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, 2018

 

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 or (215) 761-5511

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 every Interactive Data File required to be submitted 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 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 19, 2018, 243,534,265 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

46

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

66

Item 4.

Controls and Procedures

66

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

Item 1. A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

 

Unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions, except per share amounts)

 

2018

 

2017

 

2018

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,994

 

$

8,075

 

$

27,005

 

$

24,283

 

Fees and other revenues

 

1,361

 

1,266

 

4,087

 

3,782

 

Net investment income

 

355

 

298

 

1,036

 

909

 

Mail order pharmacy revenues

 

747

 

733

 

2,222

 

2,200

 

Realized investment gains (losses)

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments on fixed maturities

 

(1)

 

(6)

 

(19)

 

(15)

 

Other realized investment gains (losses), net

 

1

 

123

 

(17)

 

229

 

Net realized investment gains (losses)

 

-

 

117

 

(36)

 

214

 

TOTAL REVENUES

 

11,457

 

10,489

 

34,314

 

31,388

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

Global Health Care medical costs

 

5,360

 

4,845

 

16,098

 

14,684

 

Other benefit expenses

 

1,443

 

1,342

 

4,322

 

4,044

 

Mail order pharmacy costs

 

602

 

612

 

1,776

 

1,819

 

Other operating expenses

 

2,971

 

2,838

 

8,666

 

7,905

 

Amortization of other acquired intangible assets

 

48

 

28

 

99

 

88

 

TOTAL BENEFITS AND EXPENSES

 

10,424

 

9,665

 

30,961

 

28,540

 

Income before income taxes

 

1,033

 

824

 

3,353

 

2,848

 

Income taxes

 

 

 

 

 

 

 

 

 

Current

 

248

 

231

 

837

 

821

 

Deferred

 

11

 

31

 

17

 

62

 

TOTAL INCOME TAXES

 

259

 

262

 

854

 

883

 

Net income

 

774

 

562

 

2,499

 

1,965

 

Less: Net income (loss) attributable to noncontrolling interests

 

2

 

2

 

6

 

(6)

 

SHAREHOLDERS’ NET INCOME

 

$

772

 

$

560

 

$

2,493

 

$

1,971

 

Shareholders’ net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

3.18

 

$

2.25

 

$

10.28

 

$

7.79

 

Diluted

 

$

3.14

 

$

2.21

 

$

10.14

 

$

7.67

 

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

 

Unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions)

 

2018

 

2017

 

2018

 

2017

 

Shareholders’ net income

 

$

772

 

$

560

 

$

2,493

 

$

1,971

 

Shareholders’ other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Net unrealized (depreciation) appreciation, securities

 

-

 

(22)

 

(420)

 

52

 

Net unrealized appreciation (depreciation), derivatives

 

2

 

-

 

(11)

 

(3)

 

Net translation of foreign currencies

 

(29)

 

34

 

(136)

 

173

 

Postretirement benefits liability adjustment

 

13

 

10

 

31

 

36

 

Shareholders’ other comprehensive (loss) income, net of tax

 

(14)

 

22

 

(536)

 

258

 

Shareholders’ comprehensive income

 

758

 

582

 

1,957

 

2,229

 

Comprehensive income (loss) attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to redeemable noncontrolling interests

 

2

 

2

 

6

 

(1)

 

Net (loss) attributable to other noncontrolling interests

 

-

 

-

 

-

 

(5)

 

Other comprehensive (loss) attributable to redeemable noncontrolling interests

 

(9)

 

-

 

(19)

 

-

 

Total comprehensive (loss) income attributable to noncontrolling interests

 

(7)

 

2

 

(13)

 

(6)

 

TOTAL COMPREHENSIVE INCOME

 

$

751

 

$

584

 

$

1,944

 

$

2,223

 

 

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)

 

2018

 

2017

 

Assets

 

 

 

 

 

Investments

 

 

 

 

 

Fixed maturities, at fair value (amortized cost, $22,869; $21,867)

 

$

23,268

 

$

23,138

 

Equity securities

 

579

 

588

 

Commercial mortgage loans

 

1,867

 

1,761

 

Policy loans

 

1,421

 

1,415

 

Other long-term investments

 

1,739

 

1,518

 

Short-term investments

 

102

 

199

 

Total investments

 

28,976

 

28,619

 

Cash and cash equivalents

 

24,032

 

2,972

 

Premiums, accounts and notes receivable, net

 

3,609

 

3,380

 

Reinsurance recoverables

 

5,780

 

6,046

 

Deferred policy acquisition costs

 

2,350

 

2,237

 

Property and equipment

 

1,559

 

1,563

 

Deferred tax assets, net

 

132

 

39

 

Goodwill

 

6,129

 

6,164

 

Other assets, including other intangibles

 

2,227

 

2,316

 

Separate account assets

 

8,162

 

8,423

 

TOTAL ASSETS

 

$

82,956

 

$

61,759

 

Liabilities

 

 

 

 

 

Contractholder deposit funds

 

$

8,069

 

$

8,196

 

Future policy benefits

 

9,652

 

10,040

 

Unpaid claims and claim expenses

 

5,259

 

5,168

 

Global Health Care medical costs payable

 

2,955

 

2,719

 

Unearned premiums

 

683

 

724

 

Total insurance and contractholder liabilities

 

26,618

 

26,847

 

Accounts payable, accrued expenses and other liabilities

 

7,541

 

7,290

 

Short-term debt

 

9

 

240

 

Long-term debt

 

25,041

 

5,199

 

Separate account liabilities

 

8,162

 

8,423

 

TOTAL LIABILITIES

 

67,371

 

47,999

 

Contingencies — Note 16

 

 

 

 

 

Redeemable noncontrolling interests

 

30

 

49

 

Shareholders’ Equity

 

 

 

 

 

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

 

74

 

74

 

Additional paid-in capital

 

2,985

 

2,940

 

Accumulated other comprehensive (loss)

 

(1,857)

 

(1,082)

 

Retained earnings

 

18,474

 

15,800

 

Less treasury stock, at cost

 

(4,121)

 

(4,021)

 

TOTAL SHAREHOLDERS’ EQUITY

 

15,555

 

13,711

 

Total liabilities and shareholders’ equity

 

$

82,956

 

$

61,759

 

SHAREHOLDERS’ EQUITY PER SHARE

 

$

63.88

 

$

56.20

 

 

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

 

Unaudited

For the three months ended September 30, 2018
(In millions)

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
(Loss)

 

Retained
Earnings

 

Treasury
Stock

 

Shareholders’
Equity

 

Other Non-
controlling
Interests

 

Total
Equity

 

Redeemable
Non-
controlling
Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

$

74

 

$

2,974

 

$

(1,843)

 

$

17,722

 

$

(4,184)

 

$

14,743

 

$

-

 

$

14,743

 

$

39

 

Effect of issuing stock for employee benefit plans

 

 

 

11

 

 

 

(20)

 

63

 

54

 

 

 

54

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(14)

 

 

 

 

 

(14)

 

 

 

(14)

 

(9)

 

Net income

 

 

 

 

 

 

 

772

 

 

 

772

 

 

 

772

 

2

 

Other transactions impacting noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

(2)

 

BALANCE AT SEPTEMBER 30, 2018

 

$

74

 

$

2,985

 

$

(1,857)

 

$

18,474

 

$

(4,121)

 

$

15,555

 

$

-

 

$

15,555

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated
Other

 

 

 

 

 

 

 

Other Non-

 

 

 

Redeemable
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 June 30, 2017 as reported

 

$

 74

 

$

 2,922

 

$

 (1,146)

 

$

 15,102

 

$

 (2,406)

 

$

 14,546

 

$

 1

 

$

 14,547

 

$

 58

 

Cumulative effect of accounting for revenue recognition (1)

 

 

 

 

 

 

 

(24)

 

 

 

(24)

 

 

 

(24)

 

 

 

Balance at June 30, 2017 as retrospectively adjusted

 

74

 

2,922

 

(1,146)

 

15,078

 

(2,406)

 

14,522

 

1

 

14,523

 

58

 

Effect of issuing stock for employee benefit plans

 

 

 

7

 

 

 

(72)

 

128

 

63

 

 

 

63

 

 

 

Other comprehensive income

 

 

 

 

 

22

 

 

 

 

 

22

 

 

 

22

 

 

 

Net income

 

 

 

 

 

 

 

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)

 

$

 15,566

 

$

 (3,324)

 

$

 14,121

 

$

 -

 

$

 14,121

 

$

 52

 

 

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

 

(1) See Note 2 for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2018.

 

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, 2018

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

Shareholders’

 

controlling

 

Total

 

controlling

 

(In millions)

 

Stock

 

Capital

 

(Loss)

 

Earnings

 

Stock

 

Equity

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017 as retrospectively adjusted

 

$

74

 

$

2,940

 

$

(1,082)

 

$

15,800

 

$

(4,021)

 

$

13,711

 

$

-

 

$

13,711

 

$

49

 

Cumulative effect of accounting for financial instruments and hedging (1)

 

 

 

 

 

(10)

 

68

 

 

 

58

 

 

 

58

 

 

 

Reclassification adjustment related to U.S. tax reform legislation (1)

 

 

 

 

 

(229)

 

229

 

 

 

-

 

 

 

-

 

 

 

Effect of issuing stock for employee benefit plans

 

 

 

45

 

 

 

(106)

 

175

 

114

 

 

 

114

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(536)

 

 

 

 

 

(536)

 

 

 

(536)

 

(19)

 

Net income

 

 

 

 

 

 

 

2,493

 

 

 

2,493

 

 

 

2,493

 

6

 

Common dividends declared (per share: $0.04)

 

 

 

 

 

 

 

(10)

 

 

 

(10)

 

 

 

(10)

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

(275)

 

(275)

 

 

 

(275)

 

 

 

Other transactions impacting noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

-

 

(6)

 

BALANCE AT SEPTEMBER 30, 2018

 

$

74

 

$

2,985

 

$

(1,857)

 

$

18,474

 

$

(4,121)

 

$

15,555

 

$

-

 

$

15,555

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

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 December 31, 2016 as reported

 

$

74

 

$

2,892

 

$

(1,382)

 

$

13,855

 

$

(1,716)

 

$

13,723

 

$

4

 

$

13,727

 

$

58

 

Cumulative effect of accounting for revenue recognition (1)

 

 

 

 

 

 

 

(24)

 

 

 

(24)

 

 

 

(24)

 

 

 

Balance at December 31, 2016 as retrospectively adjusted

 

74

 

2,892

 

(1,382)

 

13,831

 

(1,716)

 

13,699

 

4

 

13,703

 

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)

 

$

15,566

 

$

(3,324)

 

$

14,121

 

$

-

 

$

14,121

 

$

52

 

 

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

 

(1) See Note 2 for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2018.

 

5


Table of Contents

 

Cigna Corporation

Consolidated Statements of Cash Flows

 

 

 

Unaudited

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2018

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

2,499

 

$

1,965

 

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

 

 

 

 

 

Depreciation and amortization

 

438

 

425

 

Realized investment losses (gains)

 

36

 

(214)

 

Deferred income taxes

 

17

 

62

 

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

 

 

 

 

 

Premiums, accounts and notes receivable

 

(243)

 

(190)

 

Reinsurance recoverables

 

100

 

144

 

Deferred policy acquisition costs

 

(195)

 

(209)

 

Other assets

 

339

 

(156)

 

Insurance liabilities

 

408

 

988

 

Accounts payable, accrued expenses and other liabilities

 

113

 

221

 

Current income taxes

 

73

 

7

 

Debt extinguishment costs

 

-

 

321

 

Distributions from partnership investments

 

128

 

114

 

Other, net

 

(69)

 

33

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

3,644

 

3,511

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from investments sold:

 

 

 

 

 

Fixed maturities and equity securities

 

1,930

 

1,376

 

Investment maturities and repayments:

 

 

 

 

 

Fixed maturities and equity securities

 

1,394

 

1,444

 

Commercial mortgage loans

 

181

 

253

 

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

 

588

 

1,486

 

Investments purchased or originated:

 

 

 

 

 

Fixed maturities and equity securities

 

(4,461)

 

(4,292)

 

Commercial mortgage loans

 

(288)

 

(272)

 

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

 

(660)

 

(722)

 

Property and equipment purchases

 

(346)

 

(340)

 

Acquisitions, net of cash acquired

 

-

 

(33)

 

Other

 

(12)

 

-

 

NET CASH (USED IN) INVESTING ACTIVITIES

 

(1,674)

 

(1,100)

 

Cash Flows from Financing Activities

 

 

 

 

 

Deposits and interest credited to contractholder deposit funds

 

816

 

965

 

Withdrawals and benefit payments from contractholder deposit funds

 

(872)

 

(1,079)

 

Net change in short-term debt

 

(109)

 

(16)

 

Payments for debt extinguishment

 

-

 

(313)

 

Repayment of long-term debt

 

(131)

 

(1,250)

 

Net proceeds on issuance of long-term debt

 

19,884

 

1,584

 

Repurchase of common stock

 

(310)

 

(1,961)

 

Issuance of common stock

 

41

 

111

 

Other, net

 

(204)

 

(9)

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

19,115

 

(1,968)

 

Effect of foreign currency rate changes on cash and cash equivalents

 

(25)

 

28

 

Net increase in cash and cash equivalents

 

21,060

 

471

 

Cash and cash equivalents, January 1,

 

2,972

 

3,185

 

Cash and cash equivalents, September 30,

 

$

24,032

 

$

3,656

 

Supplemental Disclosure of Cash Information:

 

 

 

 

 

Income taxes paid, net of refunds

 

$

767

 

$

812

 

Interest paid

 

$

167

 

$

197

 

 

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

 

6


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

8

3

Mergers and Acquisitions

14

4

Earnings Per Share

15

5

Debt

16

INSURANCE INFORMATION

 

6

Global Health Care Medical Costs Payable

18

7

Liabilities for Unpaid Claims and Claim Expenses

19

8

Reinsurance

20

INVESTMENTS

 

9

Fair Value Measurements

23

10

Investments

30

11

Derivative Financial Instruments

33

12

Variable Interest Entities

36

13

Accumulated Other Comprehensive Income (Loss)

36

WORKFORCE MANAGEMENT AND COMPENSATION

 

14

Pension and Other Postretirement Benefit Plans

38

COMPLIANCE, REGULATION AND CONTINGENCIES

 

15

Income Taxes

39

16

Contingencies and Other Matters

39

RESULTS DETAILS

 

17

Segment Information

42

 

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 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 such as 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 United States 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, 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 United States.

 

Group Disability and Life provides group long-term and short-term disability and 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, intersegment eliminations, compensation cost for stock options and related excess tax benefits, expense associated with frozen pension plans and certain litigation matters and costs for corporate projects, including overhead.

 

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 have been made to prior year amounts to conform to the current presentation.

 

8


Table of Contents

 

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 2017 Annual Report on Form 10-K (“2017 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 2017 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 2017 Form 10-K.

 

Recently Adopted Accounting Guidance

 

Accounting Standard and
Adoption Date

 

 

Requirements and Effects of Adopting New Guidance

Revenue from Contracts with Customers (Accounting Standards Update (“ASU”) 2014-09 and related amendments)

 

 

Adopted as of January 1, 2018

 

Requires:

 

· Revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services

· Additional revenue-related disclosures

 

Effects of adoption:

 

· Applies to the Company’s service and mail order pharmacy contracts with customers

· Adopted through full retrospective restatement 

· Cumulative effect adjustment of $24 million after-tax was recorded, reducing the December 31, 2016 balance of retained earnings.  Adjustment established a contract liability for service fee revenue billed that must be deferred and allocated to services performed after a customer contract terminates.  Subsequent changes in the contract liability and the related impact to net income and per share amounts since adoption were immaterial.

· Immaterial reclassifications were made to prior periods in the Consolidated Statements of Income to conform to the current presentation.  The ASU and related interpretive guidance provide clarification on topics including whether all or a part of a contract is within its scope, and the definition of a customer.  Companies are required to identify and evaluate distinct performance obligations within their contracts.  These clarifications resulted in reclassifications within the Global Health Care segment affecting premiums, fees and other revenues, Global Health Care medical costs, and other operating expenses and had no impact on recognition patterns or net income.

· Prior period balances in the Company’s footnote disclosures have been updated to reflect adjustments resulting from the adoption of this ASU.

 

 

9


Table of Contents

 

Accounting Standard and
Adoption Date

 

 

Requirements and Effects of Adopting New Guidance

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

 

 

Adopted 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

 

Effects of adoption:

 

· Certain limited partnership interests previously carried at cost of approximately $200 million were increased to fair value of approximately $275 million on January 1, 2018.  Subsequent changes in fair value are reported in net investment income.

· Changes in fair value for equity securities that have a readily determinable fair value that were previously reported in accumulated other comprehensive income are now reported in net realized investment gains.

· Cumulative effect adjustment of $62 million after-tax was recorded, increasing the opening balance of retained earnings in 2018.

· See Notes 9 and 10 for updated disclosures about equity securities.

 

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

 

 

Early adopted as of January 1, 2018

 

Guidance:

 

· Relaxes requirements for financial and nonfinancial hedging strategies to be eligible for hedge accounting and changes how companies assess effectiveness

· Amends presentation and disclosure requirements to improve transparency about the uses and results of hedging programs

 

Effects of adoption:

 

· An immaterial amount of retained earnings was reclassified to accumulated other comprehensive income, decreasing the opening balance in 2018, for a portion of the hedging instruments that was previously excluded from the assessment of hedge effectiveness for fair value hedges.

· See Note 11 for the Company’s disclosures about derivatives.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)

 

 

Early adopted as of January 1, 2018

 

Guidance:

 

· Allows companies to reclassify the tax effects stranded in accumulated other comprehensive income to retained earnings as a result of H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (referred to throughout this Form 10-Q as “U.S. tax reform” or “U.S. tax reform legislation”)

· Requires additional disclosures of the Company’s accounting policy for releasing income tax effects from accumulated other comprehensive income

· Allows companies to apply the guidance retrospectively or in the period of adoption

 

Effects of adoption:  Accumulated other comprehensive income of $229 million was reclassified to retained earnings, increasing the opening balance in 2018.  See Note 13 for additional information including accounting policy disclosures.

 

 

In addition to the standards listed above, the Company adopted the following guidance in first quarter 2018 with no material impact to our financial statements:  Intra-Entity Transfers of Assets Other than Inventory (ASU 2016-16), Clarifying the Definition of a Business (ASU 2017-01), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), Statement of Cash Flows:  Restricted Cash (ASU 2016-18), Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05) and Stock Compensation Scope of Modification Accounting (ASU 2017-09).

 

10


Table of Contents

 

Accounting Guidance Not Yet Adopted

 

Accounting Standard and
Effective Date Applicable
for Cigna

 

 

Requirements and Expected Effects of Guidance Not Yet Adopted

Leases (ASU 2016-02 and related amendments)

 

 

Required as of January 1, 2019

 

Requires:

 

· Balance sheet recognition of assets and liabilities arising from leases, including leases embedded in other contracts

· Additional disclosures of the amount, timing and uncertainty of cash flows from leases

· Modified retrospective approach for leases in effect as of and after the date of adoption with a cumulative-effect adjustment recorded in retained earnings

 

Expected effects:

 

· The Company is continuing to evaluate the impact this standard will have on its financial statements.

· While we continue to refine the estimated impact of this standard, the Company currently expects an increase to assets and liabilities of approximately $500 million.  The actual increase in assets and liabilities will depend on the volume, terms and discount rates of leases in place at the time of adoption.

· The Company plans to elect the optional practical expedient to retain the current classification of leases, and therefore, does not anticipate a material impact to the Consolidated Statements of Income or Cash Flows.

· The Company is implementing a new lease system and also expects that adoption of the new standard will require changes to internal control over financial reporting.

· The Company intends to adopt this new guidance as of the adoption date and will not present comparative periods in the financial statements, as recently allowed.

 

Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12)

 

 

Required as of January 1, 2021

 

Requires (for insurance entities that issue long-duration contracts):

 

· Cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-pay contract to be reconsidered at least annually with any changes reflected in net income.

· Discount rate assumptions to be reviewed quarterly (based on an upper-medium grade (low-credit-risk) fixed-income instrument yield that maximizes the use of observable market inputs) with any changes reflected in other comprehensive income.

· Deferred policy acquisition costs to be amortized on a constant-level basis over the expected term of the related contract.

· Fair value measurement of all market risk benefits.

· Additional disclosures, including liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement.

· Transition methods at adoption vary. 

- Changes to the liability for future policy benefits will use a modified retrospective approach (applied to all contracts on the basis of their carrying amounts as of the beginning of the earliest period presented), with an option to elect a full retrospective transition under certain criteria.

- Deferred policy acquisition costs are to be transitioned consistent with the method applied to the liability for future policyholder benefits.

- Market risk benefits are required to transition using retrospective application.

 

Expected effects:

 

· The Company is evaluating the impact of this newly-issued guidance, but it is expected to have a significant impact on our processes, controls, systems and financial results. The new guidance will apply to insurance products predominantly sold in the Company’s businesses other than the Global Health Care segment.

 

 

11


Table of Contents

 

Updates to Significant Accounting Policies

 

The Company’s 2017 Form 10-K includes discussion of significant accounting policies in Note 2 or the applicable Notes to the Consolidated Financial StatementsSignificant updates to these policies resulting from the adoption of new accounting guidance in 2018 are provided as follows:

 

·

ASU 2016-01 (Recognition and Measurement of Financial Assets and Liabilities):  see Notes 9 and 10

 

 

·

ASU 2017-12 (Targeted Improvements to Accounting for Hedging Activities):  see Note 11

 

 

·

ASU 2014-09 (Revenue from Contracts with Customers), also referred to as Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers and related guidance (“ASC 606”):  see below

 

The majority of the Company’s revenues are not subject to the guidance in ASC 606, including premiums from insurance contracts and fees for investment-related products accounted for under insurance guidance (ASC 944).  ASC 606 applies to the Company’s service and mail order pharmacy contracts with clients.  See Note 17 for disaggregated revenue from external customers by segment and by major product or service identified with applicable accounting guidance (ASC 944 or ASC 606).

 

Accounting for Contracts with Customers – Service and Mail Order Pharmacy Arrangements

 

Service Fees and Expenses

 

The majority of the Company’s service fees are derived from administrative services only (“ASO”) arrangements that allow corporate clients to self-fund claims and assume the risk of medical or other benefit costs.  Most of the Company’s ASO arrangements are for Global Health Care medical and specialty services, including pharmacy benefits and, to a lesser extent, ASO services in its Group Disability and Life and Global Supplemental Benefits segments.  Generally, the Company’s ASO arrangements are short-term.  Contract modifications typically occur on renewal and are prospective in nature.

 

In return for fees from these clients, the Company provides or makes available various services supporting benefit management and claims administration.  In addition, Global Health Care’s services include access to the Company’s participating provider networks, disease management, utilization management, and cost containment services.

 

In general, the Company considers these services to be a combined performance obligation to provide cost effective administration of plan benefits over the contract period.  Fees are billed, due and recognized monthly at contracted rates based on current membership or utilization.  This recognition pattern aligns with the benefits from services provided to clients.  These revenues are reported in fees and other revenues in the Consolidated Statements of Income.

 

For most ASO arrangements, the Company is required to perform services for a limited period after a client cancels.  If these services will not be separately billed to the client as they are performed, the Company estimates and defers a portion of compensation attributable to this service obligation received in advance.  Deferred revenue is recorded as a contract liability in accounts payable, accrued expenses and other liabilities and recognized when the related services are performed.

 

The Company may also provide performance guarantees that result in refunds to clients only if certain service standards, clinical outcomes or financial metrics are not met.  If these standards, outcomes and metrics are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount.  The Company defers revenue by recording a liability for estimated payouts associated with these guarantees within accounts payable, accrued expenses and other liabilities.  The amount of revenue deferred is estimated for each type of guarantee, using either a most likely amount or expected value method depending upon the nature of the guarantee and the information available to estimate refunds.  Estimates are refined each reporting period as additional information on the Company’s performance becomes available, and upon final reconciliation and settlement at the end of the guarantee period.  Amounts accrued and paid for performance guarantees during the reporting periods were not material.

 

Service fees are recognized net of estimated pharmaceutical manufacturer rebates payable to ASO clients using our network of retail pharmacies.  Net rebates retained by the Company from pharmaceutical manufacturers resulting from ASO client utilization at retail pharmacies represent compensation for pharmacy services and are reflected as fee revenue.  Rebates generally represent a per script amount from the manufacturer and are determined based on scripts filled during the reporting period.

 

Expenses associated with administrative programs and services are recognized in other operating expenses as incurred.

 

12


Table of Contents

 

Mail Order Pharmacy Revenues and Costs

 

Mail order pharmacy revenues are due and recognized as each prescription is shipped.  Mail order pharmacy revenues are presented net of estimated pharmaceutical manufacturer rebates payable to ASO clients that use our mail order business.  Rebates are generally determined based on actual prescriptions filled during the reporting period.

 

Mail order pharmacy costs are recognized as each prescription is shipped and include the cost of prescriptions sold and other costs to operate this business (including supplies, shipping and handling), net of estimated pharmaceutical rebates from manufacturers for prescriptions filled through our mail order business.

 

Contract Balances

 

The following table provides information about receivables and contract liabilities from service and mail order pharmacy contracts with clients.  The allowance for doubtful accounts for receivables and the Company’s contract assets were not material as of the dates presented.

 

(In millions)

 

September 30, 2018

 

December 31, 2017

 

Receivables, net

 

$

898

 

$

885

 

Contract liabilities

 

$

50

 

$

54

 

 

Revenue recognized that was included in the contract liability balance at the beginning of the reporting period was not material for the three months and nine months ended September 30, 2018 and 2017.

 

The amount of revenue recognized from performance obligations satisfied in prior periods was not material for the three months and nine months ended September 30, 2018 and 2017.

 

The incremental costs of obtaining ASO and mail order pharmacy contracts (such as sales commissions) are expensed as incurred and the Company does not disclose information about remaining performance obligations for these contracts in accordance with elections made by the Company as they are generally short-term with original expected durations of one year or less.

 

13


Table of Contents

 

Note 3 — Mergers and Acquisitions

 

 

Proposed Acquisition of Express Scripts

 

On March 8, 2018, the Company entered into an Agreement and Plan of Merger, as amended by Amendment No. 1, dated as of June 27, 2018 (as amended, the “Merger Agreement”) with Express Scripts Holding Company (“Express Scripts”), Halfmoon Parent, Inc., a direct wholly owned subsidiary of the Company (“New Cigna”), Halfmoon I, Inc., a direct wholly owned subsidiary of New Cigna (“Cigna Merger Sub”), and Halfmoon II, Inc., a direct wholly owned subsidiary of New Cigna (“Express Scripts Merger Sub”).  Subject to the terms and conditions of the Merger Agreement, the Company will acquire Express Scripts in a cash and stock transaction through (1) the merger of Cigna Merger Sub with and into the Company, with the Company surviving as a direct wholly owned subsidiary of New Cigna and (2) the merger of Express Scripts Merger Sub with and into Express Scripts, with Express Scripts surviving as a direct wholly owned subsidiary of New Cigna (collectively, the “Merger”).  New Cigna will be renamed “Cigna Corporation” immediately after the Merger.

 

Upon completion of the Merger, Cigna stockholders will receive one share of New Cigna common stock in exchange for each share of Cigna common stock held immediately prior to the Merger, and Express Scripts stockholders will receive (1) 0.2434 of a share of New Cigna common stock and (2) the right to receive $48.75 in cash, without interest, subject to applicable withholding taxes (the “Merger Consideration”), in exchange for each share of Express Scripts common stock held immediately prior to the Merger.  Upon completion of the Merger, shares of New Cigna common stock are expected to be listed for trading on the New York Stock Exchange.

 

In August 2018, the stockholders of each of Cigna and Express Scripts gave the requisite stockholder approvals for the Merger.  In September 2018, the Antitrust Division of the U.S. Department of Justice (“DOJ”) cleared the Merger, terminating the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  Completion of the Merger remains subject to certain state regulatory approvals and filings required in connection with the transaction, including clearances from certain departments of insurance, and the satisfaction or valid waiver of all closing conditions.  The Merger is not subject to a financing condition.  The Company intends to fund the cash portion of the Merger Consideration through a combination of cash on hand, assumed Express Scripts debt and new debt issuance.  See Note 5 for additional information about the financing of the Merger.  The Merger is expected to be completed by December 31, 2018.

 

The Merger Agreement provides for certain termination rights and fees for both the Company and Express Scripts.  If the Merger Agreement is terminated under certain circumstances and within 12 months after the date of such termination the Company enters into an agreement regarding a sale of a majority of the Company’s assets or equity or consummates such a sale, then the Company will be required to pay a $1.6 billion termination fee to Express Scripts prior to or contemporaneously with such a transaction.  Express Scripts has reciprocal obligations under specified circumstances to pay a $1.6 billion termination fee to the Company.

 

Additionally, in the event that the Merger Agreement is terminated by either the Company or Express Scripts due to (1) a legal restraint relating to a regulatory law prohibiting consummation of the Merger having become final and non-appealable or (2) the Merger not having been consummated on or prior to December 8, 2018 (subject to an extension to June 8, 2019 if extended by the Company or Express Scripts under certain circumstances); and, in the case of clause (2), at the time of such termination, all of the conditions to the Company’s obligation to consummate the Merger have been satisfied or waived other than those that relate to the absence of a legal restraint relating to a regulatory law or the receipt of a regulatory approval, the Company may be required to pay Express Scripts a reverse termination fee of $2.1 billion.

 

Other transactions

 

In May 2018, the Company announced an agreement to acquire OnePath Life NZ Limited from ANZ Bank New Zealand Limited, a part of Australia and New Zealand Banking Group Limited, for NZ$700 million (approximately $460 million as of September 30, 2018).  The Company expects that the transaction will be completed no later than the first quarter of 2019, subject to final regulatory approval.

 

14


Table of Contents

 

Transaction-related costs

 

The Company has incurred costs detailed in the table below in connection with the proposed acquisition of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”) and other transactions.  These costs consisted primarily of fees for legal, advisory and other professional services, amortization of the Bridge Facility fees in 2018 and interest expense on the debt issued to fund the Express Scripts merger net of investment income earned on the proceeds of the debt issuance.

 

 

 

Three Months Ended

 

 

 

September 30, 2018

 

September 30, 2017

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Interest expense on newly issued debt

 

$

33

 

$

26

 

$

-

 

$

-

 

Net investment income on debt proceeds

 

(13)

 

(10)

 

-

 

-

 

All other transaction-related costs

 

108

 

92

 

9

 

6

 

Transaction-related costs, net

 

$

128

 

$

108

 

$

9

 

$

6

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

September 30, 2017

 

(In millions)

 

Before-tax

 

After-tax

 

Before-tax

 

After-tax

 

Interest expense on newly issued debt

 

$

33

 

$

26

 

$

-

 

$

-

 

Net investment income on debt proceeds

 

(13)

 

(10)

 

-

 

-

 

All other transaction-related costs

 

298

 

251

 

88

 

67

 

Tax (benefit) - previously non-deductible costs

 

-

 

-

 

-

 

(59)

 

Transaction-related costs, net

 

$

318

 

$

267

 

$

88

 

$

8

 

 

In the second quarter of 2017, the Company recognized an incremental tax benefit of $59 million for costs that became deductible upon the termination of its merger agreement with Anthem.  When the Express Scripts acquisition is consummated, a portion of the costs related to that acquisition will not be deductible for federal income tax purposes, as is currently reflected in the Company’s financial results.

 

Note 4Earnings Per Share

 

 

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

 

 

 

Three Months Ended

 

 

 

September 30, 2018

 

September 30, 2017

 

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

 

Basic

 

Effect of
Dilution

 

Diluted

 

Basic

 

Effect of
Dilution

 

Diluted

 

Shareholders’ net income

 

$

772

 

 

 

$

772

 

$

560

 

 

 

$

560

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

242,577

 

 

 

242,577

 

249,242

 

 

 

249,242

 

Common stock equivalents

 

 

 

3,535

 

3,535

 

 

 

4,168

 

4,168

 

Total shares

 

242,577

 

3,535

 

246,112

 

249,242

 

4,168

 

253,410

 

EPS

 

$

3.18

 

$

(0.04)

 

$

3.14

 

$

2.25

 

$

(0.04)

 

$

2.21

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

September 30, 2017

 

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

 

Basic

 

Effect of
Dilution

 

Diluted

 

Basic

 

Effect of
Dilution

 

Diluted

 

Shareholders’ net income

 

$

2,493

 

 

 

$

2,493

 

$

1,971

 

 

 

$

1,971

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

242,404

 

 

 

242,404

 

252,980

 

 

 

252,980

 

Common stock equivalents

 

 

 

3,343

 

3,343

 

 

 

4,078

 

4,078

 

Total shares

 

242,404

 

3,343

 

245,747

 

252,980

 

4,078

 

257,058

 

EPS

 

$

10.28

 

$

(0.14)

 

$

10.14

 

$

7.79

 

$

(0.12)

 

$

7.67

 

 

15


Table of Contents

 

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, 2018 and 2017 because their effect was anti-dilutive.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In millions)

 

2018

 

2017

 

2018

 

2017

 

Anti-dilutive options

 

0.9

 

-

 

0.9

 

1.2

 

 

The Company held approximately 52.6 million shares of common stock in Treasury as of September 30, 2018, and 48.6 million shares as of September 30, 2017.

 

Note 5 Debt

 

 

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

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2018

 

2017

 

Short-term

 

 

 

 

 

Commercial paper

 

$

-

 

$

100

 

Current maturities of long-term debt

 

-

 

131

 

Other, including capital leases

 

9

 

9

 

Total short-term debt

 

$

9

 

$

240

 

Long-term

 

 

 

 

 

$250 million, 4.375% Notes due 2020

 

$

247

 

$

249

 

$300 million, 5.125% Notes due 2020

 

298

 

299

 

$1,000 million, Floating Rate Notes due 2020

 

996

 

-

 

$1,750 million, 3.2% Notes due 2020

 

1,741

 

-

 

$78 million, 6.37% Notes due 2021

 

78

 

78

 

$300 million, 4.5% Notes due 2021

 

296

 

299

 

$1,000 million, Floating Rate Notes due 2021

 

995

 

-

 

$1,250 million, 3.4% Notes due 2021

 

1,244

 

-

 

$750 million, 4% Notes due 2022

 

746

 

745

 

$100 million, 7.65% Notes due 2023

 

100

 

100

 

$17 million, 8.3% Notes due 2023

 

17

 

17

 

$700 million, Floating Rate Notes due 2023

 

696

 

-

 

$3,100 million, 3.75% Notes due 2023

 

3,082

 

-

 

$900 million, 3.25% Notes due 2025

 

895

 

894

 

$2,200 million, 4.125% Notes due 2025

 

2,185

 

-

 

$600 million, 3.05% Notes due 2027

 

594

 

594

 

$259 million, 7.875% Debentures due 2027

 

259

 

258

 

$3,800 million, 4.375% Notes due 2028

 

3,771

 

-

 

$45 million, 8.3% Step Down Notes due 2033

 

45

 

45

 

$191 million, 6.15% Notes due 2036

 

190

 

190

 

$2,200 million, 4.8% Notes due 2038

 

2,176

 

-

 

$121 million, 5.875% Notes due 2041

 

119

 

119

 

$317 million, 5.375% Notes due 2042

 

315

 

315

 

$1,000 million, 3.875% Notes due 2047

 

988

 

988

 

$3,000 million, 4.9% Notes due 2048

 

2,961

 

-

 

Other, including capital leases

 

7

 

9

 

Total long-term debt

 

$

25,041

 

$

5,199

 

 

16


Table of Contents

 

Notes.  In September 2018, New Cigna issued $20.0 billion of senior unsecured notes at maturities ranging from 18 months to 30 years (the “Notes”).  The various tranches of the Notes are included in the table above and can be identified as those having no balance at December 31, 2017.  Of the Notes issued, the Company would be required to redeem $17 billion at a redemption price equal to 101% of the principal amount plus accrued interest if the Merger does not close.  The proceeds of these mandatory redeemable notes and a portion of the proceeds of the notes due 2048, both of which reported in cash and cash equivalents, are restricted in order to redeem the debt if necessary.  The proceeds of all the notes are intended to be used to pay a portion of the cash consideration for the Merger, to repay certain indebtedness of Express Scripts and its subsidiaries and/or to pay related fees and expenses.  Proceeds not required for these purposes may be used by New Cigna for general corporate purposes.  Interest is payable semi-annually in the case of the fixed rate notes and quarterly in the case of the floating rate notes. Following closing of the Merger, the notes will be guaranteed by the Company and Express Scripts Holding Company (collectively “the Guarantors”), and guarantees will terminate when certain conditions are met, primarily when the debt issued by the Guarantors is collectively less than 20% of the debt issued by New Cigna and its subsidiaries in the aggregate.

 

Bridge Facility.  In March 2018, in connection with the proposed Merger, the Company and New Cigna entered into a commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd and 21 additional banks, to provide a $26.7 billion 364-day senior unsecured bridge facility (the “Bridge Facility”)The Bridge Facility commitment has been reduced to $3.9 billion as of September 30, 2018 after issuing the Notes in the third quarter of 2018 (described above) and entering into the Term Loan Credit Agreement (described below).  The Bridge Facility commitment may be used to finance the Merger, repay certain existing Express Scripts debt or pay related fees and expenses.

 

The Bridge Facility contains customary covenants and restrictions, including a financial covenant that the Company or New Cigna may not permit its leverage ratio – which is the ratio of total consolidated debt to total consolidated capitalization – to be greater than 60%.  These covenants and restrictions will apply only if New Cigna draws upon the Bridge Facility at closing.  The Bridge Facility expires at the Merger closing if not drawn upon.

 

The Company accrued approximately $140 million in fees upon entering into the Commitment Letter.  The Company paid $111 million during the nine months ended September 30, 2018 and expects to pay the remainder of the fees over the balance of 2018.  The fees were capitalized in other assets and are being amortized to operating expenses over the period the Bridge Facility is outstanding.  The Company recorded amortization of the Bridge Facility fees of $50 million during the three months and $135 million during the nine months ended September 30, 2018.

 

Revolving Credit Agreement.  On April 6, 2018, in connection with the proposed Merger, the Company and New Cigna entered into the Revolving Credit and Letter of Credit Agreement (the “Revolving Credit Agreement”) that matures on April 6, 2023 and is diversified among 23 banks.

 

Prior to the Merger, the Company can borrow up to $1.5 billion for general corporate purposes, of which up to $500 million is available for the issuance of letters of credit.  On and after the Merger, New Cigna can borrow up to $3.25 billion for general corporate purposes, of which up to $500 million is available for the issuance of letters of credit.  The Revolving Credit Agreement also includes an option to increase the facility amount by up to $500 million and an option to extend the termination date for additional one year periods, subject to the consent of the banks.

 

The Revolving Credit Agreement contains customary covenants and restrictions, including a financial covenant that the Company or New Cigna may not permit its leverage ratio to be greater than 50% prior to the Merger or 60% after the Merger.  Prior to the Merger, the debt issued in the third quarter of 2018 is excluded from determining the leverage ratio.

 

Term Loan Credit Agreement.  On April 6, 2018, the Company and New Cigna entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) that is diversified among 26 banks.  The Term Loan Credit Agreement provides for a three-year unsecured term loan facility in aggregate principal amount of $3.0 billion, which will be available to finance the Merger, repay certain existing indebtedness of Express Scripts, and pay fees and expenses in connection with the Merger.

 

The Term Loan Credit Agreement contains customary covenants and restrictions, including a financial covenant that the Company or, after the Merger, New Cigna may not permit its leverage ratio to be greater than 60%.

 

Prior to the Merger, the Company is the borrower under the Bridge Facility, the Revolving Credit Agreement and the Term Loan Credit Agreement.  On and after the Merger, New Cigna will be the borrower under each of these agreements.  In certain circumstances, certain subsidiaries of the Company or, after the Merger, New Cigna will be required to guarantee each other’s obligations under the Bridge Facility, the Term Loan Credit Agreement and the Revolving Credit Agreement.

 

The Company was in compliance with its debt covenants as of September 30, 2018.

 

17


Table of Contents

 

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.

 

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 2017 Form 10-K for further information about the assumptions and estimates used to establish this liability.

 

Activity in medical costs payable was as follows:

 

 

 

Nine Months Ended