Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

for the transition period from            to           

 

Commission file number 1-08323

 

Cigna Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1059331

(State or other jurisdiction of incorporation or organization)

 

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

900 Cottage Grove Road Bloomfield, Connecticut

 

06002

(Address of principal executive offices)

 

(Zip Code)

(860) 226-6000

Registrant’s telephone number, including area code

(860) 226-6741

Registrant’s facsimile number, including area code

Not Applicable

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

 

Indicate by check mark

 

YES

 

NO

 

·  whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

R

 

o

 

· whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

R

 

o

 

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

 

Large accelerated filer R

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company o

Emerging growth company  o

 

 

·  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

 

o

 

 

R

 

As of July 21, 2017, 251,778,121 shares of the issuer’s common stock were outstanding.

 



Table of Contents

 

Cigna Corporation

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Statements of Income

1

 

Consolidated Statements of Comprehensive Income

2

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Changes in Total Equity

4

 

Consolidated Statements of Cash Flows

6

 

Notes to the Consolidated Financial Statements

7

Item 2.

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

48

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

Item 4.

Controls and Procedures

68

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

69

Item 1.

A. Risk Factors

70

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 4.

Mine Safety Disclosures

71

Item 6.

Exhibits

72

SIGNATURE

73

INDEX TO EXHIBITS

E-1

 

 

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

 



Table of Contents

 

 

 

 

 

Part I.   FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.   FINANCIAL STATEMENTS

 

 

Cigna Corporation

Consolidated Statements of Income

 

 

 

Unaudited

Three Months Ended

June 30,

 

Unaudited

Six Months Ended

June 30,

 

(In millions, except per share amounts)

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,010

 

$

7,654

 

$

16,113

 

$

15,400

 

Fees and other revenues

 

1,192

 

1,197

 

2,415

 

2,398

 

Net investment income

 

308

 

294

 

611

 

566

 

Mail order pharmacy revenues

 

757

 

748

 

1,467

 

1,445

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments on fixed maturities

 

(2)

 

(3)

 

(9)

 

(30)

 

Other realized investment gains, net

 

53

 

70

 

106

 

65

 

Net realized investment gains

 

51

 

67

 

97

 

35

 

TOTAL REVENUES

 

10,318

 

9,960

 

20,703

 

19,844

 

Benefits and Expenses:

 

 

 

 

 

 

 

 

 

Global Health Care medical costs

 

4,924

 

4,777

 

9,909

 

9,538

 

Other benefit expenses

 

1,335

 

1,414

 

2,702

 

2,782

 

Mail order pharmacy costs

 

626

 

630

 

1,207

 

1,204

 

Other operating expenses

 

2,271

 

2,289

 

4,801

 

4,610

 

Amortization of other acquired intangible assets, net

 

28

 

37

 

60

 

78

 

TOTAL BENEFITS AND EXPENSES

 

9,184

 

9,147

 

18,679

 

18,212

 

Income before Income Taxes

 

1,134

 

813

 

2,024

 

1,632

 

Income taxes (benefits):

 

 

 

 

 

 

 

 

 

Current

 

304

 

338

 

590

 

632

 

Deferred

 

20

 

(28)

 

31

 

(17)

 

TOTAL INCOME TAXES

 

324

 

310

 

621

 

615

 

Net Income

 

810

 

503

 

1,403

 

1,017

 

Less: Net (Loss) Attributable to Noncontrolling Interests

 

(3)

 

(7)

 

(8)

 

(12)

 

SHAREHOLDERS’ NET INCOME

 

$

813

 

$

510

 

$

1,411

 

$

1,029

 

Shareholders’ Net Income Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.20

 

$

2.00

 

$

5.54

 

$

4.03

 

Diluted

 

$

3.15

 

$

1.97

 

$

5.45

 

$

3.97

 

Dividends Declared Per Share

 

$

-

 

$

-

 

$

0.04

 

$

0.04

 

 

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

 

1



Table of Contents

 

Cigna Corporation

Consolidated Statements of Comprehensive Income

 

 

 

Unaudited

Three Months Ended

June 30,

 

Unaudited

Six Months Ended

June 30,

 

(In millions)

 

2017

 

2016

 

2017

 

2016

 

Shareholders’ net income

 

$

813

 

$

510

 

$

1,411

 

$

1,029

 

Shareholders’ other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized appreciation, securities

 

67

 

177

 

74

 

350

 

Net unrealized (depreciation), derivatives

 

-

 

(1)

 

(3)

 

(4)

 

Net translation of foreign currencies

 

27

 

(40)

 

139

 

41

 

Postretirement benefits liability adjustment

 

12

 

8

 

26

 

19

 

Shareholders’ other comprehensive income, net of tax

 

106

 

144

 

236

 

406

 

Shareholders’ comprehensive income

 

919

 

654

 

1,647

 

1,435

 

Comprehensive income (loss) attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net (loss) attributable to redeemable noncontrolling interests

 

(1)

 

(2)

 

(3)

 

(3)

 

Net (loss) attributable to other noncontrolling interests

 

(2)

 

(5)

 

(5)

 

(9)

 

Other comprehensive income (loss) attributable to redeemable noncontrolling interests

 

2

 

(1)

 

-

 

2

 

Total comprehensive (loss) attributable to noncontrolling interests

 

(1)

 

(8)

 

(8)

 

(10)

 

TOTAL COMPREHENSIVE INCOME

 

$

918

 

$

646

 

$

1,639

 

$

1,425

 

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

 

2



Table of Contents

 

Cigna Corporation

Consolidated Balance Sheets

 

 

 

Unaudited

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

(In millions, except per share amounts)

 

2017

 

2016

 

Assets:

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $21,222; $19,942)

 

$

22,513

 

$

20,961

 

Equity securities, at fair value (cost, $636; $583)

 

635

 

583

 

Commercial mortgage loans

 

1,741

 

1,666

 

Policy loans

 

1,442

 

1,452

 

Other long-term investments

 

1,463

 

1,462

 

Short-term investments

 

138

 

691

 

Total investments

 

27,932

 

26,815

 

Cash and cash equivalents

 

3,611

 

3,185

 

Premiums, accounts and notes receivable, net

 

3,419

 

3,077

 

Reinsurance recoverables

 

6,302

 

6,478

 

Deferred policy acquisition costs

 

2,011

 

1,818

 

Property and equipment

 

1,509

 

1,536

 

Deferred tax assets, net

 

199

 

304

 

Goodwill

 

6,000

 

5,980

 

Other assets, including other intangibles

 

2,287

 

2,227

 

Separate account assets

 

8,468

 

7,940

 

TOTAL ASSETS

 

$

61,738

 

$

59,360

 

Liabilities:

 

 

 

 

 

Contractholder deposit funds

 

$

8,350

 

$

8,458

 

Future policy benefits

 

9,883

 

9,648

 

Unpaid claims and claim expenses

 

5,039

 

4,917

 

Global Health Care medical costs payable

 

2,848

 

2,532

 

Unearned premiums

 

1,181

 

634

 

Total insurance and contractholder liabilities

 

27,301

 

26,189

 

Accounts payable, accrued expenses and other liabilities

 

6,601

 

6,414

 

Short-term debt

 

141

 

276

 

Long-term debt

 

4,622

 

4,756

 

Separate account liabilities

 

8,468

 

7,940

 

TOTAL LIABILITIES

 

47,133

 

45,575

 

Contingencies — Note 16

 

 

 

 

 

Redeemable noncontrolling interests

 

58

 

58

 

Shareholders’ Equity:

 

 

 

 

 

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

 

74

 

74

 

Additional paid-in capital

 

2,922

 

2,892

 

Accumulated other comprehensive (loss)

 

(1,146)

 

(1,382)

 

Retained earnings

 

15,102

 

13,855

 

Less treasury stock, at cost

 

(2,406)

 

(1,716)

 

TOTAL SHAREHOLDERS’ EQUITY

 

14,546

 

13,723

 

Other noncontrolling interests

 

1

 

4

 

Total equity

 

14,547

 

13,727

 

Total liabilities and equity

 

$

61,738

 

$

59,360

 

SHAREHOLDERS’ EQUITY PER SHARE

 

$

57.53

 

$

53.42

 

 

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

 

3



Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

Unaudited

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Other Non-

 

 

 

Non-

 

For the three months ended June 30, 2017

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

(Loss)

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

$

74

 

$

2,912

 

$

(1,252)

 

$

14,356

 

$

(1,864)

 

$

14,226

 

$

3

 

$

14,229

 

$

56

 

Effect of issuing stock for employee benefit plans

 

 

 

10

 

 

 

(67)

 

150

 

93

 

 

 

93

 

 

 

Other comprehensive income

 

 

 

 

 

106

 

 

 

 

 

106

 

 

 

106

 

2

 

Net income (loss)

 

 

 

 

 

 

 

813

 

 

 

813

 

(2)

 

811

 

(1)

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(692)

 

(692)

 

 

 

(692)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

-

 

1

 

BALANCE AT JUNE 30, 2017

 

$

74

 

$

2,922

 

$

(1,146)

 

$

15,102

 

$

(2,406)

 

$

14,546

 

$

1

 

$

14,547

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2016

 

$

74

 

$

2,874

 

$

(988)

 

$

12,541

 

$

(1,826)

 

$

12,675

 

$

9

 

$

12,684

 

$

73

 

Effect of issuing stock for employee benefit plans

 

 

 

10

 

 

 

(5)

 

27

 

32

 

 

 

32

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

144

 

 

 

 

 

144

 

 

 

144

 

(1)

 

Net income (loss)

 

 

 

 

 

 

 

510

 

 

 

510

 

(5)

 

505

 

(2)

 

Other transactions impacting noncontrolling interests

 

 

 

(5)

 

 

 

 

 

 

 

(5)

 

4

 

(1)

 

1

 

BALANCE AT JUNE 30, 2016

 

$

74

 

$

2,879

 

$

(844)

 

$

13,046

 

$

(1,799)

 

$

13,356

 

$

8

 

$

13,364

 

$

71

 

 

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

 

4



Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

Unaudited

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Other non-

 

 

 

Non-

 

For the six months ended June 30, 2017

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

(Loss)

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

Balance at January 1, 2017

 

$

74

 

$

2,892

 

$

(1,382)

 

$

13,855

 

$

(1,716)

 

$

13,723

 

$

4

 

$

13,727

 

$

58

 

Effect of issuing stock for employee benefit plans

 

 

 

33

 

 

 

(154)

 

252

 

131

 

 

 

131

 

 

 

Other comprehensive income

 

 

 

 

 

236

 

 

 

 

 

236

 

 

 

236

 

-

 

Net income (loss)

 

 

 

 

 

 

 

1,411

 

 

 

1,411

 

(5)

 

1,406

 

(3)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(942)

 

(942)

 

 

 

(942)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(3

)

 

 

 

 

 

 

(3)

 

2

 

(1)

 

3

 

BALANCE AT JUNE 30, 2017

 

$

74

 

$

2,922

 

$

(1,146)

 

$

15,102

 

$

(2,406)

 

$

14,546

 

$

1

 

$

14,547

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

74

 

$

2,859

 

$

(1,250)

 

$

12,121

 

$

(1,769)

 

$

12,035

 

$

9

 

$

12,044

 

$

69

 

Effect of issuing stock for employee benefit plans

 

 

 

31

 

 

 

(94)

 

80

 

17

 

 

 

17

 

 

 

Other comprehensive income

 

 

 

 

 

406

 

 

 

 

 

406

 

 

 

406

 

2

 

Net income (loss)

 

 

 

 

 

 

 

1,029

 

 

 

1,029

 

(9)

 

1,020

 

(3)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(110)

 

(110)

 

 

 

(110)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(11)

 

 

 

 

 

 

 

(11)

 

8

 

(3)

 

3

 

BALANCE AT JUNE 30, 2016

 

$

74

 

$

2,879

 

$

(844)

 

$

13,046

 

$

(1,799)

 

$

13,356

 

$

8

 

$

13,364

 

$

71

 

 

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

 

5



Table of Contents

 

Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

 

Unaudited

 

 

 

Six Months Ended June 30,

 

(In millions)

 

2017

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,403

 

$

1,017

 

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

 

 

 

 

 

Depreciation and amortization

 

286

 

310

 

Realized investment (gains)

 

(97)

 

(35)

 

Deferred income taxes (benefits)

 

31

 

(17)

 

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

 

 

 

 

 

Premiums, accounts and notes receivable

 

(222)

 

(520)

 

Reinsurance recoverables

 

64

 

(4)

 

Deferred policy acquisition costs

 

(137)

 

(123)

 

Other assets

 

(71)

 

(83)

 

Insurance liabilities

 

973

 

607

 

Accounts payable, accrued expenses and other liabilities

 

(159)

 

(58)

 

Current income taxes

 

83

 

54

 

Distributions from partnership investments (1)

 

74

 

71

 

Other, net

 

48

 

48

 

NET CASH PROVIDED BY OPERATING ACTIVITIES (1)

 

2,276

 

1,267

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

Fixed maturities and equity securities

 

930

 

712

 

Investment maturities and repayments:

 

 

 

 

 

Fixed maturities and equity securities

 

945

 

738

 

Commercial mortgage loans

 

118

 

69

 

Other sales, maturities and repayments (primarily short-term and other long-term investments) (1)

 

1,059

 

285

 

Investments purchased or originated:

 

 

 

 

 

Fixed maturities and equity securities

 

(2,938)

 

(1,701)

 

Commercial mortgage loans

 

(194)

 

(16)

 

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

 

(444)

 

(401)

 

Property and equipment purchases

 

(194)

 

(254)

 

Acquisitions, net of cash acquired

 

(14)

 

(4)

 

NET CASH (USED IN) INVESTING ACTIVITIES (1)

 

(732)

 

(572)

 

Cash Flows from Financing Activities

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

686

 

779

 

Withdrawals and benefit payments from contractholder deposit funds

 

(733)

 

(703)

 

Net change in short-term debt

 

(14)

 

(111)

 

Repayment of long-term debt

 

(250)

 

-

 

Repurchase of common stock

 

(895)

 

(139)

 

Issuance of common stock

 

76

 

14

 

Other, net

 

(13)

 

(63)

 

NET CASH (USED IN) FINANCING ACTIVITIES

 

(1,143)

 

(223)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

25

 

14

 

Net increase in cash and cash equivalents

 

426

 

486

 

Cash and cash equivalents, January 1,

 

3,185

 

1,968

 

Cash and cash equivalents, June 30,

 

$

3,611

 

$

2,454

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

Income taxes paid, net of refunds

 

$

504

 

$

579

 

Interest paid

 

$

123

 

$

122

 

(1) As required in adopting Accounting Standard Update (“ASU”) 2016-15, the Company retrospectively reclassified $71 million of cash distributions from partnership earnings from investing to operating activities for the six months ended June 30, 2016.  The comparable amount reported in operating activities in 2017 was $74 million.  See Note 2 for further discussion.

 

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

 

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Table of Contents

 

CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TABLE OF CONTENTS

 

Note
Number

Footnote

Page

 

 

 

BUSINESS AND CAPITAL STRUCTURE

 

1

Description of Business

8

2

Significant Accounting Policies

9

3

Mergers and Acquisitions

11

4

Earnings Per Share

11

5

Debt

12

INSURANCE INFORMATION

 

6

Global Health Care Medical Costs Payable

13

7

Liabilities for Unpaid Claims and Claim Expenses

14

8

Reinsurance

16

INVESTMENTS

 

9

Fair Value Measurements

19

10

Investments

30

11

Derivative Financial Instruments

34

12

Variable Interest Entities

36

13

Accumulated Other Comprehensive Income (Loss)

37

WORKFORCE MANAGEMENT AND COMPENSATION

 

14

Pension and Other Postretirement Benefit Plans

39

COMPLIANCE, REGULATION AND CONTINGENCIES

 

15

Income Taxes

39

16

Contingencies and Other Matters

40

RESULTS DETAILS

 

17

Segment Information

45

 

7



Table of Contents

 

Note 1 – Description of Business

 

 

Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as “Cigna,” the “Company,” “we,” “our” or “us”)  is a global health services organization dedicated to a mission of helping individuals improve their health, well-being and sense of security.  To execute on our mission, Cigna’s newly evolved strategy is to “Go Deeper”, “Go Local” and “Go Beyond” with a differentiated set of medical, dental, disability, life and accident insurance and related products and services offered by our insurance and other subsidiaries.  The majority of these products are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations).  Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the U.S. and selected international markets.  In addition to its ongoing operations described above, Cigna also has certain run-off operations.

 

The financial results of the Company’s businesses are reported in the following segments:

 

Global Health Care aggregates the Commercial and Government operating segments due to their similar economic characteristics, products and services and regulatory environment:

 

·

The Commercial operating segment (“Commercial segment”) encompasses both the U.S. commercial and certain international health care businesses serving employers and their employees, other groups and individuals. Products and services include medical, dental, behavioral health, vision, and prescription drug benefit plans, health advocacy programs and other products and services to insured and self-insured customers.

 

 

·

The Government operating segment (“Government segment”) offers Medicare Advantage and Medicare Part D plans to seniors. This segment also offers Medicaid plans in selected markets.

 

 

Global Supplemental Benefits includes supplemental health, life and accident insurance products offered in selected international markets and in the U.S.

 

Group Disability and Life provides group long-term and short-term disability, group life, accident and specialty insurance products and related services.

 

Other Operations consist of:

 

·         corporate-owned life insurance (“COLI”);

 

 

·

run-off reinsurance business that is predominantly comprised of guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) in 2013;

 

 

 

 

 

·

deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and

 

 

·

run-off settlement annuity business.

 

Corporate reflects amounts not allocated to operating segments, such as net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment operations), interest on uncertain tax positions, certain litigation matters, intersegment eliminations, compensation cost for stock options and related excess tax benefits, expense associated with frozen pension plans and certain costs for corporate projects, including overhead.

 

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Table of Contents

 

Note 2 – Significant Accounting Policies

 

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of Cigna Corporation and its subsidiaries.  Intercompany transactions and accounts have been eliminated in consolidation.  These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  Amounts recorded in the Consolidated Financial Statements necessarily reflect management’s estimates and assumptions about medical costs, investment valuation, interest rates and other factors.  Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates.  The impact of a change in estimate is generally included in earnings in the period of adjustment.  Certain reclassifications may be made to prior year amounts to conform to the current presentation.

 

These interim Consolidated Financial Statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported.  The interim Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s 2016 Annual Report on Form 10-K (“2016 Form 10-K”).  The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates.  This and certain other factors, including the seasonal nature of portions of the health care and related benefits business, as well as competitive and other market conditions, call for caution in estimating full-year results based on interim results of operations.

 

Recent Accounting Pronouncements

 

The Company’s 2016 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.

 

The following tables provide information about recently adopted and recently issued or changed accounting guidance (applicable to Cigna) that have occurred since the Company filed its 2016 Form 10-K.

 

Recently Adopted Accounting Guidance

 

 

Accounting Standard and
Adoption Date

 

 

Requirements and Effects of Adopting New Guidance

 

Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (Accounting Standards Update (“ASU”)  2016-15)

 

 

 

Specifies how certain transactions should be classified in the statement of cash flows.  While the standard addresses multiple types of transactions, only a change in the treatment of distributions from equity method investments impacted the Company.

 

 

 

 

Early adopted as of December 31, 2016

 

Effects of adoption:  using the nature of distribution approach, the Company reported $74 million of cash receipts related to distributions from partnership earnings in operating activities for the six months ended June 30, 2017.  The Company reclassified $71 million of cash receipts for the six months ended June 30, 2016 from investing to operating activities in the Consolidated Statements of Cash Flows.

 

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Table of Contents

 

Recently Issued Accounting Guidance Not Yet Adopted

 

 

Accounting Standard and
Effective Date Applicable
for Cigna

 

 

Requirements and Expected Effects of New Guidance Not Yet Adopted

 

 

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)

 

 

Required as of January 1, 2018

 

 

Requires employers to separate the service cost component from the other components of net benefit cost.  Under the new guidance, only service cost is eligible for capitalization (as either deferred policy acquisition costs or capitalized software).  This change in the capitalization rule is to be applied prospectively upon adoption.  In addition, income statement captions used for each component of net benefit cost must be disclosed.

 

Expected effects: the Company expects the effect of this new guidance to be immaterial to its results of operations.

 

 

 

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

 

 

 

 

Required as of January 1, 2018

 

 

 

Requires:

 

· Entities to measure equity investments at fair value in net income if they are neither consolidated nor accounted for under the equity method

· Cumulative effect adjustment to the beginning balance of retained earnings at adoption

 

 

Expected effects:

 

· Certain limited partnership interests carried at cost of $230 million as of June 30, 2017 will be reported at fair value at adoption

· An increase to retained earnings of approximately $50 million, after-tax, if implemented as of June 30, 2017.  Actual cumulative effect adjustment will depend on investments held and market conditions at adoption.

 

 

 

 

 

 

 

 

 

 

Revenue from Contracts with Customers (ASU 2014-09 and related amendments)

 

Required as of January 1, 2018

 

Requires:

 

· Companies to estimate and allocate the expected customer contract revenues among distinct goods or services based on relative standalone selling prices

· Revenues to be recognized as goods or services are delivered

· New disclosures including the presentation of relevant categories of revenues and information about related contract assets and liabilities

· Adoption through retrospective restatement with or without using certain practical expedients or adoption with a cumulative effect adjustment

 

Expected effects:

 

· Applies to the Company’s non-insurance, administrative service and mail order pharmacy contracts but does not apply to certain contracts within the scope of other GAAP, such as the Company's insurance and investment contracts accounted for under ASC 944

· The Company expects to adopt the new guidance through retrospective restatement

· The Company does not expect the adoption of the new guidance to have a material impact to its pattern of revenue recognition or net income.  Adoption of this new guidance could result in reclassifications within the Consolidated Statements of Income.

· The Company is continuing to evaluate the new requirements.  Specifically, the Company is evaluating the combination of contract guidance for certain customers when the Company provides both insurance and non-insurance products, the deferral of revenue for services provided after the termination of certain administrative contracts and the Company’s status as principal or agent for certain performance obligations.

 

 

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Table of Contents

 

Note 3 Mergers and Acquisitions

 

 

Termination of Proposed Merger with Anthem, Inc. (“Anthem”)

 

On May 12, 2017, Cigna announced that the merger agreement between the Company and Anthem had been terminated.  See Note 16 for discussion of ongoing litigation related to the termination of the merger agreement.

 

The following table presents merger-related costs incurred by the Company for the three months and six months ended June 30, 2017 and 2016.  Merger-related costs primarily consist of fees for legal, advisory and other professional services.  In addition, because the merger was not consummated, certain merger-related costs that were previously not deductible for federal income tax purposes became deductible.  The Company recognized an incremental tax benefit for these newly deductible costs in the second quarter of 2017 as presented below.

 

 

 

Three Months Ended

 

 

 

June 30, 2017

 

June 30, 2016

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Merger-related transaction costs

 

$

16

 

$

12

 

$

34

 

$

26

 

Tax (benefit) - previously non-deductible costs

 

-

 

(59)

 

-

 

-

 

Merger-related transaction costs (benefits), net

 

$

16

 

$

(47)

 

$

34

 

$

26

 

 

 

 

Six Months Ended

 

 

 

June 30, 2017

 

June 30, 2016

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Merger-related transaction costs

 

$

79

 

$

61

 

$

74

 

$

62

 

Tax (benefit) - previously non-deductible costs

 

-

 

(59)

 

-

 

-

 

Merger-related transaction costs, net

 

$

79

 

$

2

 

$

74

 

$

62

 

 

Acquisitions

 

The Company completed certain acquisitions during 2017, the results of which were not material to its results of operations, liquidity or financial condition.

 

Note 4 Earnings Per Share

 

 

Basic and diluted earnings per share (“EPS”) were computed as follows:

 

 

 

Three Months Ended

 

 

 

June 30, 2017

 

June 30, 2016

 

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

 

Basic

 

Effect of
Dilution

 

Diluted

 

Basic

 

Effect of
Dilution

 

Diluted

 

Shareholders’ net income

 

$

813

 

 

 

$

813

 

$

510

 

 

 

$

510

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

254,087

 

 

 

254,087

 

255,381

 

 

 

255,381

 

Common stock equivalents

 

 

 

3,974

 

3,974

 

 

 

4,119

 

4,119

 

Total shares

 

254,087

 

3,974

 

258,061

 

255,381

 

4,119

 

259,500

 

EPS

 

$

3.20

 

$

(0.05)

 

$

3.15

 

$

2.00

 

$

(0.03)

 

$

1.97

 

 

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Table of Contents

 

 

 

Six Months Ended

 

 

 

June 30, 2017

 

June 30, 2016

 

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

 

Basic

 

Effect of
Dilution

 

Diluted

 

Basic

 

Effect of
Dilution

 

Diluted

 

Shareholders’ net income

 

$

1,411

 

 

 

$

1,411

 

$

1,029

 

 

 

$

1,029

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

254,879

 

 

 

254,879

 

255,101

 

 

 

255,101

 

Common stock equivalents

 

 

 

4,034

 

4,034

 

 

 

4,372

 

4,372

 

Total shares

 

254,879

 

4,034

 

258,913

 

255,101

 

4,372

 

259,473

 

EPS

 

$

5.54

 

$

(0.09)

 

$

5.45

 

$

4.03

 

$

(0.06)

 

$

3.97

 

 

The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three months and six months ended June 30, 2017 and 2016 because their effect was anti-dilutive.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

June 30, 2017

 

June 30, 2016

 

June 30, 2017

 

June 30, 2016

 

Anti-dilutive options

 

1.2

 

2.6

 

1.9

 

2.0

 

 

The Company held 43,286,059 shares of common stock in Treasury as of June 30, 2017, and 39,587,801 shares as of June 30, 2016.

 

Note 5 Debt

 

 

The outstanding amounts of debt and capital leases were as follows:

 

 

 

June 30,

 

December 31,

 

(In millions)

 

2017

 

2016

 

Short-term:

 

 

 

 

 

Current maturities of long-term debt

 

$

131

 

$

250

 

Other, including capital leases

 

10

 

26

 

Total short-term debt

 

$

141

 

$

276

 

Long-term:

 

 

 

 

 

$131 million, 6.35% Notes due 2018

 

$

-

 

$

131

 

$250 million, 4.375% Notes due 2020 (1)

 

252

 

252

 

$300 million, 5.125% Notes due 2020 (1)

 

302

 

301

 

$78 million, 6.37% Notes due 2021

 

78

 

78

 

$300 million, 4.5% Notes due 2021 (1)

 

302

 

302

 

$750 million, 4% Notes due 2022

 

744

 

744

 

$100 million, 7.65% Notes due 2023

 

100

 

100

 

$17 million, 8.3% Notes due 2023

 

17

 

17

 

$900 million, 3.25% Notes due 2025

 

894

 

893

 

$300 million, 7.875% Debentures due 2027

 

299

 

299

 

$83 million, 8.3% Step Down Notes due 2033

 

82

 

82

 

$500 million, 6.15% Notes due 2036

 

498

 

498

 

$300 million, 5.875% Notes due 2041

 

296

 

296

 

$750 million, 5.375% Notes due 2042

 

743

 

743

 

Other, including capital leases

 

15

 

20

 

Total long-term debt

 

$

4,622

 

$

4,756

 

 

(1) The Company has entered into interest rate swap contracts hedging a portion of these fixed-rate debt instruments.  See Note 11 for further information about the Company’s interest rate risk management and these derivative instruments.

 

The Company repaid $250 million of long-term notes that matured in the first quarter of 2017.

 

12



Table of Contents

 

The Company has a 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.  This agreement extends through December 12, 2019 and is diversified among 16 banks, with 3 banks each having 12% of the commitment and the remainder spread among 13 banks in varying amounts.  The credit agreement includes options subject to consent by the administrative agent and the committing banks to increase the commitment amount to $2 billion and to extend the term past December 12, 2019.  The credit agreement is available for general corporate purposes, including for the issuance of letters of credit.  The credit agreement contains customary covenants and restrictions, including a financial covenant that the Company may not permit its leverage ratio — total consolidated debt to total consolidated capitalization (each as defined in the credit agreement) — to be greater than 0.50.  The leverage ratio calculation excludes the following items that are included in accumulated other comprehensive loss on the Company’s consolidated balance sheets: net unrealized appreciation on fixed maturities and the portion of the post-retirement benefits liability adjustment attributable to pension.

 

In addition to the $4.8 billion of debt outstanding as of June 30, 2017, the Company had $10.7 billion of borrowing capacity within the maximum debt coverage covenant in the credit agreement.  This additional borrowing capacity includes the $1.5 billion available under the credit agreement.  Letters of credit outstanding as of June 30, 2017 totaled $13 million.

 

The Company was in compliance with its debt covenants as of June 30, 2017.

 

Note 6 — Global Health Care Medical Costs Payable

 

 

Medical costs payable for the Global Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.  See Note 7 to the Consolidated Financial Statements in the Company’s 2016 Form 10-K for further information about the assumptions and estimates used to establish this liability.

 

Activity in medical costs payable was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

(In millions)

 

2017

 

2016

 

2017

 

2016

 

Beginning balance

 

$

2,770

 

$

2,646

 

$

2,532

 

$

2,355

 

Less: Reinsurance and other amounts recoverable

 

256

 

207

 

275

 

243

 

Beginning balance, net

 

2,514

 

2,439

 

2,257

 

2,112

 

Incurred costs related to:

 

 

 

 

 

 

 

 

 

Current year

 

4,986

 

4,796

 

10,147

 

9,621

 

Prior years

 

(62)

 

(19)

 

(238)

 

(83)

 

Total incurred

 

4,924

 

4,777

 

9,909

 

9,538

 

Paid costs related to:

 

 

 

 

 

 

 

 

 

Current year

 

4,674

 

4,595

 

7,893

 

7,580

 

Prior years

 

175

 

252

 

1,684

 

1,701

 

Total paid

 

4,849

 

4,847

 

9,577

 

9,281

 

Ending balance, net

 

2,589

 

2,369

 

2,589

 

2,369

 

Add: Reinsurance and other amounts recoverable

 

259

 

208

 

259

 

208

 

Ending balance

 

$

2,848

 

$

2,577

 

$

2,848

 

$

2,577

 

 

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Table of Contents

 

Reinsurance and other amounts recoverable includes amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business where the Company administers the plan benefits but the right of offset does not exist.  See Note 8 for additional information on reinsurance.

 

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at June 30, 2017 and $2.4 billion at June 30, 2016.  The remaining balance in both periods reflects amounts due for physician incentives and other medical care expenses and services payable.

 

For the periods ended June 30, incurred costs related to prior years were attributable to the following factors:

 

 

 

Three Months Ended

 

(Dollars in millions)

 

June 30, 2017

 

June 30, 2016

 

 

 

$

 

%(1)

 

$

 

%(2)

 

Actual completion factors

 

$

30

 

0.2%

 

$

12

 

0.1%

 

Medical cost trend

 

23

 

0.1

 

-

 

-

 

Other (3)

 

9

 

-

 

7

 

-

 

Total favorable (unfavorable) variance

 

$

62

 

0.3%

 

$

19

 

0.1%

 

 

 

 

Six Months Ended

 

(Dollars in millions)

 

June 30, 2017

 

June 30, 2016

 

 

 

$

 

%(1)

 

$

 

%(2)

 

Actual completion factors

 

$

108

 

0.6%

 

$

63

 

0.3%

 

Medical cost trend

 

121

 

0.6

 

28

 

0.1

 

Other (3)

 

9

 

-

 

(8)

 

-

 

Total favorable (unfavorable) variance

 

$

238

 

1.2%

 

$

83

 

0.4%

 

 

(1) Percentage of current year incurred costs as reported for the year ended December 31, 2016.

(2) Percentage of current year incurred costs as reported for the year ended December 31, 2015.

(3) Other amounts in 2017 primarily related to an increase in the 2016 reinsurance reimbursement rate from the Centers for Medicare and Medicaid Services (“CMS”) under the Patient Protection and Affordable Care Act (the “Health Care Reform Act”).  Other amounts in 2016 primarily related to increased medical costs in the Government segment resulting from additional provider risk sharing.

 

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income.  The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

 

The net impact of prior year development on shareholders’ net income was a $36 million increase for the three months and a $97 million increase for the six months ended June 30, 2017.  The net impact of prior year development for the three months and six months ended June 30, 2016 was not significant.  Favorable prior year development for the three months and six months ended June 30, 2017 was attributed almost equally between medical cost trend and completion factors, resulting from lower than expected utilization of medical services.

 

Note 7 Liabilities for Unpaid Claims and Claim Expenses

 

 

The following information relates to the Company’s unpaid claims and claim expense liabilities that are related to short-duration insurance contracts.  See Note 8 to the Consolidated Financial Statements in the Company’s 2016 Form 10-K for further information about the assumptions and estimates used to establish this liability.

 

The liability for unpaid claims and claim expenses by segment as of June 30  is as follows:

 

(In millions)

 

June 30, 2017

 

June 30, 2016

 

Group Disability and Life

 

$

4,400

 

$

4,245

 

Global Supplemental Benefits

 

452

 

373

 

Other Operations

 

187

 

213

 

Unpaid claims and claim expenses

 

$

5,039

 

$

4,831

 

 

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Table of Contents

 

Activity in the Company’s Group Disability and Life and the Global Supplemental Benefits segments’ liabilities for unpaid claims and claim expenses are presented in the following table.  Liabilities associated with the Company’s Other Operations segment are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

June 30, 2017

 

June 30, 2016

 

June 30, 2017

 

June 30, 2016

 

Beginning balance

 

$

4,809

 

$

4,513

 

$

4,726

 

$

4,359

 

Less: Reinsurance

 

123

 

115

 

121

 

115

 

Beginning balance, net

 

4,686