Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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, a smaller reporting company or an emerging growth 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 October 20, 2017, 246,549,706 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

 

 

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

 



Table of Contents

 

 

 

 

 

Part I.   FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.   FINANCIAL STATEMENTS

 

 

Cigna Corporation

Consolidated Statements of Income

 

 

 

Unaudited

Three Months Ended

September 30,

 

Unaudited

Nine Months Ended

September 30,

 

(In millions, except per share amounts)

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,030

 

$

7,605

 

$

24,143

 

$

23,005

 

Fees and other revenues

 

1,204

 

1,156

 

3,619

 

3,554

 

Net investment income

 

298

 

282

 

909

 

848

 

Mail order pharmacy revenues

 

733

 

762

 

2,200

 

2,207

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments on fixed maturities

 

(6)

 

(1)

 

(15)

 

(31)

 

Other realized investment gains, net

 

123

 

76

 

229

 

141

 

Net realized investment gains

 

117

 

75

 

214

 

110

 

TOTAL REVENUES

 

10,382

 

9,880

 

31,085

 

29,724

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

Global Health Care medical costs

 

4,880

 

4,692

 

14,789

 

14,230

 

Other benefit expenses

 

1,342

 

1,343

 

4,044

 

4,125

 

Mail order pharmacy costs

 

612

 

638

 

1,819

 

1,842

 

Other operating expenses

 

2,696

 

2,428

 

7,497

 

7,038

 

Amortization of other acquired intangible assets, net

 

28

 

37

 

88

 

115

 

TOTAL BENEFITS AND EXPENSES

 

9,558

 

9,138

 

28,237

 

27,350

 

Income before income taxes

 

824

 

742

 

2,848

 

2,374

 

Income taxes:

 

 

 

 

 

 

 

 

 

Current

 

231

 

210

 

821

 

842

 

Deferred

 

31

 

80

 

62

 

63

 

TOTAL INCOME TAXES

 

262

 

290

 

883

 

905

 

Net Income

 

562

 

452

 

1,965

 

1,469

 

Less: Net income (loss) attributable to noncontrolling interests

 

2

 

(4)

 

(6)

 

(16)

 

SHAREHOLDERS’ NET INCOME

 

$

560

 

$

456

 

$

1,971

 

$

1,485

 

Shareholders’ net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.25

 

$

1.78

 

$

7.79

 

$

5.82

 

Diluted

 

$

2.21

 

$

1.76

 

$

7.67

 

$

5.72

 

Dividends declared per share

 

$

-

 

$

-

 

$

0.04

 

$

0.04

 

 

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

 

1



Table of Contents

 

Cigna Corporation

Consolidated Statements of Comprehensive Income

 

 

 

Unaudited

Three Months Ended

September 30,

 

Unaudited

Nine Months Ended

September 30,

 

(In millions)

 

2017

 

2016

 

2017

 

2016

 

Shareholders’ net income

 

$

560

 

$

456

 

$

1,971

 

$

1,485

 

Shareholders’ other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized appreciation (depreciation), securities

 

(22)

 

66

 

52

 

416

 

Net unrealized (depreciation), derivatives

 

-

 

(1)

 

(3)

 

(5)

 

Net translation of foreign currencies

 

34

 

55

 

173

 

96

 

Postretirement benefits liability adjustment

 

10

 

9

 

36

 

28

 

Shareholders’ other comprehensive income, net of tax

 

22

 

129

 

258

 

535

 

Shareholders’ comprehensive income

 

582

 

585

 

2,229

 

2,020

 

Comprehensive income (loss) attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to redeemable noncontrolling interests

 

2

 

(1)

 

(1)

 

(4)

 

Net (loss) attributable to other noncontrolling interests

 

-

 

(3)

 

(5)

 

(12)

 

Other comprehensive (loss) attributable to redeemable noncontrolling interests

 

-

 

(3)

 

-

 

(1)

 

Total comprehensive income (loss) attributable to noncontrolling interests

 

2

 

(7)

 

(6)

 

(17)

 

TOTAL COMPREHENSIVE INCOME

 

$

584

 

$

578

 

$

2,223

 

$

2,003

 

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

 

2



Table of Contents

 

Cigna Corporation

Consolidated Balance Sheets

 

 

 

Unaudited

 

 

 

As of

 

As of

 

 

 

September 30,

 

December 31,

 

(In millions, except per share amounts)

 

2017

 

2016

 

Assets:

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $21,670; $19,942)

 

$

22,944

 

$

20,961

 

Equity securities, at fair value (cost, $643; $583)

 

641

 

583

 

Commercial mortgage loans

 

1,684

 

1,666

 

Policy loans

 

1,393

 

1,452

 

Other long-term investments

 

1,408

 

1,462

 

Short-term investments

 

175

 

691

 

Total investments

 

28,245

 

26,815

 

Cash and cash equivalents

 

3,656

 

3,185

 

Premiums, accounts and notes receivable, net

 

3,308

 

3,077

 

Reinsurance recoverables

 

6,161

 

6,478

 

Deferred policy acquisition costs

 

2,073

 

1,818

 

Property and equipment

 

1,526

 

1,536

 

Deferred tax assets, net

 

172

 

304

 

Goodwill

 

6,001

 

5,980

 

Other assets, including other intangibles

 

2,362

 

2,227

 

Separate account assets

 

8,432

 

7,940

 

TOTAL ASSETS

 

$

61,936

 

$

59,360

 

Liabilities:

 

 

 

 

 

Contractholder deposit funds

 

$

8,246

 

$

8,458

 

Future policy benefits

 

9,857

 

9,648

 

Unpaid claims and claim expenses

 

5,077

 

4,917

 

Global Health Care medical costs payable

 

2,783

 

2,532

 

Unearned premiums

 

1,194

 

634

 

Total insurance and contractholder liabilities

 

27,157

 

26,189

 

Accounts payable, accrued expenses and other liabilities

 

6,802

 

6,414

 

Short-term debt

 

141

 

276

 

Long-term debt

 

5,207

 

4,756

 

Separate account liabilities

 

8,432

 

7,940

 

TOTAL LIABILITIES

 

47,739

 

45,575

 

Contingencies — Note 16

 

 

 

 

 

Redeemable noncontrolling interests

 

52

 

58

 

Shareholders’ Equity:

 

 

 

 

 

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

 

74

 

74

 

Additional paid-in capital

 

2,929

 

2,892

 

Accumulated other comprehensive (loss)

 

(1,124)

 

(1,382)

 

Retained earnings

 

15,590

 

13,855

 

Less treasury stock, at cost

 

(3,324)

 

(1,716)

 

TOTAL SHAREHOLDERS’ EQUITY

 

14,145

 

13,723

 

Other noncontrolling interests

 

-

 

4

 

Total equity

 

14,145

 

13,727

 

Total liabilities and equity

 

$

61,936

 

$

59,360

 

SHAREHOLDERS’ EQUITY PER SHARE

 

$

57.13

 

$

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 September 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 July 1, 2017

 

$

74

 

$

2,922

 

$

(1,146)-

 

$

15,102

 

$

(2,406)

 

$

14,546

 

$

1

 

$

14,547

 

$

58

 

Effect of issuing stock for employee benefit plans

 

 

 

7

 

 

 

(72)

 

128

 

63

 

 

 

63

 

 

 

Other comprehensive income

 

 

 

 

 

22

 

 

 

 

 

22

 

 

 

22

 

 

 

Net income (loss)

 

 

 

 

 

 

 

560

 

 

 

560

 

 

 

560

 

2

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(1,046)

 

(1,046)

 

 

 

(1,046)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-

 

(1)

 

(1)

 

(8)

 

BALANCE AT SEPTEMBER 30, 2017

 

$

74

 

$

2,929

 

$

(1,124)

 

$

15,590

 

$

(3,324)

 

$

14,145

 

$

-

 

$

14,145

 

$

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2016

 

$

74

 

$

2,879

 

$

(844)

 

$

13,046

 

$

(1,799)

 

$

13,356

 

$

8

 

$

13,364

 

$

71

 

Effect of issuing stock for employee benefit plans

 

 

 

7

 

 

 

(15)

 

43

 

35

 

 

 

35

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

129

 

 

 

 

 

129

 

 

 

129

 

(3)

 

Net income (loss)

 

 

 

 

 

 

 

456

 

 

 

456

 

(3)

 

453

 

(1)

 

Other transactions impacting noncontrolling interests

 

 

 

(2)

 

 

 

 

 

 

 

(2)

 

3

 

1

 

1

 

BALANCE AT SEPTEMBER 30, 2016

 

$

74

 

$

2,884

 

$

(715)

 

$

13,487

 

$

(1,756)

 

$

13,974

 

$

8

 

$

13,982

 

$

68

 

 

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

 

4



Table of Contents

 

Cigna Corporation

Consolidated Statements of Changes in Total Equity

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

Unaudited

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Other non-

 

 

 

Non-

 

For the nine months ended September 30, 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

 

 

 

40

 

 

 

(226)

 

380

 

194

 

 

 

194

 

 

 

Other comprehensive income

 

 

 

 

 

258

 

 

 

 

 

258

 

 

 

258

 

 

 

Net income (loss)

 

 

 

 

 

 

 

1,971

 

 

 

1,971

 

(5)

 

1,966

 

(1)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(1,988)

 

(1,988)

 

 

 

(1,988)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(3

)

 

 

 

 

 

 

(3)

 

1

 

(2)

 

(5)

 

BALANCE AT SEPTEMBER 30, 2017

 

$

74

 

$

2,929

 

$

(1,124)

 

$

15,590

 

$

(3,324)

 

$

14,145

 

$

-

 

$

14,145

 

$

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

74

 

$

2,859

 

$

(1,250)

 

$

12,121

 

$

(1,769)

 

$

12,035

 

$

9

 

$

12,044

 

$

69

 

Effect of issuing stock for employee benefit plans

 

 

 

38

 

 

 

(109)

 

123

 

52

 

 

 

52

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

535

 

 

 

 

 

535

 

 

 

535

 

(1)

 

Net income (loss)

 

 

 

 

 

 

 

1,485

 

 

 

1,485

 

(12)

 

1,473

 

(4)

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(110)

 

(110)

 

 

 

(110)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

(13)

 

 

 

 

 

 

 

(13)

 

11

 

(2)

 

4

 

BALANCE AT SEPTEMBER 30, 2016

 

$

74

 

$

2,884

 

$

(715)

 

$

13,487

 

$

(1,756)

 

$

13,974

 

$

8

 

$

13,982

 

$

68

 

 

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

 

5



Table of Contents

 

Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

 

Unaudited

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2017

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,965

 

$

1,469

 

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

 

 

 

 

 

Depreciation and amortization

 

425

 

460

 

Realized investment (gains)

 

(214)

 

(110)

 

Deferred income taxes

 

62

 

63

 

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

 

 

 

 

 

Premiums, accounts and notes receivable

 

(190)

 

184

 

Reinsurance recoverables

 

144

 

132

 

Deferred policy acquisition costs

 

(209)

 

(167)

 

Other assets

 

(156)

 

(32)

 

Insurance liabilities

 

988

 

1,098

 

Accounts payable, accrued expenses and other liabilities

 

221

 

9

 

Current income taxes

 

7

 

(57)

 

Debt extinguishment costs

 

321

 

-

 

Distributions from partnership investments (1)

 

114

 

105

 

Other, net

 

33

 

25

 

NET CASH PROVIDED BY OPERATING ACTIVITIES (1)

 

3,511

 

3,179

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

Fixed maturities and equity securities

 

1,376

 

1,012

 

Investment maturities and repayments:

 

 

 

 

 

Fixed maturities and equity securities

 

1,444

 

1,178

 

Commercial mortgage loans

 

253

 

117

 

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

 

1,486

 

799

 

Investments purchased or originated:

 

 

 

 

 

Fixed maturities and equity securities

 

(4,292)

 

(2,894)

 

Commercial mortgage loans

 

(272)

 

(121)

 

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

 

(722)

 

(1,317)

 

Property and equipment purchases

 

(340)

 

(362)

 

Acquisitions, net of cash acquired

 

(33)

 

(5)

 

Other

 

-

 

(101)

 

NET CASH (USED IN) INVESTING ACTIVITIES (1)

 

(1,100)

 

(1,694)

 

Cash Flows from Financing Activities

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

965

 

1,133

 

Withdrawals and benefit payments from contractholder deposit funds

 

(1,079)

 

(1,042)

 

Net change in short-term debt

 

(16)

 

(143)

 

Payments for debt extinguishment

 

(313)

 

-

 

Repayment of long-term debt

 

(1,250)

 

-

 

Net proceeds on issuance of long-term debt

 

1,584

 

-

 

Repurchase of common stock

 

(1,961)

 

(139)

 

Issuance of common stock

 

111

 

23

 

Other, net

 

(9)

 

(87)

 

NET CASH (USED IN) FINANCING ACTIVITIES

 

(1,968)

 

(255)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

28

 

26

 

Net increase in cash and cash equivalents

 

471

 

1,256

 

Cash and cash equivalents, January 1,

 

3,185

 

1,968

 

Cash and cash equivalents, September 30,

 

$

3,656

 

$

3,224

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

Income taxes paid, net of refunds

 

$

812

 

$

904

 

Interest paid

 

$

197

 

$

192

 

 

(1) As required in adopting Accounting Standard Update (“ASU”) 2016-15, the Company retrospectively reclassified $105 million of cash distributions from partnership earnings from investing to operating activities for the nine months ended September 30, 2016.  The comparable amount reported in operating activities in 2017 was $114 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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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

12

5

Debt

13

INSURANCE INFORMATION

 

6

Global Health Care Medical Costs Payable

14

7

Liabilities for Unpaid Claims and Claim Expenses

16

8

Reinsurance

17

INVESTMENTS

 

9

Fair Value Measurements

20

10

Investments

29

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

44

 

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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 primarily 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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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)

 

Early adopted as of December 31, 2016

 

 

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.

 

Effects of adoption:  using the nature of distribution approach, the Company reported $114 million of cash receipts related to distributions from partnership earnings in operating activities for the nine months ended September 30, 2017.  The Company reclassified $105 million of cash receipts for the nine months ended September 30, 2016 from investing to operating activities in the Consolidated Statements of Cash Flows.

 

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.

 

 

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Table of Contents

 

 

Accounting Standard and
Effective Date Applicable
for Cigna

 

 

Requirements and Expected Effects of New Guidance Not Yet Adopted

 

 

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 $220 million as of September 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 September 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:

 

· Guidance 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 has largely completed its evaluation of the new requirements and does not expect the adoption of the new guidance to have a material impact to its pattern of revenue recognition or net income.

· The Company expects to adopt the new guidance through retrospective restatement and is currently working to develop required disclosures and restate historical periods in line with its chosen method of adoption.  The Company does not anticipate significant changes to its systems, processes or controls.

· The Company expects the cumulative effect of implementing this guidance to result in an immaterial decrease to January 1, 2017 shareholders’ equity due to the establishment of a contract liability for service fee revenue that must be deferred and allocated to services provided after the termination of certain administrative service contracts.

· Adoption of this new guidance is expected to result in reclassifications within the Consolidated Statements of Income due to changes in the Company’s accounting policy as a result of clarifications in the new guidance and its related interpretations.

 

 

Targeted improvements to accounting for hedging activities (ASU 2017-12)

 

Required as of January 1, 2019, early adoption permitted

 

 

Relaxes requirements for financial and nonfinancial hedging strategies to be eligible for hedge accounting and changes how companies assess effectiveness.  It also amends presentation and disclosure requirements to improve transparency about uses and results of hedging programs.

 

Expected effects:  the Company is evaluating the effects of and implementation timing for this new guidance.

 

 

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Note 3Mergers 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(E) 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 nine months ended September 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

 

 

 

September 30, 2017

 

September 30, 2016

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Merger-related transaction costs

 

$

9

 

$

6

 

$

49

 

$

46

 

Tax (benefit) - previously non-deductible costs

 

-

 

-

 

-

 

-

 

Merger-related transaction costs (benefits), net

 

$

9

 

$

6

 

$

49

 

$

46

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

September 30, 2016

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Merger-related transaction costs

 

$

88

 

$

67

 

$

123

 

$

108

 

Tax (benefit) - previously non-deductible costs

 

-

 

(59)

 

-

 

-

 

Merger-related transaction costs, net

 

$

88

 

$

8

 

$

123

 

$

108

 

 

Acquisitions

 

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

 

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Table of Contents

 

Note 4Earnings Per Share

 

 

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

 

 

 

Three Months Ended

 

 

 

September 30, 2017

 

September 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

 

$

560

 

 

 

$

560

 

$

456

 

 

 

$

456

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

249,242

 

 

 

249,242

 

255,519

 

 

 

255,519

 

Common stock equivalents

 

 

 

4,168

 

4,168

 

 

 

4,235

 

4,235

 

Total shares

 

249,242

 

4,168

 

253,410

 

255,519

 

4,235

 

259,754

 

EPS

 

$

2.25

 

$

(0.04)

 

$

2.21

 

$

1.78

 

$

(0.02)

 

$

1.76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

September 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

 

$

1,971

 

 

 

$

1,971

 

$

1,485

 

 

 

$

1,485

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

252,980

 

 

 

252,980

 

255,242

 

 

 

255,242

 

Common stock equivalents

 

 

 

4,078

 

4,078

 

 

 

4,326

 

4,326

 

Total shares

 

252,980

 

4,078

 

257,058

 

255,242

 

4,326

 

259,568

 

EPS

 

$

7.79

 

$

(0.12)

 

$

7.67

 

$

5.82

 

$

(0.10)

 

$

5.72

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In millions)

 

2017

 

2016

 

2017

 

2016

 

Anti-dilutive options

 

-

 

2.6

 

1.2

 

2.2

 

 

The Company held 48,572,794 shares of common stock in Treasury as of September 30, 2017, and 39,425,208 shares as of September 30, 2016.

 

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Table of Contents

 

Note 5Debt

 

 

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

 

 

 

September 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)

 

301

 

301

 

$78 million, 6.37% Notes due 2021

 

78

 

78

 

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

 

301

 

302

 

$750 million, 4% Notes due 2022

 

745

 

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

 

$600 million, 3.05% Notes due 2027

 

594

 

-

 

$259 million, 7.875% Debentures due 2027 (2)

 

258

 

299

 

$45 million, 8.3% Step Down Notes due 2033 (2)

 

45

 

82

 

$191 million, 6.15%  Notes due 2036 (2)

 

190

 

498

 

$121 million, 5.875% Notes due 2041 (2)

 

119

 

296

 

$317 million, 5.375% Notes due 2042 (2)

 

314

 

743

 

$1,000 million, 3.875% Notes due 2047

 

987

 

-

 

Other, including capital leases

 

12

 

20

 

Total long-term debt

 

$

5,207

 

$

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.

(2) The Company redeemed a portion of these debt issues through a cash tender offer in September 2017, the aggregate amount of which was $1.0 billion.

 

In the third quarter of 2017, the Company entered into two significant debt transactions: the issuance of new debt and a cash tender offer to retire a portion of outstanding debt.  These transactions are described in more detail below.

 

On September 14, 2017, the Company issued new long-term debt as follows:

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

Debt Instrument

Principal

Term

Maturity

Stated Interest
Rate

Effective
Interest Rate

Amount net of
discount and
fees

Interest payment
dates

 

 

 

 

 

 

 

 

10-Year Notes

$           600

10-Year

October 15, 2027

3.05%  

3.183%

$

594

April 15 and
October 15

30-Year Notes

$        1,000

30-Year

October 15, 2047

3.875%  

3.951%

$

987

April 15 and
October 15

 

The proceeds of this debt were mainly used to pay the consideration for the cash tender offer as described below.  The Company intends to use the remaining proceeds for general corporate purposes, including the maturity of its Notes due in 2018.

 

At any time prior to July 15, 2027 (three months prior to the maturity date of the 10-Year Notes) or April 15, 2047 (six months prior to the maturity date of the 30-Year Notes), the Company may redeem the 10-Year Notes or the 30-Year Notes, in whole or in part, with accrued and unpaid interest, at a redemption price equal to the greater of:

 

·         100% of the principal amount of the applicable Notes; or

 

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·                  the sum of the present values of the remaining scheduled payments of principal and interest (excluding interest accrued at the redemption date) from the redemption date to the maturity date discounted to the redemption date at the applicable Treasury Rate plus 15 basis points for the 10-Year Notes and 20 basis points for the 30-Year Notes,

 

In the third quarter of 2017, the Company completed a cash tender offer to purchase $1.0 billion of aggregate principal amount of certain of its outstanding debt securities.  The Company recorded a pre-tax loss of $321 million ($209 million after-tax), consisting primarily of premium payments on the tender.

 

During the first quarter of 2017, the Company repaid $250 million of long-term notes that had matured.

 

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 $5.3 billion of debt outstanding as of September 30, 2017, the Company had $9.8 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 September 30, 2017 totaled $11 million.

 

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

 

Note 6Global 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

(In millions)

 

2017

 

2016

 

2017

 

2016

 

Beginning balance

 

$

2,848

 

$

2,577

 

$

2,532

 

$

2,355

 

Less: Reinsurance and other amounts recoverable

 

259

 

208

 

275

 

243

 

Beginning balance, net

 

2,589

 

2,369

 

2,257

 

2,112

 

Incurred costs related to:

 

 

 

 

 

 

 

 

 

Current year

 

4,910

 

4,697

 

15,057

 

14,318

 

Prior years

 

(30)

 

(5)

 

(268)

 

(88)

 

Total incurred

 

4,880

 

4,692

 

14,789

 

14,230

 

Paid costs related to:

 

 

 

 

 

 

 

 

 

Current year

 

4,901

 

4,705

 

12,794

 

12,285

 

Prior years

 

46

 

82

 

1,730

 

1,783

 

Total paid

 

4,947

 

4,787

 

14,524

 

14,068

 

Ending balance, net

 

2,522

 

2,274

 

2,522

 

2,274

 

Add: Reinsurance and other amounts recoverable

 

261

 

276

 

261

 

276

 

Ending balance

 

$

2,783

 

$

2,550

 

$

2,783

 

$

2,550

 

 

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Reinsurance and other amounts recoverable in the above table 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 $2.6 billion at September 30, 2017 and $2.4 billion at September 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 September 30, incurred costs related to prior years were attributable to the following factors:

 

 

 

Three Months Ended

 

(Dollars in millions)

 

September 30, 2017

 

September 30, 2016

 

 

 

$

 

%(1)

 

$

 

%(2)

 

Actual completion factors

 

$

20

 

0.1

  %

$