rate or expected return on plan assets of 50 basis points could occur.  An unfavorable change is a decrease in these key assumptions with resulting impacts as discussed below.

 

If discount rates for the qualified and nonqualified pension plans decreased by 50 basis points:

 

·                       annual pension costs for 2012 would decrease by approximately $4 million, after-tax; and

·                       the accrued pension benefit liability would increase by approximately $256 million as of December 31, 2011 resulting in an after-tax decrease to shareholders’ equity of approximately $166 million as of December 31, 2011.

 

If the expected long-term return on domestic qualified pension plan assets decreased by 50 basis points, annual pension costs for 2012 would increase by approximately $11 million after-tax.

 

If the Company used the market value of assets to measure pension costs as opposed to the market-related value, annual pension cost for 2012 would increase by approximately $11 million after-tax.

 

If the December 31, 2011 fair values of domestic qualified plan assets decreased by 10%, the accrued pension benefit liability would increase by approximately $328 million as of December 31, 2011 resulting in an after-tax decrease to shareholders’ equity of approximately $213 million.

 

An increase in these key assumptions would result in impacts to annual pension costs, the accrued pension liability and shareholders’ equity in an opposite direction, but similar amounts.

 

 

 

Health Care medical claims payable

 

Medical claims payable for the Health Care segment include both reported claims and estimates for losses incurred but not yet reported.

 

Liabilities for medical claims payable as of December 31 were as follows (in millions):

 

·                  2011 – gross $1,095; net $901

·                  2010 – gross $1,246; net $1,010

 

These liabilities are presented above both gross and net of reinsurance and other recoverables and generally exclude amounts for administrative services only business.

 

See Notes 2 and  5 to the Consolidated Financial Statements for additional information regarding assumptions and methods used to estimate this liability.

 

In  2011, actual experience differed from the Company’s key assumptions as of December 31, 2010, resulting in $126 million of favorable incurred claims related to prior years’ medical claims payable or 1.5% of the current year incurred claims as reported in  2010. In  2010, actual experience differed from the Company’s key assumptions as of December 31, 2009, resulting in $93 million of favorable incurred claims related to prior years’ medical claims, or 1.3% of the current year incurred claims reported in  2009.  Specifically, the favorable impact is due to faster than expected completion factors and lower than expected medical cost trends, both of which included an assumption for moderately adverse experience.

 

The impact of this favorable prior year development was an increase to shareholders’ net income of $53 million after-tax ($82 million pre-tax) in 2011.  The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in shareholders’ net income as explained in Note 5 to the Consolidated Financial Statements.

 

20



 

Balance Sheet Caption /
Nature of Critical Accounting Estimate

 

Effect if Different Assumptions Used

Valuation of fixed maturity investments

Fixed maturities are primarily classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within shareholders’ equity.

 

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.

 

The determination of fair value for a financial instrument requires management judgment.  The degree of judgment involved generally correlates to the level of pricing readily observable in the markets.  Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment.  Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value.  There may be a number of alternative inputs to select, based on an understanding of the issuer, the structure of the security and overall market conditions.  In addition, these factors are inherently variable in nature as they change frequently in response to market conditions.  Approximately two-thirds of the Company’s fixed maturities are public securities, and one-third are private placement securities.

 

See Note 10 to the Consolidated Financial Statements for a discussion of the Company’s fair value measurements and the procedures performed by management to determine that the amounts represent appropriate estimates.

 

Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows from the instrument.  Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset.

 

If the spreads used to calculate fair value changed by 100 basis points, the fair value of the total fixed maturity portfolio of $16.2 billion would change by approximately $1.0 billion.

 

 

 

Assessment of “other- than-temporary” impairments of fixed maturities

To determine whether a fixed maturity’s decline in fair value below its amortized cost is other than temporary, the Company must evaluate the expected recovery in value and its intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery.  To make this determination, the Company considers a number of general and specific factors including the regulatory, economic and market environment, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer.

 

See Notes 2 (C) and 11 to the Consolidated Financial Statements for additional discussion of the Company’s review of declines in fair value, including information regarding the Company’s accounting policies for fixed maturities.

 

For all fixed maturities with cost in excess of their fair value, if this excess was determined to be other-than-temporary, shareholders’ net income for the year ended December 31, 2011 would have decreased by approximately $42 million after-tax.

 

21



 

SEGMENT REPORTING

 

Operating segments generally reflect groups of related products, but the International segment is generally based on geography.  The Company measures the financial results of its segments using “segment earnings (loss)”, which is defined as shareholders’ income (loss) from continuing operations excluding after-tax realized investment gains and losses.  “Adjusted income from operations” for each segment is defined as segment earnings excluding special items and the results of the Company’s GMIB business.  Adjusted income from operations is another measure of profitability used by the Company’s management because it presents the underlying results of operations of the segment and permits analysis of trends.  This measure is not determined in accordance with GAAP and should not be viewed as a substitute for the most directly comparable GAAP measure, which is segment earnings.  Each segment provides a reconciliation between segment earnings and adjusted income from operations.

 

Beginning in 2010, the Company began reporting the expense associated with its frozen pension plans in Corporate. Prior periods were not restated; the effect on prior periods is not material.

 

Health Care Segment

 

Segment Description

 

The Health Care segment offers insured and self-insured medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services that may be integrated to provide comprehensive health care benefit programs.  Cigna HealthCare companies offer these products and services in all 50 states, the District of Columbia and the U.S. Virgin Islands.  These products and services are offered through a variety of funding arrangements such as guaranteed cost, retrospectively experience-rated and administrative services only (“ASO”) arrangements.

 

The Company measures the operating effectiveness of the Health Care segment using the following key factors:

 

·                  segment earnings and adjusted income from operations;

·                  membership growth;

·                  sales of specialty products to core medical customers;

·                  operating expenses as a percentage of segment revenues (operating expense ratio);

·                  changes in operating expenses per member; and

·                  medical expense as a percentage of premiums (medical care ratio) in the guaranteed cost business.

 

Results of Operations

 

(In millions)

 

 

 

 

 

 

 

Financial Summary

 

2011

 

2010

 

2009

 

Premiums and fees

 

$

13,181

 

$

13,319

 

$

11,384

 

Net investment income

 

274

 

243

 

181

 

Mail order pharmacy revenues

 

1,447

 

1,420

 

1,282

 

Other revenues

 

234

 

266

 

262

 

Segment revenues

 

15,136

 

15,248

 

13,109

 

Mail order pharmacy cost of goods sold

 

1,203

 

1,169

 

1,036

 

Benefits and other operating expenses

 

12,386

 

12,742

 

10,943

 

Benefits and expenses

 

13,589

 

13,911

 

11,979

 

Income before taxes

 

1,547

 

1,337

 

1,130

 

Income taxes

 

556

 

476

 

399

 

Segment earnings

 

991

 

861

 

731

 

Less: special items (after-tax) included in segment earnings:

 

 

 

 

 

 

 

Curtailment gain (See Note 9 to the Consolidated Financial Statements)

 

 

 

25

 

Cost reduction charge

 

 

 

(24

)

Completion of IRS examination (See Note 19 to the Consolidated Financial Statements)

 

1

 

 

1

 

Adjusted income from operations

 

$

990

 

$

861

 

$

729

 

Realized investment gains (losses), net of taxes

 

$

24

 

$

26

 

$

(19

)

 

22



 

The Health Care segment’s adjusted income from operations increased 15% in 2011, as compared with 2010 reflecting:

 

·                  growth in premiums and fees of 6% in 2011, excluding the impact of exiting the Medicare IPFFS business, primarily due to higher average membership in the guaranteed cost and ASO businesses, particularly in the targeted market segments: Middle, Select and Individual, and growth in specialty revenues as well as rate increases on most products consistent with underlying trend;

·                  a lower guaranteed cost medical care ratio and higher experience-rated margins driven by low medical services utilization trend, as well as favorable prior year development, partially offset by the estimated cost of premium rebates calculated under the minimum medical loss ratio requirements of Health Care Reform; and

·                  higher net investment income of 13% in 2011, primarily reflecting increased average asset levels driven by membership growth, as well as higher income from partnership investments.

 

The Health Care segment’s adjusted income from operations increased 18% in 2010, as compared with 2009 reflecting:

 

·                  revenue growth in the commercial risk businesses, particularly in the targeted market segments, as evidenced by a 15% increase in commercial risk membership.  In addition, adjusted income from operations was favorably impacted by increased penetration of the Company’s specialty products;

·                  a lower guaranteed cost medical care ratio driven by lower medical cost trend, reflecting lower utilization levels, as well as favorable prior year development; and

·                  higher investment income due to higher security partnership results, higher real estate income and increased assets driven by membership growth.

 

Revenues

 

The table below shows premiums and fees for the Health Care segment:

 

(In millions) 

 

2011

 

2010

 

2009

 

Medical:

 

 

 

 

 

 

 

Guaranteed cost (1),(2)

 

$

4,176

 

$

3,929

 

$

3,380

 

Experience-rated (2),(3)

 

1,934

 

1,823

 

1,699

 

Stop loss

 

1,451

 

1,287

 

1,274

 

Dental

 

894

 

804

 

731

 

Medicare

 

489

 

1,470

 

595

 

Medicare Part D

 

624

 

558

 

342

 

Other(4)

 

600

 

543

 

515

 

Total medical

 

10,168

 

10,414

 

8,536

 

Life and other non-medical

 

77

 

103

 

179

 

Total premiums

 

10,245

 

10,517

 

8,715

 

Fees (2),(5)

 

2,936

 

2,802

 

2,669

 

Total premiums and fees

 

13,181

 

13,319

 

11,384

 

Less: Medicare IPFFS

 

 

827

 

 

Premiums and fees, excluding Medicare IPFFS

 

$

13,181

 

$

12,492

 

$

11,384

 

 


(1) Includes guaranteed cost premiums primarily associated with open access and commercial HMO, as well as other risk-related products.

(2) Premiums and/or fees associated with certain specialty products are also included.

(3) Includes minimum premium  arrangements with a risk profile similar to experience-rated funding arrangements.  The risk portion of minimum premium revenue is reported in experience-rated medical premium whereas the self funding portion of minimum premium revenue is recorded in fees. Also, includes certain non-participating cases for which special customer level reporting of experience is required.

(4) Other medical premiums include risk revenue and specialty products.

(5) Represents administrative service fees for medical members and related specialty product fees for non-medical members as well as fees related to Medicare Part D of $61 million in 2011, $57 million in 2010 and $41 million in 2009.

 

23



 

Premiums and fees decreased 1% in 2011, compared with 2010.  Excluding the impact of exiting the Medicare IPFFS business, premiums and fees were up 6% in 2011, compared with 2010, primarily due to membership growth in the administrative services business, and higher average membership in guaranteed cost, driven by strong retention and sales in targeted market segments, as well as rate increases on most products consistent with underlying trend.  Higher penetration of specialty products also contributed to the increase in fees.

 

Premiums and fees increased 17% in 2010, compared with 2009.  Excluding the impact of Medicare IPFFS business, premiums and fees were up 10% in 2010 compared with 2009, primarily reflecting membership growth in most risk-based products, including Medicare, and to a lesser extent rate increases.  The membership growth was driven by strong retention and new sales in targeted market segments.  The increase in fees primarily reflects growth in specialty products.

 

Excluding the impact of the Medicare IPFFS business, the increases in premiums and fees in 2011 and 2010 reflect the Company’s sustained success in delivering differentiated value to its customers with a focus on providing cost-effective products and services that expand access and provide superior clinical outcomes.

 

Net investment income increased 13% in 2011 compared with 2010 benefiting from increased average asset levels driven by membership growth and higher income from partnership investments.  Net investment income  increased 34% in 2010 compared with 2009 primarily reflecting higher security partnership results, higher real estate income and increased invested assets driven by business growth.

 

Other revenues for the Health Care segment consist of revenues earned on direct channel sales of certain specialty products, including behavioral health and disease management.  Other revenues decreased 12% in 2011 compared with 2010 mostly due to the sale of the Cigna Government Services business in the second quarter of  2011, as well as declines in certain stand-alone medical cost management business.

 

Benefits and Expenses

 

Health Care segment benefits and expenses consist of the following:

 

(In millions)

 

2011

 

2010

 

2009

 

Medical claims expense - excluding Medicare IPFFS

 

$

8,201

 

$

7,798

 

$

6,927

 

Medical claims expense - Medicare IPFFS

 

(19

)

772

 

 

Medical claims expense

 

8,182

 

8,570

 

6,927

 

Other benefit expenses

 

83

 

100

 

169

 

Mail order pharmacy cost of goods sold

 

1,203

 

1,169

 

1,036

 

Other operating expenses:

 

 

 

 

 

 

 

Medical operating expenses

 

2,757

 

2,739

 

2,723

 

Operating expenses (excluding Medicare IPFFS)

 

1,364

 

1,251

 

1,124

 

Other operating expenses (excluding Medicare IPFFS)

 

4,121

 

3,990

 

3,847

 

Operating expenses - Medicare IPFFS

 

 

82

 

 

Total other operating expenses

 

4,121

 

4,072

 

3,847

 

Total benefits and expenses

 

$

13,589

 

$

13,911