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 March 31, 2013
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 |
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06-1059331 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
900 Cottage Grove Road Bloomfield, Connecticut |
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06002 |
(Address of principal executive offices) |
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(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 |
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YES |
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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. |
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R |
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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). |
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R |
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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). |
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o |
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R | |||
As of April 15, 2013, 285,322,450 shares of the issuer’s common stock were outstanding.
Cigna Corporation
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Page | ||
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1 | |
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2 | |
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3 | |
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4 | |
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5 | |
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6 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
42 | |
73 | ||
74 | ||
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75 | ||
76 | ||
77 | ||
77 | ||
78 | ||
79 | ||
E-1 |
As used herein, “Cigna” or the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.
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Cigna Corporation
Consolidated Statements of Income
|
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Unaudited |
| ||||
|
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Three Months Ended |
| ||||
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March 31, |
| ||||
(In millions, except per share amounts) |
|
2013 |
|
2012 |
| ||
Revenues |
|
|
|
|
| ||
Premiums and fees |
|
$ |
7,314 |
|
$ |
6,107 |
|
Net investment income |
|
287 |
|
288 |
| ||
Mail order pharmacy revenues |
|
425 |
|
386 |
| ||
Other revenues |
|
18 |
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(40 |
) | ||
Realized investment gains (losses): |
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|
|
|
| ||
Other-than-temporary impairments on fixed maturities, net |
|
- |
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(3 |
) | ||
Other realized investment gains |
|
139 |
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16 |
| ||
Total realized investment gains |
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139 |
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13 |
| ||
Total revenues |
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8,183 |
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6,754 |
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Benefits and Expenses |
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|
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Global Health Care medical claims expense |
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4,047 |
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3,316 |
| ||
Other benefit expenses |
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1,862 |
|
825 |
| ||
Mail order pharmacy cost of goods sold |
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344 |
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321 |
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GMIB fair value (gain) |
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- |
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(67 |
) | ||
Other operating expenses |
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1,856 |
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1,807 |
| ||
Total benefits and expenses |
|
8,109 |
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6,202 |
| ||
Income before Income Taxes |
|
74 |
|
552 |
| ||
Income taxes (benefits): |
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|
|
|
| ||
Current |
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(101) |
|
135 |
| ||
Deferred |
|
116 |
|
46 |
| ||
Total income taxes |
|
15 |
|
181 |
| ||
Net Income |
|
59 |
|
371 |
| ||
Less: Net Income Attributable to Redeemable Noncontrolling Interest |
|
2 |
|
- |
| ||
Shareholders’ Net Income |
|
$ |
57 |
|
$ |
371 |
|
Shareholders’ Net Income Per Share: |
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|
|
|
| ||
Basic |
|
$ |
0.20 |
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$ |
1.30 |
|
Diluted |
|
$ |
0.20 |
|
$ |
1.28 |
|
Dividends Declared Per Share |
|
$ |
0.04 |
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$ |
0.04 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Cigna Corporation
Consolidated Statements of Comprehensive Income
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Unaudited |
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Three Months Ended |
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(In millions, except per share amounts) |
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2013 |
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2012 |
| ||
Shareholders’ net income |
|
$ |
57 |
|
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$ |
371 |
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Shareholders’ other comprehensive income (loss): |
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|
|
|
|
| ||
Net unrealized appreciation (depreciation) on securities: |
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|
|
|
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Fixed maturities |
|
(72) |
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23 |
| ||
Equity securities |
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2 |
|
|
1 |
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Net unrealized appreciation (depreciation), on securities |
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(70) |
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24 |
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Net unrealized appreciation (depreciation), derivatives |
|
3 |
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(5) |
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Net translation of foreign currencies |
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(58) |
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|
35 |
| ||
Postretirement benefits liability adjustment |
|
40 |
|
|
11 |
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Shareholders’ other comprehensive income (loss) |
|
(85) |
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|
65 |
| ||
Shareholders’ comprehensive income (loss) |
|
(28) |
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|
436 |
| ||
Comprehensive income (loss) attributable to noncontrolling interest: |
|
|
|
|
|
| ||
Net income attributable to redeemable noncontrolling interest |
|
2 |
|
|
- |
| ||
Other comprehensive (loss) attributable to redeemable noncontrolling interest |
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(3) |
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|
- |
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Total comprehensive income (loss) |
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$ |
(29) |
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|
$ |
436 |
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The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Cigna Corporation
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Unaudited |
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As of |
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As of |
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(In millions, except per share amounts) |
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March 31, 2013 |
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December 31, 2012 |
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Assets |
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Investments: |
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Fixed maturities, at fair value (amortized cost, $14,531; $15,481) |
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$ |
16,600 |
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$ |
17,705 |
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Equity securities, at fair value (cost, $137; $121) |
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|
|
131 |
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|
|
111 |
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Commercial mortgage loans |
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2,811 |
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|
|
2,851 |
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Policy loans |
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|
|
1,504 |
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|
|
1,501 |
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Real estate |
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|
82 |
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|
|
83 |
| ||||
Other long-term investments |
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|
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1,249 |
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|
|
1,255 |
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Short-term investments |
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|
|
122 |
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|
|
154 |
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Total investments |
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|
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22,499 |
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|
|
23,660 |
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Cash and cash equivalents |
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|
|
3,306 |
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|
|
2,978 |
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Accrued investment income |
|
|
|
277 |
|
|
|
258 |
| ||||
Premiums, accounts and notes receivable, net |
|
|
|
1,943 |
|
|
|
1,777 |
| ||||
Reinsurance recoverables |
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|
|
7,514 |
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|
|
6,256 |
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Deferred policy acquisition costs |
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|
|
1,221 |
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|
|
1,198 |
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Property and equipment |
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|
1,109 |
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|
|
1,120 |
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Deferred income taxes, net |
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|
284 |
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|
|
374 |
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Goodwill |
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|
5,990 |
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|
|
6,001 |
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Other assets, including other intangibles |
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2,846 |
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|
2,355 |
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Separate account assets |
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|
|
7,950 |
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|
|
7,757 |
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Total assets |
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$ |
54,939 |
|
|
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$ |
53,734 |
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Liabilities |
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Contractholder deposit funds |
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$ |
8,512 |
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$ |
8,508 |
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Future policy benefits |
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|
9,538 |
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9,265 |
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Unpaid claims and claim expenses |
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|
4,218 |
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|
4,062 |
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Global Health Care medical claims payable |
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|
2,000 |
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1,856 |
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Unearned premiums and fees |
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|
577 |
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|
549 |
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Total insurance and contractholder liabilities |
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24,845 |
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24,240 |
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Accounts payable, accrued expenses and other liabilities |
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6,976 |
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|
6,667 |
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Short-term debt |
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|
400 |
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|
|
201 |
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Long-term debt |
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|
4,995 |
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|
4,986 |
| ||||
Separate account liabilities |
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|
|
7,950 |
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|
|
7,757 |
| ||||
Total liabilities |
|
|
|
45,166 |
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|
|
43,851 |
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Contingencies — Note 17 |
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|
|
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|
|
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Redeemable noncontrolling interest |
|
|
|
113 |
|
|
|
114 |
| ||||
Shareholders’ Equity |
|
|
|
|
|
|
|
|
| ||||
Common stock (par value per share, $0.25; shares issued, 366; authorized, 600) |
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|
|
92 |
|
|
|
92 |
| ||||
Additional paid-in capital |
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|
|
3,305 |
|
|
|
3,295 |
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Net unrealized appreciation, fixed maturities |
|
$ |
811 |
|
|
|
$ |
883 |
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|
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Net unrealized appreciation, equity securities |
|
6 |
|
|
|
4 |
|
|
| ||||
Net unrealized depreciation, derivatives |
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(25) |
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|
|
(28) |
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|
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Net translation of foreign currencies |
|
11 |
|
|
|
69 |
|
|
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Postretirement benefits liability adjustment |
|
(1,559) |
|
|
|
(1,599) |
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|
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Accumulated other comprehensive loss |
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|
|
(756) |
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|
|
(671) |
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Retained earnings |
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|
|
12,328 |
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|
12,330 |
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Less treasury stock, at cost |
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|
|
(5,309) |
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|
|
(5,277) |
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Total shareholders’ equity |
|
|
|
9,660 |
|
|
|
9,769 |
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Total liabilities and equity |
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|
|
$ |
54,939 |
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|
|
$ |
53,734 |
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Shareholders’ Equity Per Share |
|
|
|
$ |
33.79 |
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|
|
$ |
34.18 |
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The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Cigna Corporation
Consolidated Statements of Changes in Total Equity
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Accumulated |
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Unaudited |
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Additional |
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Other |
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Redeemable |
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For the three months ended March 31, 2013 |
Common |
|
Paid-in |
|
Comprehensive |
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Retained |
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Treasury |
|
Shareholders’ |
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Noncontrolling |
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(In millions, except per share amounts) |
|
Stock |
|
Capital |
|
Loss |
|
Earnings |
|
Stock |
|
Equity |
|
Interest |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance at January 1, 2013 |
|
$ |
92 |
|
$ |
3,295 |
|
$ |
(671) |
|
$ |
12,330 |
|
$ |
(5,277) |
|
$ |
9,769 |
|
$ |
114 |
|
Effect of issuing stock for employee benefit plans |
|
|
|
10 |
|
|
|
(48) |
|
65 |
|
27 |
|
|
| |||||||
Other comprehensive loss |
|
|
|
|
|
(85) |
|
|
|
|
|
(85) |
|
(3) |
| |||||||
Net income |
|
|
|
|
|
|
|
57 |
|
|
|
57 |
|
2 |
| |||||||
Common dividends declared (per share: $0.04) |
|
|
|
|
|
|
|
(11) |
|
|
|
(11) |
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|
| |||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
(97) |
|
(97) |
|
|
| |||||||
Balance at March 31, 2013 |
|
$ |
92 |
|
$ |
3,305 |
|
$ |
(756) |
|
$ |
12,328 |
|
$ |
(5,309) |
|
$ |
9,660 |
|
$ |
113 |
|
For the three months ended March 31,
2012 |
Common |
|
Additional |
|
Accumulated |
|
Retained |
|
Treasury |
|
Shareholders’ |
|
Redeemable |
| ||||||||
Balance at January 1, 2012 |
|
$ |
92 |
|
$ |
3,188 |
|
$ |
(787) |
|
$ |
10,787 |
|
$ |
(5,286) |
|
$ |
7,994 |
|
$ |
|
|
Effect of issuing stock for employee benefit plans |
|
|
|
80 |
|
|
|
(24) |
|
86 |
|
142 |
|
|
| |||||||
Other comprehensive income |
|
|
|
|
|
65 |
|
|
|
|
|
65 |
|
|
| |||||||
Net income |
|
|
|
|
|
|
|
371 |
|
|
|
371 |
|
|
| |||||||
Common dividends declared (per share: $0.04) |
|
|
|
|
|
|
|
(11) |
|
|
|
(11) |
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|
| |||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
| |||||||
Balance at March 31, 2012 |
|
$ |
92 |
|
$ |
3,268 |
|
$ |
(722) |
|
$ |
11,123 |
|
$ |
(5,200 |
) |
$ |
8,561 |
|
$ |
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Cigna Corporation
Consolidated Statements of Cash Flows
|
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Unaudited |
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|
|
Three Months Ended |
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(In millions) |
|
2013 |
|
|
2012 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
|
| ||
Net income |
|
$ |
59 |
|
|
$ |
371 |
|
Adjustments to reconcile net income to net cash (used in) / provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
150 |
|
|
126 |
| ||
Realized investment gains |
|
(139) |
|
|
(13) |
| ||
Deferred income taxes |
|
116 |
|
|
46 |
| ||
Gains on sale of businesses |
|
(4) |
|
|
(5) |
| ||
Net changes in assets and liabilities, net of non-operating effects: |
|
|
|
|
|
| ||
Premiums, accounts and notes receivable |
|
(158) |
|
|
(215) |
| ||
Reinsurance recoverables |
|
328 |
|
|
(30) |
| ||
Deferred policy acquisition costs |
|
(82) |
|
|
(47) |
| ||
Other assets |
|
103 |
|
|
155 |
| ||
Insurance liabilities |
|
750 |
|
|
637 |
| ||
Accounts payable, accrued expenses and other liabilities |
|
(328) |
|
|
(166) |
| ||
Current income taxes |
|
(110) |
|
|
105 |
| ||
Cash used to effectively exit run-off reinsurance business |
|
(1,475) |
|
|
- |
| ||
Other, net |
|
(15) |
|
|
(23) |
| ||
Net cash (used in) / provided by operating activities |
|
(805) |
|
|
941 |
| ||
Cash Flows from Investing Activities |
|
|
|
|
|
| ||
Proceeds from investments sold: |
|
|
|
|
|
| ||
Fixed maturities |
|
958 |
|
|
221 |
| ||
Equity securities |
|
3 |
|
|
- |
| ||
Commercial mortgage loans |
|
46 |
|
|
165 |
| ||
Other (primarily short-term and other long-term investments) |
|
221 |
|
|
300 |
| ||
Investment maturities and repayments: |
|
|
|
|
|
| ||
Fixed maturities |
|
386 |
|
|
317 |
| ||
Equity securities |
|
9 |
|
|
- |
| ||
Commercial mortgage loans |
|
9 |
|
|
36 |
| ||
Investments purchased: |
|
|
|
|
|
| ||
Fixed maturities |
|
(383) |
|
|
(831) |
| ||
Equity securities |
|
(27) |
|
|
- |
| ||
Commercial mortgage loans |
|
(15) |
|
|
(180) |
| ||
Other (primarily short-term and other long-term investments) |
|
(121) |
|
|
(167) |
| ||
Property and equipment purchases |
|
(84) |
|
|
(81) |
| ||
Acquisitions and dispositions, net of cash acquired |
|
(40) |
|
|
(3,199) |
| ||
Net cash provided by / (used in) investing activities |
|
962 |
|
|
(3,419) |
| ||
Cash Flows from Financing Activities |
|
|
|
|
|
| ||
Deposits and interest credited to contractholder deposit funds |
|
363 |
|
|
261 |
| ||
Withdrawals and benefit payments from contractholder deposit funds |
|
(332) |
|
|
(231) |
| ||
Change in cash overdraft position |
|
(3) |
|
|
22 |
| ||
Net change in short-term debt |
|
198 |
|
|
123 |
| ||
Repayment of long-term debt |
|
- |
|
|
(326) |
| ||
Repurchase of common stock |
|
(77) |
|
|
- |
| ||
Issuance of common stock |
|
36 |
|
|
45 |
| ||
Net cash provided by / (used in) financing activities |
|
185 |
|
|
(106) |
| ||
Effect of foreign currency rate changes on cash and cash equivalents |
|
(14) |
|
|
5 |
| ||
Net increase / (decrease) in cash and cash equivalents |
|
328 |
|
|
(2,579) |
| ||
Cash and cash equivalents, January 1, |
|
2,978 |
|
|
4,690 |
| ||
Cash and cash equivalents, March 31, |
|
$ |
3,306 |
|
|
$ |
2,111 |
|
Supplemental Disclosure of Cash Information: |
|
|
|
|
|
| ||
Income taxes paid, net of refunds |
|
$ |
12 |
|
|
$ |
22 |
|
Interest paid |
|
$ |
70 |
|
|
$ |
54 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CIGNA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 — Basis of Presentation
Cigna Corporation was incorporated in the State of Delaware in 1981. Various businesses that are described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (“2012 Form 10-K”) are conducted by its insurance and other subsidiaries. As used in this document, “Cigna”, the “Company”, “we” and “our” may refer to Cigna Corporation itself, one or more of its subsidiaries, or Cigna Corporation and its consolidated subsidiaries. The Consolidated Financial Statements include the accounts of Cigna Corporation and its significant 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”).
The Company is a global health services organization with a mission to help its customers improve their health, well-being and sense of security. Its insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations). Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets. In addition to its ongoing operations described above, the Company also has certain run-off operations, including a Run-off Reinsurance segment.
The 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 in the Company’s 2012 Form 10-K.
The preparation of interim consolidated financial statements necessarily relies heavily on estimates. This and certain other factors, such as 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. Certain reclassifications have been made to prior period amounts to conform to the current presentation. In particular, as a result of the changes in segment reporting discussed further in Note 16, benefits expense amounts previously reported in Other Benefits Expense for the international health care business have been reclassified to Global Health Care Medical Claims Expense in the Consolidated Statement of Income for the three months ended March 31, 2012.
Note 2 — Recent Accounting Pronouncements
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”) (Accounting Standards Update (“ASU”) 2013-02). Effective January 1, 2013, the Company adopted the Financial Accounting Standards Board’s (“FASB”) updated guidance on the reporting of items of AOCI reclassified to net income. The updated guidance requires disclosures of the effect of items reclassified out of AOCI into net income on each individual line item in the statement of income. See Note 14 for the Company’s updated disclosures.
Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The FASB’s new requirements to disclose information on both a gross and net basis for certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with specific criteria or subject to a master netting or similar arrangement became effective January 1, 2013. There were no effects to the Company’s financial statements because no transactions or arrangements were subject to these new disclosure requirements.
Fees Paid to the Federal Government by Health Insurers (ASU 2011-06). In 2011, the FASB issued accounting guidance for the health insurance industry assessment (the “fee”) mandated by the Patient Protection and Affordable Care Act of 2010 (“Health Care Reform”). The fee will be levied on health insurers beginning in 2014 based on a ratio of an insurer’s net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total. In addition, because these fees will generally not be tax deductible, the Company’s effective tax rate is expected to be adversely impacted in future periods. Under the guidance, the liability for the fee will be estimated and recorded in full each year beginning in 2014 when health insurance is first provided. A corresponding deferred cost will be recorded and amortized over the calendar year. The amount of the fees is expected to be material, although the Company is unable to estimate the impact of these fees on shareholders’ net income and the effective tax rate.
Note 3 — Acquisitions and Dispositions
The Company may from time to time acquire or dispose of assets, subsidiaries or lines of business. For further information on the effective exit from the guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) business, see Note 6. Other significant transactions are described below.
A. Joint Venture Agreement with Finansbank
On November 9, 2012, the Company acquired 51% of the total shares of Finans Emeklilik ve Hayat A.S. (“Finans Emeklilik”), a Turkish insurance company, from Finansbank A.S. (“Finansbank”), a Turkish retail bank, for a cash purchase price of approximately $116 million. Finansbank continues to hold 49% of the total shares. Finans Emeklilik operates in life insurance, accident insurance and pension product markets. The acquisition provides Cigna opportunities to reach and serve the growing middle class market in Turkey through Finansbank’s network of retail banking branches.
In accordance with GAAP, the total purchase price, including the redeemable noncontrolling interest of $111 million, has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair value. Accordingly, approximately $113 million was allocated to identifiable intangible assets, primarily a distribution relationship and the value of business acquired (“VOBA”) that represents the present value of the estimated net cash flows from the long duration contracts in force, with the remaining $116 million recorded as goodwill. The identifiable intangible assets will be amortized over an estimated useful life of approximately 10 years. Goodwill has been allocated to the Global Supplemental Benefits segment and is not deductible for federal income tax purposes.
The redeemable noncontrolling interest is classified as temporary equity in the Company’s Consolidated Balance Sheet because Finansbank has the right to require the Company to purchase its 49% interest for the value of its net assets and the inforce business in 15 years.
The condensed balance sheet at the acquisition date was as follows:
(In millions) |
|
|
| |
Investments |
|
$ |
23 |
|
Cash and cash equivalents |
|
54 |
| |
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet) |
|
26 |
| |
Goodwill |
|
116 |
| |
Separate account assets |
|
99 |
| |
Other assets, including other intangibles |
|
98 |
| |
Total assets acquired |
|
416 |
| |
Insurance liabilities |
|
58 |
| |
Accounts payable, accrued expenses and other liabilities |
|
32 |
| |
Separate account liabilities |
|
99 |
| |
Total liabilities acquired |
|
189 |
| |
Redeemable noncontrolling interest |
|
111 |
| |
Net assets acquired |
|
$ |
116 |
|
The results of Finans Emeklilik have been included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effects on total revenues and net income assuming the acquisition had occurred as of January 1, 2012 were not material to the Company for the three months ended March 31, 2012.
B. Acquisition of Great American Supplemental Benefits Group
On August 31, 2012, the Company acquired Great American Supplemental Benefits Group, one of the largest providers of supplemental health insurance products in the U.S. for $326 million, with cash from internal sources. The acquisition provides the Company with an increased presence in the Medicare supplemental benefits market. It also extends the Company’s global direct-to-consumer retail channel as well as further enhances its distribution network of agents and brokers. Subsequent to the segment reporting changes in 2012, results of this business are reported in the Global Supplemental Benefits segment.
In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair value. Approximately $168 million was allocated to intangible assets, primarily the VOBA asset that will be amortized in proportion to premium recognized over the life of the contracts that is estimated to be 30 years. Amortization will be higher in early years and decline as policies lapse. Goodwill has been allocated to the Global Supplemental Benefits segment. Substantially all of the goodwill is tax deductible and will be amortized over the next 15 years for federal income tax purposes.
The condensed balance sheet at the acquisition date was as follows:
(In millions) |
|
|
|
Investments |
$ |
211 |
|
Cash and cash equivalents |
|
36 |
|
Reinsurance recoverables |
|
448 |
|
Goodwill |
|
168 |
|
Value of business acquired (reported in Deferred policy acquisition costs in the Consolidated Balance Sheet) |
|
144 |
|
Other assets, including other intangibles |
|
35 |
|
Total assets acquired |
|
1,042 |
|
Insurance liabilities |
|
707 |
|
Accounts payable, accrued expenses and other liabilities |
|
9 |
|
Total liabilities acquired |
|
716 |
|
Net assets acquired |
$ |
326 |
|
The results of Great American Supplemental Benefits have been included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effects on total revenues and net income assuming the acquisition had occurred as of January 1, 2012 were not material to the Company for the three months ended March 31, 2012.
C. Acquisition of HealthSpring, Inc.
On January 31, 2012 the Company acquired the outstanding shares of HealthSpring, Inc. (“HealthSpring”) for $55 per share in cash and Cigna stock awards, representing a cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 15 states and the District of Columbia, as well as a large, national stand-alone Medicare prescription drug business. The acquisition of HealthSpring strengthens the Company’s ability to serve individuals across their life stages as well as deepens its presence in a number of geographic markets. The addition of HealthSpring brings industry leading physician partnership capabilities and creates the opportunity to deepen the Company’s existing client and customer relationships, as well as facilitates a broader deployment of its range of health and wellness capabilities and product offerings. The Company funded the acquisition with internal cash resources.
Purchase price allocation. In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair values. Goodwill is not deductible for federal income tax purposes and is allocated to the Government operating segment. The condensed balance sheet of HealthSpring at the acquisition date was as follows:
(In millions) |
|
|
| |
Investments |
|
$ |
612 |
|
Cash and cash equivalents |
|
492 |
| |
Premiums, accounts and notes receivable |
|
320 |
| |
Goodwill |
|
2,541 |
| |
Intangible assets |
|
795 |
| |
Other |
|
96 |
| |
Total assets acquired |
|
4,856 |
| |
Insurance liabilities |
|
505 |
| |
Deferred income taxes |
|
214 |
| |
Debt |
|
326 |
| |
Total liabilities acquired |
|
1,045 |
| |
Net assets acquired |
|
$ |
3,811 |
|
In accordance with debt covenants, HealthSpring’s debt obligation was paid immediately following the acquisition. This repayment is reported as a financing activity in the statement of cash flows for the three months ended March 31, 2012.
The results of HealthSpring have been included in the Company’s Consolidated Financial Statements from the date of the acquisition. Revenues of HealthSpring included in the Company’s results for the three months ended March 31, 2012 were approximately $1.0 billion.
Pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of HealthSpring had occurred as of January 1, 2011. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
|
|
Three Months Ended |
| |
(In millions, except per share amounts) |
|
March 31, 2012 |
| |
Total revenues |
|
$ |
7,277 |
|
Shareholders’ net income |
|
$ |
381 |
|
Earnings per share: |
|
|
| |
Basic |
|
$ |
1.33 |
|
Diluted |
|
$ |
1.32 |
|
Note 4 — Earnings Per Share (“EPS”)
Basic and diluted earnings per share were computed as follows:
|
|
|
|
Effect of |
|
|
| |||
(Dollars in millions, except per share amounts) |
|
Basic |
|
Dilution |
|
Diluted |
| |||
Three Months Ended March 31, |
|
|
|
|
|
|
| |||
2013 |
|
|
|
|
|
|
| |||
Shareholders’ net income |
|
$ |
57 |
|
|
|
$ |
57 |
| |
Shares (in thousands): |
|
|
|
|
|
|
| |||
Weighted average |
|
283,804 |
|
|
|
283,804 |
| |||
Common stock equivalents |
|
|
|
5,454 |
|
5,454 |
| |||
Total shares |
|
283,804 |
|
5,454 |
|
289,258 |
| |||
EPS |
|
$ |
0.20 |
|
$ |
- |
|
$ |
0.20 |
|
2012 |
|
|
|
|
|
|
| |||
Shareholders’ net income |
|
$ |
371 |
|
|
|
$ |
371 |
| |
Shares (in thousands): |
|
|
|
|
|
|
| |||
Weighted average |
|
285,159 |
|
|
|
285,159 |
| |||
Common stock equivalents |
|
|
|
3,840 |
|
3,840 |
| |||
Total shares |
|
285,159 |
|
3,840 |
|
288,999 |
| |||
EPS |
|
$ |
1.30 |
|
$ |
(0.02) |
|
$ |
1.28 |
|
The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect would have increased diluted earnings per share (antidilutive) as their exercise price was greater than the average share price of the Company’s common stock for the period.
|
|
Three Months Ended |
| |||
|
|
March 31, |
| |||
(In millions) |
|
2013 |
|
|
2012 |
|
Antidilutive options |
|
- |
|
|
3.8 |
|
The Company held 80,302,892 shares of common stock in Treasury as of March 31, 2013, and 77,847,260 shares as of March 31, 2012.
Note 5 — Global Health Care Medical Claims Payable
Medical claims payable for the Global Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not yet reported, those that have been reported but not yet paid (reported claims in process), and other medical expenses payable that is primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities. The liability for incurred but not yet reported claims is the majority of the reserve balance as follows:
|
|
March 31, |
|
December 31, |
| ||
(In millions) |
|
2013 |
|
2012 |
| ||
Incurred but not yet reported |
|
$ |
1,717 |
|
$ |
1,541 |
|
Reported claims in process |
|
190 |
|
243 |
| ||
Physician incentives and other medical expense payable |
|
93 |
|
72 |
| ||
Medical claims payable |
|
$ |
2,000 |
|
$ |
1,856 |
|
Activity in medical claims payable was as follows:
|
|
For the period ended |
| ||||
|
|
March 31, |
|
December 31, |
| ||
(In millions) |
|
2013 |
|
2012 |
| ||
Balance at January 1, |
|
$ |
1,856 |
|
$ |
1,305 |
|
Less: Reinsurance and other amounts recoverable |
|
242 |
|
249 |
| ||
Balance at January 1, net |
|
1,614 |
|
1,056 |
| ||
|
|
|
|
|
| ||
Acquired net: |
|
- |
|
504 |
| ||
Incurred claims related to: |
|
|
|
|
| ||
Current year |
|
4,164 |
|
14,428 |
| ||
Prior years |
|
(117) |
|
(200) |
| ||
Total incurred |
|
4,047 |
|
14,228 |
| ||
Paid claims related to: |
|
|
|
|
| ||
Current year |
|
2,694 |
|
12,854 |
| ||
Prior years |
|
1,162 |
|
1,320 |
| ||
Total paid |
|
3,856 |
|
14,174 |
| ||
Ending Balance, net |
|
1,805 |
|
1,614 |
| ||
Add: Reinsurance and other amounts recoverable |
|
195 |
|
242 |
| ||
Ending Balance |
|
$ |
2,000 |
|
$ |
1,856 |
|
Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for minimum premium products and certain administrative services only business where the right of offset does not exist. See Note 6 for additional information on reinsurance. For the three months ended March 31, 2013, actual experience differed from the Company’s key assumptions resulting in favorable incurred claims related to prior years’ medical claims payable of $117 million, or 0.8% of the current year incurred claims as reported for the year ended December 31, 2012. Actual completion factors accounted for $47 million, or 0.3% of the favorability while actual medical cost trend resulted in the remaining $70 million, or 0.5%.
For the year ended December 31, 2012, actual experience differed from the Company’s key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $200 million, or 2.2% of the current year incurred claims as reported for the year ended December 31, 2011. Actual completion factors accounted for $91 million, or 1.0% of favorability while actual medical cost trend resulted in the remaining $109 million, or 1.2%.
The impact of prior year development on shareholders’ net income was $48 million for the three months ended March 31, 2013 compared with $41 million for the three months ended March 31, 2012. The favorable effect of prior year development for both years primarily reflects low utilization of medical services, as well as the impact of the medical loss ratio (MLR) rebate accrual. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in the Company’s shareholders’ net income recognized for the following reasons:
First, the Company consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice that require the liabilities be adequate under moderately adverse conditions. As the Company establishes the liability for each incurral year, the Company ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase determined appropriate to address moderately adverse conditions for the current year incurred claims, the Company does not consider that offset amount as having any impact on shareholders’ net income.
Second, as a result of the MLR provisions of the Patient Protection and Affordable Care Act, changes in medical claim estimates due to prior year development may be offset by a change in the MLR rebate accrual.
Third, changes in reserves for the Company’s retrospectively experience-rated business do not always impact shareholders’ net income. For the Company’s retrospectively experience-rated business only adjustments to medical claims payable on accounts in deficit affect shareholders’ net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrues to the Company and directly impacts shareholders’ net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus generally accrue directly to the policyholder with no impact on the Company’s shareholders’ net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.
The determination of liabilities for Global Health Care medical claims payable requires the Company to make critical accounting estimates. See Note 2(N) to the Consolidated Financial Statements in the Company’s 2012 Form 10-K.
Note 6 — Reinsurance
The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance does not relieve the originating insurer of liability. The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.
Effective Exit of GMDB and GMIB Business
On February 4, 2013, the Company entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska (Berkshire) to effectively exit the GMDB and GMIB business via a reinsurance transaction. Berkshire reinsured 100% of the Company’s future claim payments, net of retrocessional arrangements in place prior to February 4, 2013. The reinsurance agreement is subject to an overall limit of approximately $3.8 billion plus future premiums collected under the contracts being reinsured that will be paid to Berkshire. The Company estimates that these future premium amounts will be from $0.1 to $0.3 billion and, accordingly, expects future claims of approximately $4 billion to be covered by the agreement.
This transaction resulted in an after-tax charge to shareholders’ net income in the first quarter of 2013 of $507 million ($781 million pre-tax reported as follows: $727 million in other benefits expense; $45 million in GMIB fair value (gain) loss; and $9 million in other operating expenses). The reinsurance premium due to Berkshire under the agreement was $2.2 billion, of which $1.5 billion was paid through March 31, 2013. The unpaid premium of $0.7 billion as of March 31, 2013 is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheet and was paid on April 18, 2013. The reinsurance premium was funded from the sale of investment assets, tax benefits related to the transaction and available parent cash.
Recoverables for GMDB and GMIB Business
The Company had reinsurance recoverables related to the GMDB business of approximately $1.4 billion and GMIB assets of $1.1 billion as of March 31, 2013. Approximately 80% of the combined GMDB recoverables and GMIB assets of $2.5 billion are secured by assets in trust, letters of credit, or funds withheld or are not subject to collection risk. Approximately $1.8 billion of the combined GMDB recoverables and GMIB assets relate to the February 4, 2013 reinsurance arrangement with Berkshire, including $0.7 billion for the cost of reinsurance (excess of premium over recorded reserves).
The following disclosures for the reinsured GMDB and GMIB business provide further context to prior year results as well as activity in the assets and liabilities including the impacts of the reinsurance transaction.
GMDB
The Company has historically estimated its liabilities for assumed and ceded GMDB exposures with an internal model using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company’s experience and future expectations over an extended period, consistent with the long-term nature of this product.
In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. The Company tests for premium deficiency by reviewing its reserve each quarter using current market conditions and its long-term assumptions. Under
premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. The premium attributable to GMDB from the reinsurance transaction with Berkshire was approximately $1.6 billion. Because this premium exceeded the recorded reserve on February 4, 2013, the Company recorded a reserve strengthening of $0.7 billion ($0.5 billion after-tax) in the first quarter of 2013. Subsequent to the reinsurance transaction on February 4, 2013, any such reserve increase will have a corresponding increase in the recorded reinsurance recoverable, provided that the increased recoverable remains within the overall limit (including the GMIB asset).
The Company’s dynamic hedge programs were discontinued during the first quarter of 2013 due to the reinsurance agreement with Berkshire. These programs were used to reduce certain equity and interest rate exposures associated with this business. These hedge programs generated losses of $32 million for the three months ended March 31, 2013 and $87 million for the three months ended March 31, 2012 that were included in Other Revenues. Prior to the hedge programs being discontinued, amounts representing corresponding reductions in liabilities for GMDB contracts were included in benefits and expenses. As a result of discontinuing the hedge programs, the growth rate assumption for the underlying equity funds was changed to use long-term historical averages, resulting in a decrease in the gross reserve liability and the offsetting reinsurance recoverable.
For the full year ended December 31, 2012, a reserve strengthening of $43 million ($27 million after-tax) was due primarily to reductions to the lapse rate assumptions, adverse interest rate impacts, and, to a lesser extent, an increase in the volatility and correlation assumptions, partially offset by favorable equity market conditions. The adverse interest rate impacts reflect management’s consideration of the anticipated impact of continued low short-term interest rates.
Activity in future policy benefit reserves for the GMDB business was as follows:
|
|
For the period ended |
| ||||
|
|
March 31, |
|
December 31, |
| ||
(In millions) |
|
2013 |
|
2012 |
| ||
Balance at January 1 |
|
$ |
1,090 |
|
$ |
1,170 |
|
Add: Unpaid claims |
|
24 |
|
40 |
| ||
Less: Reinsurance and other amounts recoverable |
|
42 |
|
53 |
| ||
Balance at January 1, net |
|
1,072 |
|
1,157 |
| ||
Add: Incurred benefits |
|
702 |
|
17 |
| ||
Less: Paid benefits (including $1,647 premium for Berkshire) |
|
1,672 |
|
102 |
| ||
Ending balance, net |
|
102 |
|
1,072 |
| ||
Less: Unpaid claims |
|
23 |
|
24 |
| ||
Add: Reinsurance and other amounts recoverable |
|
1,371 |
|
42 |
| ||
Ending balance |
|
$ |
1,450 |
|
$ |
1,090 |
|
Benefits paid and incurred are net of ceded amounts. For the three months ended March 31, 2013, incurred benefits reflect the February 4, 2013 reinsurance transaction. The remaining retained reserve in 2013 is to cover claims retained by the Company, as well as ongoing administrative expenses. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include the charges discussed above.
The death benefit coverage in force for GMDB contracts assumed by the Company (and reinsured as of February 4, 2013) was $3.6 billion as of March 31, 2013 and $4 billion as of December 31, 2012. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 425,000 as of March 31, 2013 and 435,000 as of December 31, 2012). The aggregate value of the underlying mutual fund investments for these GMDB contracts, assuming no reinsurance, was $13.7 billion as of March 31, 2013 and $13.3 billion as of December 31, 2012.
GMIB
As discussed further in Note 8, because GMIB contracts are without significant life insurance risk, they are not accounted for as insurance products. Instead, the Company reports GMIB liabilities and assets as derivatives at fair value. The GMIB asset is classified in Other assets, including other intangibles and the GMIB liability is classified in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheet. Disclosures related to fair value are included in Note 8 and the derivative is further described under Note 10.
The February 4, 2013 transaction with Berkshire described above resulted in an increase in GMIB assets, representing the increased
receivable from that transaction. As of March 31, 2013, GMIB assets include $0.5 billion from Berkshire.
In addition, the GMIB business had GMIB assets of $0.6 billion (classified in Other assets, including other intangibles in the Consolidated Balance Sheet) from two other retrocessionaires as of March 31, 2013.
Other Run-off
The Company’s Run-off Reinsurance operations also assumed risks related to workers’ compensation and personal accident business, and purchased retrocessional coverage to reduce the risk of loss on these contracts. The reinsurance recoverables were $125 million as of March 31, 2013. Of this amount, approximately 99% are secured by assets in a trust or letters of credit.
Other Reinsurance
Supplemental benefits business. The Company had reinsurance recoverables of approximately $394 million as of March 31, 2013 and $402 million as of December 31, 2012 from Great American Life Insurance Company resulting from the acquisition of Great American’s Supplemental Benefits business on August 31, 2012. The life insurance and annuity lines of business written by the acquired legal entities were fully reinsured by the seller as part of the transaction. The resulting reinsurance recoverables are secured primarily by fixed maturities with book value equal to or greater than 100% of the reinsured policy liabilities. These fixed maturities are held in a trust established for the benefit of the Company.
Retirement benefits business. The Company had reinsurance recoverables of $1.3 billion as of March 31, 2013 and December 31, 2012 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, that was primarily in the form of a reinsurance arrangement. The reinsurance recoverable, that is reduced as the Company’s reinsured liabilities are paid or directly assumed by the reinsurer, is secured primarily by fixed maturities whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities are held in a trust established for the benefit of the Company. As of March 31, 2013, the book value of the trust assets exceeded the recoverable.
Individual life and annuity reinsurance. The Company had reinsurance recoverables of $4 billion as of March 31, 2013 and December 31, 2012 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company’s individual life insurance and annuity business through indemnity reinsurance arrangements. The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York must maintain a specified minimum credit or claims paying rating, or they will be required to fully secure the outstanding balance. As of March 31, 2013, both companies had ratings sufficient to avoid triggering this contractual obligation.
Ceded Reinsurance: Ongoing operations. The Company’s insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Global Health Care, Global Supplemental Benefits and Group Disability and Life segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $346 million as of March 31, 2013 are expected to be collected from more than 80 reinsurers.
The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of March 31, 2013, the Company’s recoverables related to these segments were net of a reserve of $3 million.
Summary. The Company’s reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers and retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of March 31, 2013, based on current information. 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.
Effects of reinsurance. In the Company’s Consolidated Statements of Income, Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
(In millions) |
|
2013 |
|
2012 |
| ||
Ceded premiums and fees |
|
|
|
|
| ||
Individual life insurance and annuity business sold |
|
$ |
46 |
|
$ |
51 |
|
Other |
|
79 |
|
66 |
| ||
Total |
|
$ |
125 |
|
$ |
117 |
|
Reinsurance recoveries |
|
|
|
|
| ||
Individual life insurance and annuity business sold |
|
$ |
88 |
|
$ |
68 |
|
Other |
|
(262) |
|
54 |
| ||
Total |
|
$ |
(174) |
|
$ |
122 |
|
As noted in the GMDB section above, recoveries for the three months ended March 31, 2013 are net of the impact of a decrease in reinsurance recoverables due to a change in the growth rate assumption, resulting from the discontinuance of the hedge programs following the reinsurance transaction with Berkshire.
Note 7 — Realignment and Efficiency Plan
During the third quarter of 2012, in connection with the execution of its strategy, the Company committed to a series of actions to further improve its organizational alignment, operational effectiveness, and efficiency. As a result, the Company recognized charges in other operating expenses of $77 million pre-tax ($50 million after-tax) in the third quarter of 2012 consisting primarily of severance costs. Summarized below is activity in the liability for the three months ended March 31, 2013:
(In millions) |
|
Severance |
|
Real estate |
|
Total |
| |||
Balance, January 1, 2013 |
|
$ |
67 |
|
$ |
4 |
|
$ |
71 |
|
Less: Payments |
|
8 |
|
1 |
|
9 |
| |||
Balance, March 31, 2013 |
|
$ |
59 |
|
$ |
3 |
|
$ |
62 |
|
The severance costs are expected to be substantially paid in 2013.
Note 8 — Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements including fixed maturities, equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value under certain conditions, such as when impaired.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
The Company’s financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The Company estimates fair values using prices from third parties or internal pricing methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available, and other market information that a market participant may use to estimate fair value. The internal pricing methods are performed by the Company’s investment professionals, and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality, as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.
The Company is responsible for determining fair value, as well as the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls completed by the Company and third-party pricing services include reviewing to ensure that prices do not become stale and whether changes from prior valuations are reasonable or require additional review. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. Exceptions identified during these processes indicate that adjustments to prices are infrequent and do not significantly impact valuations.
Financial Assets and Financial Liabilities Carried at Fair Value
The following tables provide information as of March 31, 2013 and December 31, 2012 about the Company’s financial assets and liabilities carried at fair value. Similar disclosures for separate account assets, which are also recorded at fair value on the Company’s Consolidated Balance Sheets, are provided separately as gains and losses related to these assets generally accrue directly to policyholders.
March 31, 2013 |
|
Quoted Prices in |
|
Significant Other |