NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TABLE OF CONTENTS
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Note Number
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Footnote
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Page
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BUSINESS AND CAPITAL STRUCTURE
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INSURANCE INFORMATION
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INVESTMENTS
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WORKFORCE MANAGEMENT AND COMPENSATION
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Organizational Efficiency Plan
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PROPERTY, LEASES AND OTHER ASSET BALANCES
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COMPLIANCE, REGULATION AND CONTINGENCIES
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RESULTS DETAILS
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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 service organization with a mission of helping those we serve improve their health, well-being and peace of mind. We offer a differentiated set of pharmacy, medical, dental, disability, life and accident insurance and related products and services offered by our 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 these ongoing operations, Cigna also has certain run-off operations.
The Company reports its results in the following segments.
Health Services includes pharmacy benefits management, specialty pharmacy services, clinical solutions, home delivery and health management services.
Integrated Medical offers a variety of health care solutions to employers and individuals.
•The Commercial operating segment serves employers (also referred to as “clients”) and their employees (also referred to as “customers”) and other groups. This segment provides deeply integrated medical and specialty offerings including medical, pharmacy, dental, behavioral health and vision, health advocacy programs and other products and services to insured and self-insured clients.
•The Government operating segment offers Medicare Advantage, Medicare Supplement and Medicare Part D plans for seniors (including the acquired Express Scripts' Medicare Part D business), Medicaid plans, and individual health insurance coverage both on and off the public exchanges.
International Markets includes supplemental health, life and accident insurance products and health care coverage in our international markets, as well as health care benefits to globally mobile employees of multinational organizations.
The remainder of our business operations are reported in Group Disability and Other, consisting of the following:
•Group Disability and Life provides group long-term and short-term disability, group life, accident, voluntary and specialty insurance products and related services. In December 2019, Cigna entered into a definitive agreement to sell the U.S. Group Disability and Life insurance business to New York Life Insurance Company. See Note 6 for further information on the classification of this business as held for sale.
•Corporate-Owned Life Insurance (“COLI”) offers permanent insurance contracts sold to corporations to provide coverage on the lives of certain employees for the purpose of financing employer-paid future benefit obligations.
•Run-off businesses:
•Reinsurance: 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.
•Settlement Annuity business in run-off.
•Individual Life Insurance and Annuity and Retirement Benefits Businesses: deferred gains from the sales of these businesses.
Corporate reflects amounts not allocated to operating segments, including interest expense, net investment income on investments not supporting segment and other operations, interest on uncertain tax positions, certain litigation matters, expense associated with our frozen pension plans, severance, certain enterprise-wide projects and intersegment eliminations for products and services sold between segments.
Note 2 – COVID-19 and Related Economic Impact
Cigna continues to actively monitor all aspects of our business in light of the ongoing coronavirus ("COVID-19") pandemic. As described below, management has taken a number of steps to assess the impact on our business, including the financial reporting implications associated with this pandemic.
The COVID-19 pandemic has pervasively impacted the economy, financial markets and the global health care delivery systems during the second quarter, including significant deferral of care of our customers. These impacts were most prominent in April 2020 and moderated throughout the quarter with utilization levels returning to nearly normal levels by the end of June 2020. These impacts were most significant in our Integrated Medical segment where results reflect higher quarterly earnings and a lower medical care ratio as a result of the deferral of care significantly exceeding the incremental COVID-19 costs, partially offset by COVID-19 related actions including premium relief programs for clients as well as cost share waivers for customers. The Health Services segment quarterly earnings also reflected effects of the pandemic, specifically, a favorable mix of claims as a result of both the type of drugs dispensed as well as the distribution method used for dispensing and fulfilling, partially offset by lower non-specialty, 30-day retail script volume.
The Company conducted its normal quarterly qualitative assessment of goodwill impairment, and concluded that the current economic and business conditions did not result in a triggering event requiring a quantitative impairment analysis. All other long-lived assets, including intangible assets, were reviewed for impairment and no material impairments were recorded for the six months ended June 30, 2020.
The Company reviewed all classes of financial instruments including investments, accounts receivable and reinsurance recoverables, and recorded an additional allowance for expected credit losses of $48 million related to investments (see Note 11) and $13 million related to accounts receivable (see Note 4) for the six months ended June 30, 2020. The Company also initiated several actions to assist our customers, clients, health care providers, and employees in this time of crisis.
Additionally, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The direct impact of this new legislation was not material to the Company's results of operations for the six months ended June 30, 2020. As permitted by the CARES Act and COVID-19 related regulatory actions, the Company deferred approximately $900 million in income and payroll tax payments during the second quarter of 2020. Approximately $825 million of the deferred tax payments will be made during the third quarter of 2020. The Company did not request any funding under the CARES Act. However, in April 2020 the Company received $41 million from the provider relief fund which was immediately returned to the U.S. Department of Health and Human Services.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Cigna Corporation and its consolidated 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 and receivable valuations, 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.
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 2019 Annual Report on Form 10-K (“2019 Form 10-K”). The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates. This and other factors, including the seasonal nature of portions of the health care and related benefits business, competitive and other market conditions, as well as COVID-19 related impacts, call for caution in estimating full-year results based on interim results of operations.
Recent Accounting Pronouncements
The Company's 2019 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted our financial statements or may impact them in the future. The following information provides updates on recently adopted or recently issued accounting pronouncements that have occurred since the Company filed its 2019 Form 10-K.
Recently Adopted Accounting Guidance
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Accounting Standard and Adoption Date
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Requirements and Effects of Adopting New Guidance
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Measurement of Credit Losses on Financial Instruments (Accounting Standards Update (ASU) 2016-13 and related amendments)
Adopted as of January 1, 2020
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Requires:
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A new approach using expected credit losses to estimate and recognize credit losses for certain financial instruments (such as mortgage loans, reinsurance recoverables and other receivables) when such instruments are first originated or acquired, and in each subsequent reporting period, compared with the incurred loss model previously followed under GAAP. At adoption, the Company recorded an allowance for estimated credit losses and subsequent changes in the allowance will be reported in current period earnings.
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Changes in the criteria for impairment of available-for-sale debt securities
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Effects of adoption:
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Adopted using a modified retrospective approach
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Cumulative effect adjustment of $30 million after-tax was recorded as a reduction to retained earnings as of January 1, 2020, reflecting an additional allowance for future expected credit losses required under the new model, primarily related to reinsurance recoverables.
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See additional information regarding the Company’s accounting policy for establishing the allowance for credit losses in Note 4, Accounts Receivable, Net, Note 10, Reinsurance, and Note 11, Investments.
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Simplifying the Test for Goodwill Impairment (ASU 2017-04)
Adopted as of January 1, 2020
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Requires:
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A simplified approach to the accounting for goodwill impairment by eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment
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The amount of goodwill impairment to equal the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill of the reporting unit
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Effects of adoption:
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Adopted on a prospective basis
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There was no impact of adopting this new standard to the Company’s financial statements because our quarterly qualitative assessments did not result in a triggering event for impairment of goodwill.
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Accounting Guidance Not Yet Adopted
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Accounting Standard and Effective Date
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Requirements and Expected Effects of New Guidance Not Yet Adopted
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Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
Optional, effective upon issuance (March 12, 2020) through December 31, 2022
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Guidance:
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Provides temporary optional relief to ease the potential burden of accounting for reference rate reform under existing GAAP. Amendments are elective and apply to all entities that have contracts, hedging relationships and other transactions that reference interbank offered rates, including LIBOR, expected to be discontinued by December 31, 2021.
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Permits optional expedients and exceptions to simplify the accounting for contract modifications, hedging arrangements and held-to-maturity investments, when certain changes are made to a contract or instrument to facilitate reference rate reform.
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An entity may elect to apply the amendments, by topic or subsection, at any point prospectively through December 31, 2022. When elected, the optional expedients must be applied consistently for all eligible contracts or transactions.
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Expected effects:
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To date, the Company has identified minimal exposure to LIBOR and does not anticipate that LIBOR’s phase-out will have a material impact on its operations or financial results.
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The Financial Accounting Standards Board voted to propose the deferral of the effective date of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts and, in July 2020, issued a proposed standard for comment extending the effective date by one year, or until January 1, 2023 for the Company.
Note 4 - Accounts Receivable, Net
Accounting policy. The Company's accounts receivable balances primarily include amounts due from clients, third-party payors, customers and pharmaceutical manufacturers, and are presented net of allowances. The Company's adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), as of January 1, 2020 did not have a material impact on our accounts receivable credit loss allowance, as there were no substantive changes to our methodology for this class of assets. The allowance for expected credit losses for current accounts receivable is based primarily on past collections experience relative to the length of time receivables are past due; however, when available evidence reasonably supports an assumption that counterparty credit risk over the expected payment period will differ from current and historical payment collections, a forecasting adjustment is reflected in the allowance for expected credit losses.
All other (non-credit) allowances are based on the current status of each customer's receivable balance as well as current economic and market conditions and a variety of other factors, including the length of time the receivables are past due, the financial health of customers and our past experience. We bill pharmaceutical manufacturers based on management's interpretation of contractual terms and estimate a contractual allowance based on the best information available at the time a claim is processed. Contractual allowances for certain rebates receivable from pharmaceutical manufacturers are determined by reviewing payment experience and specific known items that could be adjusted under contract terms. The Company's estimation process for contractual allowances for pharmaceutical manufacturer receivables generally results in an allowance for balances outstanding greater than 90 days.
Contractual allowances for certain receivables from third-party payors are based on their contractual terms and are estimates based on the Company's best information available at the time revenue is recognized.
Receivables and any associated allowance are written off only when all collection attempts have failed and such amounts are determined unrecoverable. We regularly review the adequacy of these allowances based on a variety of factors, including age of the outstanding receivable and collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted.
The following amounts were included within accounts receivable, net:
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(In millions)
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June 30, 2020
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December 31, 2019
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Noninsurance customer receivables
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$
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5,678
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$
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5,143
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Pharmaceutical manufacturers receivable
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4,654
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3,439
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Insurance customer receivables
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2,607
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2,321
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Other receivables
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386
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334
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Total
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13,325
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11,237
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Accounts receivable, net classified as assets of business held for sale
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(631)
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(521)
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Accounts receivable, net per Consolidated Balance Sheets
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$
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12,694
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$
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10,716
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These receivables are reported net of our allowances of $1.1 billion as of June 30, 2020 and $778 million as of December 31, 2019. These allowances include contractual allowances for certain rebates receivable with pharmaceutical manufacturers and certain receivables from third-party payors, discounts and claims adjustments issued to customers in the form of client credits, an allowance for the balance of our risk corridor receivables under the Patient Protection and Affordable Care Act ("ACA"), an allowance for current expected credit losses and other non-credit adjustments. The Company's allowance for current expected credit losses was $72 million as of June 30, 2020 and $39 million as of January 1, 2020 (no change to allowance for credit losses from December 31, 2019). The allowance for current expected credit losses as of June 30, 2020 includes an additional forecasting adjustment of $13 million related to COVID-19.
Note 5 – Mergers and Acquisitions
Integration and Transaction-related Costs
The Company incurred integration and transaction costs related to the acquisition and integration of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”), the sale of the U.S. Group Disability and Life insurance business, and other transactions. These costs were $130 million pre-tax ($99 million after-tax) for the three months and $227 million pre-tax ($173 million after tax) for the six months ended June 30, 2020, compared with $155 million pre-tax ($115 million after-tax) for the three months and $291 million pre-tax ($223 million after-tax) for the six months ended June 30, 2019. These costs consisted primarily of certain projects to integrate or separate the Company’s systems, products and services, fees for legal, advisory and other professional services and certain employment-related costs.
Note 6 – Assets and Liabilities of Business Held for Sale
In December 2019, Cigna entered into a definitive agreement to sell its U.S. Group Disability and Life insurance business to New York Life Insurance Company for $6.3 billion. The sale is expected to close in the third quarter of 2020 following applicable regulatory approvals and other customary closing conditions. The Company believes this sale is probable and has aggregated and classified the assets and liabilities directly associated with the pending sale of its Group Disability and Life insurance business as held for sale and has reported them separately on our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019. The assets and liabilities of business held for sale were as follows:
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(In millions)
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June 30, 2020
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December 31, 2019
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Cash and cash equivalents
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$
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418
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$
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743
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Accounts receivable, net
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631
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521
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Investments
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8,181
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7,709
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Other assets
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558
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539
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Total assets of business held for sale
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9,788
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9,512
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Insurance and contractholder liabilities
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6,549
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6,308
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Other liabilities
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560
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504
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Total liabilities of business held for sale
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$
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7,109
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$
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6,812
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Note 7 – Earnings Per Share (“EPS”)
Basic and diluted earnings per share were computed as follows:
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Three Months Ended
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June 30, 2020
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June 30, 2019
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(Shares in thousands, dollars in millions, except per share amounts)
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Basic
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Effect of Dilution
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Diluted
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Basic
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Effect of Dilution
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Diluted
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Shareholders’ net income
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$
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1,754
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$
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1,754
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$
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1,408
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$
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1,408
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Shares:
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Weighted average
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367,396
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367,396
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377,962
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377,962
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Common stock equivalents
|
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3,301
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3,301
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|
3,007
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|
3,007
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Total shares
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367,396
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3,301
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370,697
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377,962
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3,007
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380,969
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EPS
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$
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4.77
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$
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(0.04)
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$
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4.73
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$
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3.73
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$
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(0.03)
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$
|
3.70
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Six Months Ended
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June 30, 2020
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June 30, 2019
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(Shares in thousands, dollars in millions, except per share amounts)
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Basic
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Effect of
Dilution
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Diluted
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Basic
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Effect of
Dilution
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Diluted
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Shareholders’ net income
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$
|
2,935
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$
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2,935
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$
|
2,776
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$
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2,776
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Shares:
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Weighted average
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368,918
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368,918
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378,672
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378,672
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Common stock equivalents
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3,750
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3,750
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3,824
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|
3,824
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Total shares
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368,918
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3,750
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372,668
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378,672
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3,824
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382,496
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EPS
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$
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7.96
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$
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(0.08)
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$
|
7.88
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$
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7.33
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$
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(0.07)
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$
|
7.26
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The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive.
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Three Months Ended June 30,
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Six Months Ended June 30,
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(In millions)
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2020
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2019
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2020
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2019
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Anti-dilutive options
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4.0
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5.4
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4.0
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|
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4.1
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The Company held approximately 20.8 million shares of common stock in treasury at June 30, 2020, 13.0 million shares as of December 31, 2019 and 6.2 million shares as of June 30, 2019.
Note 8 – Debt
The outstanding amounts of debt and finance leases were as follows:
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(In millions)
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|
June 30, 2020
|
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December 31, 2019
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Short-term debt
|
|
|
|
|
|
$1,000 million, Floating Rate Notes due 3/2020
|
|
|
$
|
—
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|
$
|
999
|
|
$300 million, 5.125% Notes due 6/2020
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|
|
—
|
|
|
300
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|
$1,750 million, 3.2% Notes due 9/2020
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|
|
1,750
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|
|
1,748
|
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$349 million, 4.125% Notes due 9/2020
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|
|
349
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|
|
351
|
|
$500 million, 2.6% Notes due 11/2020
|
|
|
498
|
|
|
496
|
|
$400 million, Floating Rate Notes due 11/2020
|
|
|
400
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|
|
400
|
|
$250 million, 4.375% Notes due 12/2020
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|
|
250
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|
|
249
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|
$1,400 million, Floating Rate Term Loan due 3/2021
|
|
|
1,398
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|
|
—
|
|
$78 million, 6.37% Notes due 6/2021
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|
|
78
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|
|
—
|
|
Commercial paper
|
|
|
5
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|
|
944
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|
Other, including finance leases
|
|
|
22
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|
|
27
|
|
Total short-term debt
|
|
|
$
|
4,750
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|
|
$
|
5,514
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Long-term debt
|
|
|
|
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|
$500 million, 3.3% Notes due 2021
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|
|
$
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—
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|
|
$
|
499
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|
$300 million, 4.5% Notes due 2021
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|
|
—
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|
|
298
|
|
$78 million, 6.37% Notes due 2021
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|
|
—
|
|
|
78
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|
$1,000 million, Floating Rate Notes due 2021
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|
|
998
|
|
|
998
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|
$1,250 million, 3.4% Notes due 2021
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|
|
1,248
|
|
|
1,247
|
|
$1,248 million, 4.75% Notes due 2021
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|
|
—
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|
|
1,272
|
|
$277 million, 4% Notes due 2022
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|
|
276
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|
|
747
|
|
$973 million, 3.9% Notes due 2022
|
|
|
972
|
|
|
999
|
|
$500 million, 3.05% Notes due 2022
|
|
|
488
|
|
|
485
|
|
$17 million, 8.3% Notes due 2023
|
|
|
17
|
|
|
17
|
|
$63 million, 7.65% Notes due 2023
|
|
|
63
|
|
|
100
|
|
$700 million, Floating Rate Notes due 2023
|
|
|
698
|
|
|
698
|
|
$1,000 million, 3% Notes due 2023
|
|
|
971
|
|
|
966
|
|
$2,187 million, 3.75% Notes due 2023
|
|
|
2,180
|
|
|
3,088
|
|
$1,000 million, 3.5% Notes due 2024
|
|
|
974
|
|
|
970
|
|
$900 million, 3.25% Notes due 2025
|
|
|
895
|
|
|
895
|
|
$2,200 million, 4.125% Notes due 2025
|
|
|
2,189
|
|
|
2,188
|
|
$1,500 million, 4.5% Notes due 2026
|
|
|
1,505
|
|
|
1,506
|
|
$1,500 million, 3.4% Notes due 2027
|
|
|
1,404
|
|
|
1,396
|
|
$259 million, 7.875% Debentures due 2027
|
|
|
259
|
|
|
259
|
|
$600 million, 3.05% Notes due 2027
|
|
|
595
|
|
|
595
|
|
$3,800 million, 4.375% Notes due 2028
|
|
|
3,778
|
|
|
3,776
|
|
$1,500 million, 2.4% Notes due 2030
|
|
|
1,489
|
|
|
—
|
|
$45 million, 8.3% Step Down Notes due 2033
|
|
|
45
|
|
|
45
|
|
$190 million, 6.15% Notes due 2036
|
|
|
190
|
|
|
190
|
|
$2,200 million, 4.8% Notes due 2038
|
|
|
2,179
|
|
|
2,178
|
|
$750 million, 3.2% Notes due 2040
|
|
|
742
|
|
|
—
|
|
$121 million, 5.875% Notes due 2041
|
|
|
119
|
|
|
119
|
|
$448 million, 6.125% Notes due 2041
|
|
|
490
|
|
|
491
|
|
$317 million, 5.375% Notes due 2042
|
|
|
315
|
|
|
315
|
|
$1,500 million, 4.8% Notes due 2046
|
|
|
1,464
|
|
|
1,465
|
|
$1,000 million, 3.875% Notes due 2047
|
|
|
988
|
|
|
988
|
|
$3,000 million, 4.9% Notes due 2048
|
|
|
2,965
|
|
|
2,964
|
|
$1,250 million, 3.4% Notes due 2050
|
|
|
1,235
|
|
|
—
|
|
Other, including finance leases
|
|
|
43
|
|
|
61
|
|
Total long-term debt
|
|
|
$
|
31,774
|
|
|
$
|
31,893
|
|
Debt issuance and redemption. In order to decrease future interest expense and reduce future refinancing risk, the Company entered into the following transactions:
•Debt issuance: On March 16, 2020, the Company issued $3.5 billion of new senior notes. The proceeds of this debt were mainly used to pay the consideration for the cash tender and redemption offer as described below. Interest on this debt is paid semi-annually.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
Maturity Date
|
|
Interest Rate
|
|
Net Proceeds
|
$1,500 million
|
March 15, 2030
|
|
2.40%
|
|
$1,491 million
|
$750 million
|
March 15, 2040
|
|
3.20%
|
|
$743 million
|
$1,250 million
|
March 15, 2050
|
|
3.40%
|
|
$1,237 million
|
•Debt tender and redemption: In March and April 2020, the Company completed a tender offer and an optional redemption totaling $3.5 billion of aggregate principal amount of certain of its outstanding debt securities. The principal amount repurchased in this tender offer was $1.5 billion. Additionally, $2.0 billion of notes were repurchased via optional redemption. The Company recorded a pre-tax loss of $199 million ($151 million after-tax), consisting primarily of premium payments on the tender and optional redemption.
Debt Exchange. In the fourth quarter of 2019, the Company settled an exchange of approximately $12.7 billion of Notes issued by Express Scripts Holding Company, Medco Health Solutions, Inc. and Cigna Holding Company (formerly named Cigna Corporation) for privately placed Notes issued by Cigna with the same interest rates and maturities and comparable other terms. We initiated an exchange offer to register such debt in the second quarter of 2020 and completed the exchange in July 2020.
Debt Repayment. During the first six months of 2020, the Company repaid $4.8 billion of long-term debt, including the $3.5 billion debt tender and redemption described above.
Revolving Credit Agreements. Cigna has a revolving credit and letter of credit agreement that matures in April 2023 and is diversified among 23 banks. Cigna can borrow up to $3.25 billion for general corporate purposes, with up to $500 million available for issuance of letters of credit. This revolving credit agreement also includes an option to increase the facility amount up to $500 million and an option to extend the termination date for additional one year periods, subject to consent of the banks.
In the fourth quarter of 2019, the Company entered into an additional 364-day revolving credit agreement that matures in October 2020 and is diversified among 23 banks. Pursuant to this revolving credit agreement, Cigna can borrow up to $1.0 billion for general corporate purposes. The agreement includes the option to “term out” any revolving loans that are outstanding at maturity by converting them into a term loan maturing on the one year anniversary of conversion.
The revolving credit agreements contain customary covenants and restrictions including a financial covenant that the Company’s leverage ratio may not exceed 60%. As of June 30, 2020, there were no outstanding balances under the revolving credit agreements.
Term Loan Credit Agreement. On April 1, 2020, the Company borrowed an aggregate principal amount of $1.4 billion under a new 364-Day Term Loan Credit Agreement (the "Credit Agreement"). The Company entered into the Credit Agreement to enhance its liquidity position in light of disruption in the commercial paper market and used a portion of the net proceeds to pay down amounts outstanding under its commercial paper facility. The Credit Agreement may be prepaid at any time in whole or in part without premium or penalty. Term loans prepaid may not be reborrowed. The Credit Agreement provides for mandatory prepayment of the term loans in an amount equal to 20% of any Net Cash Proceeds (as defined in the Credit Agreement) arising from the previously announced sale of Cigna’s U.S. Group Disability and Life insurance business to New York Life Insurance Company.
Commercial Paper. The commercial paper program had approximately $5 million outstanding at June 30, 2020 at an average interest rate of 1.0%.
The Company was in compliance with its debt covenants as of June 30, 2020.
Note 9 – Insurance and Contractholder Liabilities
A.Account Balances – Insurance and Contractholder Liabilities
As of June 30, 2020, December 31, 2019 and June 30, 2019, the Company’s insurance and contractholder liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
June 30, 2019
|
(In millions)
|
Current
|
|
Non-current
|
|
Total
|
|
Current
|
|
Non-current
|
|
Total
|
|
Total
|
Contractholder deposit funds
|
$
|
627
|
|
|
$
|
7,062
|
|
|
$
|
7,689
|
|
|
$
|
600
|
|
|
$
|
7,139
|
|
|
$
|
7,739
|
|
|
$
|
7,883
|
|
Future policy benefits
|
528
|
|
|
9,417
|
|
|
9,945
|
|
|
553
|
|
|
9,281
|
|
|
9,834
|
|
|
9,715
|
|
Unpaid claims and claim expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Medical
|
2,942
|
|
|
17
|
|
|
2,959
|
|
|
2,875
|
|
|
17
|
|
|
2,892
|
|
|
2,881
|
|
Other segments
|
2,551
|
|
|
3,599
|
|
|
6,150
|
|
|
2,529
|
|
|
3,474
|
|
|
6,003
|
|
|
5,793
|
|
Unearned premiums
|
561
|
|
|
369
|
|
|
930
|
|
|
453
|
|
|
360
|
|
|
813
|
|
|
776
|
|
Total
|
7,209
|
|
|
20,464
|
|
|
27,673
|
|
|
7,010
|
|
|
20,271
|
|
|
27,281
|
|
|
27,048
|
|
Insurance and contractholder liabilities classified as liabilities of business held for sale(1)
|
(2,149)
|
|
|
(4,400)
|
|
|
(6,549)
|
|
|
(2,089)
|
|
|
(4,219)
|
|
|
(6,308)
|
|
|
|
Total insurance and contractholder liabilities
|
$
|
5,060
|
|
|
$
|
16,064
|
|
|
$
|
21,124
|
|
|
$
|
4,921
|
|
|
$
|
16,052
|
|
|
$
|
20,973
|
|
|
$
|
27,048
|
|
(1) Amounts classified as Liabilities of business held for sale primarily include $5.1 billion of unpaid claims, $758 million of contractholder deposit funds and $644 million of future policy benefits as of June 30, 2020 and $4.9 billion of unpaid claims, $717 million of contractholder deposit funds and $653 million of future policy benefits as of December 31, 2019.
Insurance and contractholder liabilities expected to be paid within one year are classified as current.
B.Unpaid Claims and Claim Expenses – Integrated Medical
This liability 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.
The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at June 30, 2020 and June 30, 2019.
Activity, net of intercompany transactions, in the unpaid claims liability for the Integrated Medical segment for the six months ended June 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
(In millions)
|
June 30, 2020
|
|
June 30, 2019
|
Beginning balance
|
$
|
2,892
|
|
|
$
|
2,697
|
|
Less: Reinsurance and other amounts recoverable
|
303
|
|
|
264
|
|
Beginning balance, net
|
2,589
|
|
|
2,433
|
|
Incurred costs related to:
|
|
|
|
Current year
|
12,212
|
|
|
12,120
|
|
Prior years
|
(130)
|
|
|
(149)
|
|
Total incurred
|
12,082
|
|
|
11,971
|
|
Paid costs related to:
|
|
|
|
Current year
|
9,585
|
|
|
9,629
|
|
Prior years
|
2,284
|
|
|
2,134
|
|
Total paid
|
11,869
|
|
|
11,763
|
|
Ending balance, net
|
2,802
|
|
|
2,641
|
|
Add: Reinsurance and other amounts recoverable
|
157
|
|
|
240
|
|
Ending balance
|
$
|
2,959
|
|
|
$
|
2,881
|
|
Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims of certain business for which the Company administers the plan benefits without any right of offset. See Note 10 for additional information on reinsurance.
Variances in incurred costs related to prior years’ unpaid claims and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions for the six months ended June 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
|
|
$
|
|
%(1)
|
|
$
|
|
%(2)
|
Actual completion factors
|
$
|
50
|
|
|
0.2
|
%
|
|
$
|
91
|
|
|
0.4
|
%
|
Medical cost trend
|
80
|
|
|
0.3
|
|
|
58
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Total favorable variance
|
$
|
130
|
|
|
0.5
|
%
|
|
$
|
149
|
|
|
0.7
|
%
|
(1)Percentage of current year incurred costs as reported for the year ended December 31, 2019.
(2)Percentage of current year incurred costs as reported for the year ended December 31, 2018.
Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.
Prior year development increased shareholders’ net income by $44 million ($56 million before-tax) for the six months ended June 30, 2020, compared with $62 million ($78 million before-tax) for the six months ended June 30, 2019. Favorable prior year development in both periods reflects lower than expected utilization of medical services.
C.Unpaid Claims and Claim Expenses – Group Disability and Other and International Markets
Liability balance details. The liability details for unpaid claims and claim expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
June 30, 2020 (1)
|
|
June 30, 2019
|
Group Disability and Other
|
|
|
|
Group Disability and Life
|
$
|
5,165
|
|
|
$
|
4,827
|
|
Other Operations
|
160
|
|
|
195
|
|
Total Group Disability and Other
|
5,325
|
|
|
5,022
|
|
International Markets
|
825
|
|
|
771
|
|
Unpaid claims and claim expenses Group Disability and Other and International Markets
|
$
|
6,150
|
|
|
$
|
5,793
|
|
(1) Includes unpaid claim amounts classified as Liabilities of business held for sale.
Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
(In millions)
|
June 30, 2020(1)
|
|
June 30, 2019
|
Beginning balance
|
$
|
5,816
|
|
|
$
|
5,432
|
|
Less: Reinsurance
|
184
|
|
|
156
|
|
Beginning balance, net
|
5,632
|
|
|
5,276
|
|
Incurred claims related to:
|
|
|
|
Current year
|
2,829
|
|
|
2,814
|
|
Prior years:
|
|
|
|
Interest accretion
|
81
|
|
|
81
|
|
All other incurred
|
(8)
|
|
|
(42)
|
|
Total incurred
|
2,902
|
|
|
2,853
|
|
Paid claims related to:
|
|
|
|
Current year
|
1,357
|
|
|
1,415
|
|
Prior years
|
1,353
|
|
|
1,275
|
|
Total paid
|
2,710
|
|
|
2,690
|
|
Foreign currency
|
(14)
|
|
|
(16)
|
|
Ending balance, net
|
5,810
|
|
|
5,423
|
|
Add: Reinsurance
|
180
|
|
|
175
|
|
Ending balance
|
$
|
5,990
|
|
|
$
|
5,598
|
|
(1) Includes Unpaid claims amounts classified as Liabilities of business held for sale.
Reinsurance in the table above reflects amounts due from reinsurers related to unpaid claims liabilities. The Company’s insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses. See Note 10 for additional information on reinsurance.
The majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts that relate to a business held for sale. Interest earned on assets backing these liabilities is an integral part of pricing and reserving. Therefore, interest accreted on prior year balances is shown as a separate component of prior
year incurred claims and reported in Medical costs and other benefit expenses in the income statement. This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period. The remaining prior year incurred claims amount primarily reflects updates to the Company’s liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability. Assumptions reflect the Company’s expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business. Favorable prior year incurred claims for the six months ended June 30, 2020 primarily reflected favorable experience in Europe and the Middle East and favorable Voluntary and Life incidence, partially offset by unfavorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve. Favorable prior year incurred claims for the six months ended June 30, 2019 primarily reflected favorable life and voluntary loss ratio experience relative to expectations reflected in the prior year reserve.
Note 10 – Reinsurance
The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance is also used to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance does not relieve the originating insurer of liability. Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.
A.Reinsurance Recoverables
Accounting policy. Reinsurance recoverables represent amounts due from reinsurers for both paid and unpaid claims of the Company’s insurance businesses. Most reinsurance recoverables are classified as non-current assets. The current portion of reinsurance recoverables is reported in Other current assets and consists primarily of recoverables on paid claims expected to be settled within one year. Reinsurance recoverables are presented net of allowances for uncollectible reinsurance that, effective with adopting ASU 2016-13 on January 1, 2020, consists primarily of an allowance for expected credit losses. Estimates of the allowance for expected credit losses are based on internal and external data used to develop expected loss rates over the anticipated duration of the recoverable asset that vary by external credit rating and collateral level. The Company's allowance for credit losses on reinsurance recoverables was $34 million as of June 30, 2020, of which $31 million was through a cumulative effect adjustment to retained earnings at adoption.
The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Included in the table below is $224 million of current reinsurance recoverables that are reported in Other current assets as of June 30, 2020; as of December 31, 2019 there was $222 million of current reinsurance recoverables reported in Other current assets. The Company’s reinsurance recoverables are presented in the following table by range of external credit rating and collateral level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fair value of collateral contractually required to meet or exceed carrying value of recoverable
|
|
Collateral provisions exist that may mitigate risk of credit loss (3)
|
|
No collateral
|
|
Total
|
Ongoing Operations
|
|
|
|
|
|
|
|
|
Upper-medium grade and higher (1)
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
311
|
|
|
$
|
317
|
|
Lower-medium grade (2)
|
|
—
|
|
|
—
|
|
|
66
|
|
|
66
|
|
Not rated
|
|
89
|
|
|
14
|
|
|
17
|
|
|
120
|
|
Total recoverables related to ongoing operations (3)
|
|
$
|
89
|
|
|
$
|
20
|
|
|
$
|
394
|
|
|
$
|
503
|
|
Acquisition, disposition or runoff activities
|
|
|
|
|
|
|
|
|
Upper-medium grade and higher (1)
|
|
|
|
|
|
|
|
|
Lincoln National Life and Lincoln Life & Annuity of New York
|
|
—
|
|
|
3,064
|
|
|
—
|
|
|
3,064
|
|
Berkshire
|
|
329
|
|
|
493
|
|
|
—
|
|
|
822
|
|
Prudential Retirement Insurance and Annuity
|
|
660
|
|
|
—
|
|
|
—
|
|
|
660
|
|
Other
|
|
241
|
|
|
21
|
|
|
19
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
Not rated
|
|
—
|
|
|
40
|
|
|
3
|
|
|
43
|
|
Total recoverables related to acquisition, disposition or runoff activities
|
|
1,230
|
|
|
3,618
|
|
|
22
|
|
|
4,870
|
|
Total
|
|
$
|
1,319
|
|
|
$
|
3,638
|
|
|
$
|
416
|
|
|
$
|
5,373
|
|
Allowance for uncollectible reinsurance
|
|
|
|
|
|
|
|
(34)
|
|
Reinsurance recoverables classified as assets of business held for sale
|
|
|
|
|
|
|
|
(173)
|
|
Total reinsurance recoverables
|
|
|
|
|
|
|
|
$
|
5,166
|
|
(1) Includes A- equivalent and higher current ratings certified by a nationally recognized statistical rating organization ('NRSRO')
|
|
|
|
|
|
|
|
|
(2) Includes BBB- to BBB+ equivalent current credit ratings certified by a NRSRO
|
|
|
|
|
|
|
|
|
(3) This includes collateral provisions requiring the reinsurer to fully collateralize its obligation if its external credit rating is downgraded to a specified level
|
|
|
|
|
|
|
|
|
Collateral levels are defined internally based on the fair value of the collateral relative to the carrying amount of the reinsurance recoverable, the frequency at which collateral is required to be replenished and the potential for volatility in the collateral’s fair value. The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables, as further described above.
B.Effects of Reinsurance
In the Company’s Consolidated Statements of Income, premiums were reported net of amounts ceded to reinsurers and medical costs and other benefit expenses were reported net of reinsurance recoveries in the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Total ceded premiums
|
$
|
117
|
|
|
$
|
126
|
|
|
$
|
245
|
|
|
$
|
256
|
|
Total reinsurance recoveries
|
$
|
102
|
|
|
$
|
53
|
|
|
$
|
280
|
|
|
$
|
112
|
|
C.Effective Exit of GMDB and GMIB Business
The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013. Berkshire reinsured 100% of the Company’s future claim payments in this business, net of other reinsurance arrangements existing at that time. The reinsurance agreement is subject to an overall limit with approximately $3.3 billion remaining at June 30, 2020.
GMDB is accounted for as assumed and ceded reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below. GMIB assets are reported in Other current assets and Other assets, and GMIB liabilities are reported in Accrued expenses and other liabilities and Other non-current liabilities.
GMDB
The GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death. The Company’s exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death.
The following table presents the account value, net amount at risk and the number of contractholders for guarantees assumed by the Company in the event of death. The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date. The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, excludes impact of reinsurance ceded)
|
June 30, 2020
|
|
December 31, 2019
|
Account value
|
$
|
8,424
|
|
|
$
|
9,110
|
|
Net amount at risk
|
$
|
1,776
|
|
|
$
|
1,764
|
|
Number of contractholders (estimated)
|
190,000
|
|
|
200,000
|
|
GMIB
The Company reinsured contracts with issuers of GMIB products. The Company’s exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values. Payment by the Company depends on the actual account value in the related underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that can only occur within 30 days of a policy
anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage (“GMIB assets”) for these contracts including retrocessional coverage from Berkshire.
Assumptions used in fair value measurement. GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates). The Company classifies GMIB assets and liabilities in Level 3 of the fair value hierarchy described in Note 12 because assumptions related to future annuitant behavior are largely unobservable.
The only assumption expected to impact future shareholders’ net income is non-performance risk. The non-performance risk adjustment reflects a market participant’s view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company, and (b) the GMIB assets to be paid by the reinsurers, after considering collateral. The impact of non-performance risk was immaterial for the three and six months ended June 30, 2020 and June 30, 2019.
GMIB liabilities totaling $838 million as of June 30, 2020 and $688 million as of December 31, 2019 were reported in Accrued expenses and other liabilities and Other non-current liabilities. There were three reinsurers covering 100% of the GMIB exposures as of June 30, 2020 and December 31, 2019 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Line of Business
|
|
Reinsurer
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Collateral and Other Terms at June 30, 2020
|
GMIB
|
|
Berkshire
|
|
$
|
404
|
|
|
$
|
332
|
|
|
100% were secured by assets in a trust.
|
|
|
Sun Life Assurance Company of Canada
|
|
249
|
|
|
202
|
|
|
|
|
|
Liberty Re (Bermuda) Ltd.
|
|
218
|
|
|
179
|
|
|
96% were secured by assets in a trust.
|
Total GMIB recoverables reported in Other current assets and Other assets
|
|
|
|
$
|
871
|
|
|
$
|
713
|
|
|
|
Amounts included in shareholders’ net income for GMIB assets and liabilities were not material for the three or six months ended June 30, 2020 or June 30, 2019.
Note 11 – Investments
Cigna’s investment portfolio consists of a broad range of investments including debt securities, equity securities, commercial mortgage loans, policy loans, other long-term investments, short-term investments and derivative financial instruments. The sections below provide more detail regarding our investment balances and realized investment gains and losses. See Note 12 for information about the valuation of the Company’s investment portfolio. The following table summarizes the Company's investments by category and current or long-term classification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
(In millions)
|
Current
|
|
Long-term
|
|
Total
|
|
Current
|
|
Long-term
|
|
Total
|
Debt securities
|
$
|
1,046
|
|
|
$
|
22,628
|
|
|
$
|
23,674
|
|
|
$
|
928
|
|
|
$
|
22,827
|
|
|
$
|
23,755
|
|
Equity securities
|
—
|
|
|
373
|
|
|
373
|
|
|
—
|
|
|
303
|
|
|
303
|
|
Commercial mortgage loans
|
—
|
|
|
1,942
|
|
|
1,942
|
|
|
—
|
|
|
1,947
|
|
|
1,947
|
|
Policy loans
|
—
|
|
|
1,364
|
|
|
1,364
|
|
|
—
|
|
|
1,357
|
|
|
1,357
|
|
Other long-term investments
|
—
|
|
|
2,900
|
|
|
2,900
|
|
|
—
|
|
|
2,403
|
|
|
2,403
|
|
Short-term investments
|
456
|
|
|
—
|
|
|
456
|
|
|
423
|
|
|
—
|
|
|
423
|
|
Total
|
$
|
1,502
|
|
|
$
|
29,207
|
|
|
$
|
30,709
|
|
|
$
|
1,351
|
|
|
$
|
28,837
|
|
|
$
|
30,188
|
|
Investments classified as assets of business held for sale(1)
|
(312)
|
|
|
(7,869)
|
|
|
(8,181)
|
|
|
(414)
|
|
|
(7,295)
|
|
|
(7,709)
|
|
Investments per Consolidated Balance Sheets
|
$
|
1,190
|
|
|
$
|
21,338
|
|
|
$
|
22,528
|
|
|
$
|
937
|
|
|
$
|
21,542
|
|
|
$
|
22,479
|
|
(1) The table above includes $8.2 billion as of June 30, 2020 and $7.7 billion as of December 31, 2019 of investments associated with the U.S. Group Disability and Life business that are held for sale to New York Life. Under the terms of the definitive agreement, some of the assets currently associated with the Group Disability and Life business can be substituted for other assets. The assets that will transfer to New York Life will be primarily debt securities and to a lesser extent commercial mortgage loans and short-term investments.
|
|
|
|
|
|
|
|
|
|
|
|
A.Investment Portfolio
Debt Securities
Accounting policy. Debt securities (including bonds, mortgage and other asset-backed securities and preferred stocks redeemable by the investor) are classified as available for sale and are carried at fair value with changes in fair value recorded either in Accumulated other comprehensive income (loss) within Shareholders’ equity or in credit loss expense based on fluctuations in the allowance for credit losses, as further discussed below. Net unrealized appreciation on debt securities supporting the Company’s run-off settlement annuity business is reported in Non-current insurance and contractholder liabilities rather than Accumulated other comprehensive income (loss). When the Company intends to sell or determines that it is more likely than not to be required to sell an impaired debt security, the excess of amortized cost over fair value is directly written down with a charge to Realized investment gains and losses.
As of January 1, 2020, the Company adopted ASU 2016-13 that included certain targeted improvements to the accounting for available-for-sale debt securities. The new guidance resulted in certain policy changes related to the process used by the Company to review declines in fair value from a security’s amortized cost basis to determine whether a credit loss exists. For example, the length of time that a debt security has been impaired is no longer a criterion for this review. In addition, under this new guidance, the Company recognizes an allowance for credit loss with a corresponding charge to credit loss expense, presented in Realized investment gains and losses in the Company’s income statement. Prior to this new guidance, the Company recorded a direct write-down of the instrument’s amortized cost basis. The allowance for credit loss represents the excess of amortized cost over the greater of its fair value or the net present value of the debt security's projected future cash flows (based on
qualitative and quantitative factors, including the probability of default, and the estimated timing and amount of recovery). Each period, the allowance for credit loss is adjusted through credit loss expense.
The Company elected the expedient to not measure an allowance for credit losses for accrued interest receivables. Consistent with prior practice, when interest payments are delinquent based on contractual terms or when certain terms (interest rate or maturity date) of the investment have been restructured, accrued interest, reported in Other current assets, is written off through a charge to Net investment income, and interest income is recognized on a cash basis.
Debt securities are classified as either Current or Long-term investments based on their contractual maturities.
Review of declines in fair value. Management reviews impaired debt securities to determine whether a credit loss allowance is needed based on criteria that include:
•severity of decline;
•financial health and specific prospects of the issuer; and
•changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region.
The amortized cost and fair value by contractual maturity periods for debt securities were as follows at June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amortized
Cost
|
|
Fair
Value
|
Due in one year or less
|
$
|
1,049
|
|
|
$
|
1,059
|
|
Due after one year through five years
|
7,298
|
|
|
7,593
|
|
Due after five years through ten years
|
8,751
|
|
|
9,582
|
|
Due after ten years
|
4,053
|
|
|
4,969
|
|
Mortgage and other asset-backed securities
|
475
|
|
|
471
|
|
Total
|
$
|
21,626
|
|
|
$
|
23,674
|
|
Actual maturities of these securities could differ from their contractual maturities used in the table above because issuers may have the right to call or prepay obligations, with or without penalties.
Gross unrealized appreciation (depreciation) on debt securities by type of issuer is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amortized
Cost
|
|
Allowance for Credit Loss
|
|
Unrealized
Appreciation
|
|
Unrealized
Depreciation
|
|
Fair
Value
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
Federal government and agency
|
$
|
415
|
|
|
$
|
—
|
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
637
|
|
State and local government
|
654
|
|
|
—
|
|
|
85
|
|
|
(2)
|
|
|
737
|
|
Foreign government
|
2,002
|
|
|
—
|
|
|
293
|
|
|
(9)
|
|
|
2,286
|
|
Corporate
|
18,080
|
|
|
(39)
|
|
|
1,663
|
|
|
(161)
|
|
|
19,543
|
|
Mortgage and other asset-backed
|
475
|
|
|
(9)
|
|
|
28
|
|
|
(23)
|
|
|
471
|
|
Total
|
$
|
21,626
|
|
|
$
|
(48)
|
|
|
$
|
2,291
|
|
|
$
|
(195)
|
|
|
$
|
23,674
|
|
Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)
|
$
|
2,209
|
|
|
$
|
(11)
|
|
|
$
|
803
|
|
|
$
|
(25)
|
|
|
$
|
2,976
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Federal government and agency
|
$
|
498
|
|
|
$
|
—
|
|
|
$
|
235
|
|
|
$
|
—
|
|
|
$
|
733
|
|
State and local government
|
729
|
|
|
—
|
|
|
81
|
|
|
—
|
|
|
810
|
|
Foreign government
|
2,027
|
|
|
—
|
|
|
230
|
|
|
(1)
|
|
|
2,256
|
|
Corporate
|
18,149
|
|
|
—
|
|
|
1,299
|
|
|
(28)
|
|
|
19,420
|
|
Mortgage and other asset-backed
|
506
|
|
|
—
|
|
|
31
|
|
|
(1)
|
|
|
536
|
|
Total
|
$
|
21,909
|
|
|
$
|
—
|
|
|
$
|
1,876
|
|
|
$
|
(30)
|
|
|
$
|
23,755
|
|
Investments supporting liabilities of the Company’s run-off settlement annuity business (included in total above) (1)
|
$
|
2,229
|
|
|
$
|
—
|
|
|
$
|
740
|
|
|
$
|
(4)
|
|
|
$
|
2,965
|
|
(1)Net unrealized appreciation for these investments is excluded from accumulated other comprehensive income.
The table below summarizes debt securities with a decline in fair value from amortized cost by investment grade and the length of time these securities have been in an unrealized loss position. These debt securities are primarily corporate securities with a decline in fair value that reflects an increase in market yields since purchase. See discussion of Realized Investment Gains and Losses below for further information on the credit loss expense recorded for the Company's investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(Dollars in millions)
|
Fair
Value
|
|
Amortized
Cost
|
|
Unrealized
Depreciation
|
|
Number
of Issues
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Unrealized
Depreciation
|
|
Number
of Issues
|
One year or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
$
|
1,337
|
|
|
$
|
1,412
|
|
|
$
|
(75)
|
|
|
280
|
|
$
|
723
|
|
|
$
|
729
|
|
|
$
|
(6)
|
|
|
267
|
|
Below investment grade
|
$
|
968
|
|
|
$
|
1,055
|
|
|
$
|
(87)
|
|
|
831
|
|
$
|
340
|
|
|
$
|
348
|
|
|
$
|
(8)
|
|
|
355
|
|
More than one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
$
|
201
|
|
|
$
|
221
|
|
|
$
|
(20)
|
|
|
23
|
|
$
|
366
|
|
|
$
|
378
|
|
|
$
|
(12)
|
|
|
118
|
|
Below investment grade
|
$
|
75
|
|
|
$
|
88
|
|
|
$
|
(13)
|
|
|
35
|
|
$
|
84
|
|
|
$
|
88
|
|
|
$
|
(4)
|
|
|
93
|
|
Total
|
$
|
2,581
|
|
|
$
|
2,776
|
|
|
$
|
(195)
|
|
|
1,169
|
|
|
$
|
1,513
|
|
|
$
|
1,543
|
|
|
$
|
(30)
|
|
|
833
|
|
The table below presents a roll-forward of the allowance for credit losses on debt securities for the six months ended June 30, 2020.
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
Beginning balance, January 1, 2020
|
$
|
0
|
|
Additions to allowance for credit losses on securities for which credit losses were not previously recorded
|
55
|
|
Balance at March 31, 2020
|
55
|
|
Second Quarter Activity:
|
|
Additions to allowance for credit losses on securities for which credit losses were not previously recorded
|
25
|
|
Reductions for securities sold during the period
|
(9)
|
|
Net reductions to allowance for credit losses on securities that had an allowance recorded in a previous period
|
(23)
|
|
Ending balance, June 30, 2020
|
$
|
48
|
|
Equity Securities
Equity securities with a readily determinable fair value consist primarily of mutual funds that invest in fixed income debt securities. Equity securities without a readily determinable fair value consist of private equity investments and are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The amount of impairments or value changes resulting from observable price changes was not material as of June 30, 2020 and December 31, 2019. Hybrid equity securities consist of preferred stock investments that have call features.
The following table provides the values of the Company's equity security investments as of June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
(Dollars in millions)
|
Amortized Cost
|
|
Carrying Value
|
|
Amortized Cost
|
|
Carrying Value
|
Equity securities with readily determinable fair values
|
$
|
140
|
|
|
$
|
134
|
|
|
$
|
61
|
|
|
$
|
64
|
|
Equity securities with no readily determinable fair value
|
$
|
187
|
|
|
$
|
196
|
|
|
$
|
183
|
|
|
$
|
192
|
|
Hybrid equity securities
|
$
|
58
|
|
|
$
|
43
|
|
|
$
|
58
|
|
|
$
|
47
|
|
Total
|
$
|
385
|
|
|
$
|
373
|
|
|
$
|
302
|
|
|
$
|
303
|
|
Commercial Mortgage Loans
Accounting policy. Commercial mortgage loans are carried at unpaid principal balances. Beginning January 1, 2020 with the adoption of ASU 2016-13, unpaid principal balances are presented net of an allowance for expected credit losses. Changes in the allowance for expected credit losses are recognized as credit loss expense and presented in Realized investment gains and losses in the Company’s income statement. Each period, the Company establishes (or adjusts) its allowance for expected credit losses for commercial mortgage loans. The allowance for expected credit losses is based on a credit risk category that is assigned to each loan at origination using key credit quality indicators, including debt service coverage and loan-to-value ratios. Credit risk categories are updated as key credit quality indicators change. An expected loss rate, assigned based on the credit risk category, is applied to each loan's unpaid principal balance to develop an aggregate allowance for expected credit losses. Prior to adoption, impaired commercial mortgage loans were written down to the lower of unpaid principal or fair value of the underlying collateral when it became probable that the Company would not collect all amounts due under its promissory note. The Company recorded an allowance of $7 million through a cumulative effect adjustment to retained earnings to reflect expected credit losses at adoption. The credit loss allowance for the Company’s commercial mortgage loan investments was $8 million as of June 30, 2020.
Commercial mortgage loans are considered impaired and written off against the allowance when it is probable that the Company will not collect all amounts due per the terms of the promissory note. The Company elected the expedient to not measure an allowance for credit losses for accrued interest receivables. Consistent with our prior practice, accrued interest, reported in other current assets, is written off through a charge to net investment income; interest income on impaired loans is only recognized when a payment is received.
In the event of a foreclosure, the allowance for credit losses is based on the excess of the carrying value of the mortgage loan over the fair value of its underlying collateral.
Mortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type, location and borrower. Loans are generally issued at fixed rates of interest and are secured by high quality, primarily completed and substantially leased operating properties. Commercial mortgage loans are classified as either current or long-term investments based on their contractual maturities.
Credit quality. The Company regularly evaluates and monitors credit risk, beginning with the initial underwriting of a mortgage loan and continuing throughout the investment holding period. Mortgage origination professionals employ an internal credit quality rating system designed to evaluate the relative risk of the transaction at origination that is then updated each year as part of the annual portfolio loan review. The Company evaluates and monitors credit quality on a consistent and ongoing basis, classifying each loan as a loan in good standing, potential problem loan or problem loan.
Quality ratings are based on our evaluation of a number of key inputs related to the loan, including real estate market-related factors such as rental rates and vacancies, and property-specific inputs such as growth rate assumptions and lease rollover statistics. However, the two most significant contributors to the credit quality rating are the debt service coverage and loan-to-value ratios. The debt service coverage ratio measures the amount of property cash flow available to meet annual interest and principal payments on debt, with a ratio below 1.0 indicating that there is not enough cash flow to cover the required loan payments. The loan-to-value ratio, commonly expressed as a percentage, compares the amount of the loan to the fair value of the underlying property collateralizing the loan.
The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Loan-to-Value Ratio
|
Carrying Value
|
|
Average Debt Service Coverage Ratio
|
|
Average Loan-to-Value Ratio
|
|
Carrying Value
|
|
Average Debt Service Coverage Ratio
|
|
Average Loan-to-Value Ratio
|
Below 60%
|
$
|
904
|
|
|
2.18
|
|
|
|
$
|
1,136
|
|
|
2.19
|
|
|
60% to 79%
|
903
|
|
|
1.94
|
|
|
|
723
|
|
|
1.98
|
|
|
80% to 100%
|
143
|
|
|
1.33
|
|
|
|
88
|
|
|
1.62
|
|
|
Allowance for credit losses
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,942
|
|
|
2.01
|
|
60
|
%
|
|
$
|
1,947
|
|
|
2.09
|
|
58
|
%
|
The Company’s annual in-depth review of its commercial mortgage loan investments is the primary mechanism for identifying emerging risks in the portfolio. The Company’s investment professionals completed the annual in-depth review in the second quarter of 2020 that included an analysis of each underlying property’s most recent annual financial statements, rent rolls, operating plans, budgets, a physical inspection of the property and other pertinent factors. Based on historical results, current leases, lease expirations and rental conditions in each market, the Company estimated the current year and future stabilized property income and fair value for each loan. The average loan to value increased slightly from last year and remains strong. The portfolio's average debt service coverage ratio decreased slightly as June 30, 2020 compared with December 31, 2019 but remains at a high level.
The Company re-evaluates a loan’s credit quality between annual reviews if new property information is received or an event such as delinquency or a borrower’s request for restructure causes management to believe that the Company’s estimate of financial performance, fair value or the risk profile of the underlying property has been impacted.
All commercial mortgage loans in the Company's portfolio are current as of June 30, 2020 and December 31, 2019.
Other Long-Term Investments
Other long-term investments include investments in unconsolidated entities, including certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company's ownership percentage of reporting income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income or loss from these investments is reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments.
Other long-term investments also include investment real estate, foreign currency swaps, and statutory and other deposits. The following table provides carrying value information for these investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of
|
|
|
|
(In millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Real estate investments
|
$
|
850
|
|
|
$
|
788
|
|
|
Securities partnerships
|
1,525
|
|
|
1,409
|
|
|
Other
|
525
|
|
|
206
|
|
|
Total
|
$
|
2,900
|
|
|
$
|
2,403
|
|
|
Short-Term Investments and Cash Equivalents
Short-term investments and cash equivalents included the following types of issuers:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
June 30, 2020
|
|
December 31, 2019
|
Corporate securities
|
$
|
4,266
|
|
|
$
|
1,985
|
|
Federal government securities
|
$
|
482
|
|
|
$
|
472
|
|
Foreign government securities
|
$
|
32
|
|
|
$
|
65
|
|
Money market funds
|
$
|
814
|
|
|
$
|
631
|
|
B.Realized Investment Gains and Losses
Accounting policy. Realized investment gains and losses are based on specifically identified assets and results from sales, investment asset write-downs, change in the fair value of certain derivatives and equity securities, and changes in valuation reserves on commercial mortgage loans. Commencing January 1, 2020, realized gains and losses also
include credit loss expense resulting from the impact of changes in the allowances for credit losses on debt securities and commercial mortgage loan investments under ASU 2016-13.
The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business (consistent with accounting for a premium deficiency), as well as realized gains and losses attributed to the Company’s separate accounts because those gains and losses generally accrue directly to separate account policyholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net realized investment gains, excluding credit loss expense and asset write-downs
|
$
|
33
|
|
|
$
|
25
|
|
|
$
|
9
|
|
|
$
|
36
|
|
Credit loss expense on invested assets
|
6
|
|
|
—
|
|
|
(49)
|
|
|
—
|
|
Other investment asset write-downs
|
(1)
|
|
|
(2)
|
|
|
(10)
|
|
|
(3)
|
|
Net realized investment gains (losses), before income taxes
|
$
|
38
|
|
|
$
|
23
|
|
|
$
|
(50)
|
|
|
$
|
33
|
|
Net realized investment gains, excluding credit loss expense and asset write-downs, for the six months ended June 30, 2020 primarily represent gains on the sales of debt securities, partially offset by mark-to-market losses on foreign exchange derivatives and equity securities. Net realized investment gains, excluding credit loss expense and asset write-downs, for the six months ended June 30, 2019 represent mark-to-market gains on equity securities and gains on the sales of debt securities and real estate partnerships. Credit loss expense on invested assets for the six months ended June 30, 2020 reflects credit losses incurred on debt securities due to uncertainty around issuers in certain industries that are particularly impacted by the global COVID-19 pandemic. Realized gains and losses on equity securities still held at June 30, 2020 and 2019 were not material.
The following table presents sales information for available-for-sale debt securities. Gross gains on sales and gross losses on sales exclude amounts required to adjust future policy benefits for the run-off settlement annuity business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Proceeds from sales
|
$
|
880
|
|
|
$
|
565
|
|
|
$
|
1,623
|
|
|
$
|
1,651
|
|
Gross gains on sales
|
$
|
27
|
|
|
$
|
9
|
|
|
$
|
66
|
|
|
$
|
23
|
|
Gross losses on sales
|
$
|
(14)
|
|
|
$
|
(2)
|
|
|
$
|
(21)
|
|
|
$
|
(12)
|
|
C.Derivative Financial Instruments
The Company uses derivative financial instruments to manage the characteristics of investment assets (such as duration, yield, currency and liquidity) to meet the varying demands of the related insurance and contract holder liabilities. The Company also uses derivative financial instruments to hedge the risk of changes in the net assets of certain of its foreign subsidiaries due to changes in foreign currency exchange rates. The Company has written and purchased GMIB reinsurance contracts in its run-off reinsurance business that are accounted for as freestanding derivatives as discussed in Note 10. Derivatives in the Company’s separate accounts are excluded from the following discussion because associated gains and losses generally accrue directly to separate account policyholders.
Derivative instruments used by the Company typically include foreign currency swap contracts and foreign currency forward contracts. Foreign currency swap contracts periodically exchange cash flows between two currencies for principal and interest. Foreign currency forward contracts require the Company to purchase a foreign currency in
exchange for the functional currency of its operating unit at a future date, generally within three months from the contracts’ trade dates.
The Company manages the credit risk of these derivative instruments by diversifying its portfolio among approved dealers of high credit quality and through routine monitoring of credit risk exposures. Certain of the Company’s over-the-counter derivative instruments require either the Company or the counterparty to post collateral or demand immediate payment depending on the amount of the net liability position of the derivative instrument and predefined financial strength or credit rating thresholds. These collateral posting requirements vary by counterparty. The Company would incur a loss if dealers completely failed to perform under derivative contracts, however collateral has been posted by dealers to cover substantially all of the fair values owed by dealers at June 30, 2020 and December 31, 2019. The fair value of collateral posted by the Company was not significant as of June 30, 2020 or December 31, 2019.
The gross fair values of our derivative financial instruments are presented in Note 12. The following table summarizes the types and notional quantity of derivative instruments held by the Company. As of June 30, 2020 and December 31, 2019, the effects of these individual hedging strategies were not material to the Consolidated Financial Statements, including gains or losses reclassified from accumulated other comprehensive income into shareholders' net income, as well as amounts excluded from the assessment of hedge effectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Notional Value as of
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Purpose
|
Type of Instrument
|
|
|
|
|
Fair value hedge: To hedge the foreign exchange-related changes in fair values of certain foreign-denominated bonds. The notional value of these derivatives matches the amortized cost of the hedged bonds.
|
Foreign currency swap contracts
|
|
$
|
817
|
|
|
$
|
817
|
|
Net investment hedge: To reduce the risk of changes in net assets due to changes in foreign currency spot exchange rates for certain foreign subsidiaries that conduct their business principally in Euros, Korean Won, and Taiwan Dollar. The notional value of hedging instruments matches the hedged amount of subsidiary net assets.
|
Foreign currency swap contracts
|
|
$
|
526
|
|
|
$
|
438
|
|
|
Foreign currency forward contracts
|
|
$
|
606
|
|
|
$
|
406
|
|
Economic hedge: To hedge the foreign exchange-related changes in fair value of a U.S. dollar-denominated bond portfolio to reflect the local currency for the Company’s foreign subsidiary in South Korea. The notional value of hedging instruments generally aligns with the fair value of the hedged bond portfolio.
|
Foreign currency forward contracts
|
|
$
|
442
|
|
|
$
|
410
|
|
The Company’s derivative financial instruments are presented as follows:
•Fair value hedges of the foreign exchange-related changes in fair values of certain foreign-denominated bonds: Swap fair values are reported in Long-term investments or Other non-current liabilities. Changes in fair values attributable to foreign exchange risk of the swap contracts and the hedged bonds are reported in Realized investment gains and losses. The portion of the swap contracts’ changes in fair value excluded from the assessment of hedge effectiveness is recorded in Other comprehensive income and recognized in Net investment income as swap coupon payments are accrued, offsetting the foreign-denominated coupons received on the designated bonds. Net cash flows are reported in Operating activities, while exchanges of notional principal amounts are reported in Investing activities.
•Net investment hedges of certain foreign subsidiaries that conduct their business principally in currencies other than the U.S. dollar: The fair values of the foreign currency swap and forward contracts are reported in Other assets or Other liabilities. The changes in fair values of these instruments are reported in Other comprehensive income, specifically in translation of foreign currencies. The portion of the change in fair values relating to foreign exchange spot rates will be recognized in earnings upon deconsolidation of the
hedged foreign subsidiaries. The remaining changes in fair value of these instruments are excluded from our effectiveness assessment and recognized in interest expense when coupon payments are accrued or ratably over the term of the instrument. The notional value of hedging instruments matches the hedged amount of subsidiary net assets. Cash flows relating to these contracts are reported in Investing activities.
•Economic hedges for derivatives not designated as accounting hedges: Fair values of forward contracts are reported in current Investments or Accrued expenses and other liabilities. The changes in fair values are reported in Realized investment gains and losses. Cash flows relating to these contracts are reported in Investing activities.
Note 12 – Fair Value Measurements
The Company carries certain financial instruments at fair value in the financial statements including debt securities, certain equity securities, short-term investments and derivatives. Other financial instruments are measured at fair value only under certain conditions, such as when impaired or when there are observable price changes for equity securities with no readily determinable fair value.
Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a market participant, not the amount that would be paid to settle the liability with the creditor.
The Company’s financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level of input that is significant to its measurement. For example, a financial asset or liability carried at fair value would be classified in Level 3 if unobservable inputs were significant to the instrument’s fair value, even though the measurement may be derived using inputs that are both observable (Levels 1 and 2) and unobservable (Level 3).
The Company estimates fair values using prices from third parties or internal pricing methods. Fair value estimates received from third-party pricing services are based on reported trade activity and quoted market prices when available, and other market information that a market participant would use to estimate fair value. The internal pricing methods are performed by the Company’s investment professionals and generally involve using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality as well as other qualitative factors. In instances where there is little or no market activity for the same or similar instruments, fair value is estimated using methods, models and assumptions that the Company believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of estimation and judgment that becomes significant with increasingly complex instruments or pricing models.
The Company is responsible for determining fair value and for assigning the appropriate level within the fair value hierarchy based on the significance of unobservable inputs. The Company reviews methodologies, processes and controls of third-party pricing services and compares prices on a test basis to those obtained from other external pricing sources or internal estimates. The Company performs ongoing analyses of both prices received from third-party pricing services and those developed internally to determine that they represent appropriate estimates of fair value. The controls executed by the Company include evaluating changes in prices and monitoring for potentially stale valuations. The Company also performs sample testing of sales values to confirm the accuracy of prior fair value estimates. The minimal exceptions identified during these processes indicate that adjustments to prices are
infrequent and do not significantly impact valuations. We conduct an annual on-site visit of the most significant pricing service to review their processes, methodologies and controls. This on-site review includes a walk-through of inputs for a sample of securities held across various asset types to validate the documented pricing process.
A.Financial Assets and Financial Liabilities Carried at Fair Value
The following table provides information as of June 30, 2020 and December 31, 2019 about the Company’s financial assets and liabilities carried at fair value. Separate account assets are also recorded at fair value on the Company’s Consolidated Balance Sheets and are reported separately in the Separate Accounts section below as gains and losses related to these assets generally accrue directly to policyholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Total
|
|
|
|
As of June 30, 2020
|
|
As of December 31, 2019
|
|
As of June 30, 2020
|
|
As of December 31, 2019
|
|
As of June 30, 2020
|
|
As of December 31, 2019
|
|
As of June 30, 2020
|
|
As of December 31, 2019
|
Financial assets at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government and agency
|
$
|
192
|
|
|
$
|
197
|
|
|
$
|
445
|
|
|
$
|
536
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
637
|
|
|
$
|
733
|
|
State and local government
|
—
|
|
|
—
|
|
|
737
|
|
|
810
|
|
|
—
|
|
|
—
|
|
|
737
|
|
|
810
|
|
Foreign government
|
—
|
|
|
—
|
|
|
2,260
|
|
|
2,228
|
|
|
26
|
|
|
28
|
|
|
2,286
|
|
|
2,256
|
|
Corporate
|
—
|
|
|
—
|
|
|
18,889
|
|
|
19,063
|
|
|
654
|
|
|
357
|
|
|
19,543
|
|
|
19,420
|
|
Mortgage and other asset-backed
|
—
|
|
|
—
|
|
|
322
|
|
|
398
|
|
|
149
|
|
|
138
|
|
|
471
|
|
|
536
|
|
Total debt securities
|
192
|
|
|
197
|
|
|
22,653
|
|
|
23,035
|
|
|
829
|
|
|
523
|
|
|
23,674
|
|
|
23,755
|
|
Equity securities (1)
|
1
|
|
|
7
|
|
|
145
|
|
|
72
|
|
|
31
|
|
|
32
|
|
|
177
|
|
|
111
|
|
Short-term investments
|
—
|
|
|
—
|
|
|
456
|
|
|
423
|
|
|
—
|
|
|
—
|
|
|
456
|
|
|
423
|
|
Derivative assets
|
—
|
|
|
—
|
|
|
193
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
83
|
|
Real estate funds priced at NAV as a practical expedient (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
184
|
|
Financial liabilities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
18
|
|
(1)Excludes certain equity securities that have no readily determinable fair value.
(2)As a practical expedient, certain real estate funds are carried at fair value based on the Company’s ownership share of the equity of the investee (Net Asset Value (“NAV“)) including changes in the fair value of its underlying investments. The Company has $55 million in unfunded commitments in these funds as of June 30, 2020.
Level 1 Financial Assets
Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. A relatively small portion of the Company’s investment assets are classified in this category given the narrow definition of Level 1 and the Company’s investment asset strategy to maximize investment returns.
Level 2 Financial Assets and Financial Liabilities
Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant.
Debt and equity securities. Approximately 95% of the Company’s investments in debt and equity securities are classified in Level 2 including most public and private corporate debt and hybrid equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics because many debt securities do not trade daily. Pricing models are used to determine these prices when recent trades are not available. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating.
Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued using a single, unadjusted market-observable input derived by averaging multiple broker-dealer quotes, consistent with local market practice.
Short-term investments are carried at fair value that approximates cost. The Company compares market prices for these securities to recorded amounts on a regular basis to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2.
Derivative assets and liabilities classified in Level 2 represent over-the-counter instruments such as foreign currency forward and swap contracts. Fair values for these instruments are determined using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty and the Company is considered when estimating the fair values of these derivatives. However, the Company is largely protected by collateral arrangements with counterparties and determined that no adjustments for credit risk were required as of June 30, 2020 or December 31, 2019. The nature and use of these derivative financial instruments are described in Note 11.
Level 3 Financial Assets and Financial Liabilities
Certain inputs for instruments classified in Level 3 are unobservable (supported by little or no market activity) and significant to their resulting fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The Company classifies certain newly-issued, privately-placed, complex or illiquid securities in Level 3. Approximately 4% of debt and equity securities are priced using significant unobservable inputs and classified in this category.
Fair values of mortgage and other asset-backed securities, as well as corporate and government debt securities, are primarily determined using pricing models that incorporate the specific characteristics of each asset and related assumptions including the investment type and structure, credit quality, industry and maturity date in comparison to current market indices, spreads and liquidity of assets with similar characteristics. Inputs and assumptions for pricing may also include characteristics of the issuer, collateral attributes and prepayment speeds for mortgage and other asset-backed securities. Recent trades in the subject security or similar securities are assessed when available, and the Company may also review published research in its evaluation, as well as the issuer’s financial statements.
Quantitative Information about Unobservable Inputs
The following table summarizes the fair value and significant unobservable inputs used in pricing the following debt securities that were developed directly by the Company as of June 30, 2020 and December 31, 2019. The range and weighted average basis point (“bps”) amounts for liquidity and credit spreads (adjustment to discount rates) reflect the Company’s best estimates of the unobservable adjustments a market participant would make to calculate these fair values. These inputs have increased over the reported periods, resulting from continued uncertainty over the economic impacts related to COVID-19.
Corporate and government debt securities. The significant unobservable input used to value the following corporate and government debt securities is an adjustment for liquidity. This adjustment is needed to reflect current market conditions and issuer circumstances when there is limited trading activity for the security.
Mortgage and other asset-backed securities. The significant unobservable inputs used to value the following mortgage and other asset-backed securities are liquidity and weighting of credit spreads. An adjustment for liquidity is made as of the measurement date that considers current market conditions, issuer circumstances and complexity of the security structure when there is limited trading activity for the security. An adjustment to weight credit spreads is needed to value a more complex bond structure with multiple underlying collateral and no standard market valuation technique. The weighting of credit spreads is primarily based on the underlying collateral’s characteristics and their proportional cash flows supporting the bond obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
|
Unobservable Adjustment Range
(Weighted Average by Quantity)
as of
|
|
|
(Fair value in millions )
|
June 30, 2020
|
|
December 31, 2019
|
|
Unobservable input June 30, 2020
|
|
June 30, 2020
|
|
December 31, 2019
|
Debt securities
|
|
|
|
|
|
|
|
|
|
Corporate and government debt securities
|
$
|
678
|
|
|
$
|
385
|
|
|
Liquidity
|
|
70 - 1700 (390) bps
|
|
70 - 930 (280) bps
|
Mortgage and other asset-backed securities
|
149
|
|
|
138
|
|
|
Liquidity
|
|
60 - 370 (70) bps
|
|
60 - 370 (70) bps
|
|
|
|
|
|
Weighting of credit spreads
|
|
310 - 620 (440) bps
|
|
240 - 460 (330) bps
|
Securities not priced by the Company (1)
|
2
|
|
|
—
|
|
|
|
|
|
|
|
Total Level 3 debt securities
|
$
|
829
|
|
|
$
|
523
|
|
|
|
|
|
|
|
(1)The fair values for these securities use single, unadjusted non-binding broker quotes not developed directly by the Company.
Significant increases in liquidity or credit spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. The unobservable inputs are generally not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.
Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the three and six months ended June 30, 2020 and 2019. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and Equity Securities
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
766
|
|
|
$
|
436
|
|
|
$
|
555
|
|
|
$
|
410
|
|
Total gains (losses) included in shareholders’ net income
|
17
|
|
|
—
|
|
|
5
|
|
|
(1)
|
|
Gains (losses) included in other comprehensive income
|
12
|
|
|
5
|
|
|
(59)
|
|
|
12
|
|
Gains (losses) required to adjust future policy benefits for settlement annuities (1)
|
7
|
|
|
—
|
|
|
(3)
|
|
|
2
|
|
Purchases, sales and settlements
|
|
|
|
|
|
|
|
Purchases
|
2
|
|
|
43
|
|
|
64
|
|
|
43
|
|
Sales
|
—
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
Settlements
|
(5)
|
|
|
(9)
|
|
|
(7)
|
|
|
(10)
|
|
Total purchases, sales and settlements
|
$
|
(3)
|
|
|
$
|
34
|
|
|
$
|
45
|
|
|
$
|
33
|
|
Transfers into/(out of) Level 3
|
|
|
|
|
|
|
|
Transfers into Level 3
|
179
|
|
|
13
|
|
|
527
|
|
|
33
|
|
Transfers out of Level 3
|
(118)
|
|
|
(57)
|
|
|
(210)
|
|
|
(58)
|
|
Total transfers into/(out of) Level 3
|
$
|
61
|
|
|
$
|
(44)
|
|
|
$
|
317
|
|
|
$
|
(25)
|
|
Balance at June 30,
|
$
|
860
|
|
|
$
|
431
|
|
|
$
|
860
|
|
|
$
|
431
|
|
Total gains (losses) included in shareholders’ net income attributable to instruments held at the reporting date
|
$
|
16
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
Change in unrealized gains or losses included in other comprehensive income for assets held at the end of the reporting period
|
$
|
12
|
|
|
N/A
|
|
$
|
(54)
|
|
|
N/A
|
(1)Amounts do not accrue to shareholders.
Total gains and losses included in Shareholders’ net income in the tables above are reflected in the Consolidated Statements of Income as Net realized investment gains (losses) and Net investment income.
Gains and losses included in Other comprehensive income in the tables above are reflected in Net unrealized appreciation (depreciation) on securities in the Consolidated Statements of Comprehensive Income.
Transfers into or out of the Level 3 category occur when unobservable inputs, such as the Company’s best estimate of what a market participant would use to determine a current transaction price, become more or less significant to the fair value measurement. Transfers between Level 2 and Level 3 during 2020 and 2019 primarily reflected changes in liquidity and credit risk estimates for certain private placement issuers across several sectors.
Separate Accounts
The investment income and fair value gains and losses of separate account assets generally accrue directly to the contractholders and, together with their deposits and withdrawals, are excluded from the Company’s Consolidated Statements of Income and Cash Flows.
Fair values of separate account assets at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Total
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2020
|
|
December 31, 2019
|
Guaranteed separate accounts (See Note 18)
|
$
|
203
|
|
|
$
|
219
|
|
|
$
|
298
|
|
|
$
|
271
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
501
|
|
|
$
|
490
|
|
Non-guaranteed separate accounts (1)
|
1,485
|
|
|
1,450
|
|
|
5,228
|
|
|
5,522
|
|
|
334
|
|
|
263
|
|
|
7,047
|
|
|
7,235
|
|
Subtotal
|
$
|
1,688
|
|
|
$
|
1,669
|
|
|
$
|
5,526
|
|
|
$
|
5,793
|
|
|
$
|
334
|
|
|
$
|
263
|
|
|
$
|
7,548
|
|
|
$
|
7,725
|
|
Non-guaranteed separate accounts priced at NAV as a practical expedient (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
727
|
|
|
756
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,275
|
|
|
$
|
8,481
|
|
Separate account assets of business classified as held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
(14)
|
|
|
(16)
|
|
Separate account assets per Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,261
|
|
|
$
|
8,465
|
|
(1)Non-guaranteed separate accounts included $3.9 billion as of June 30, 2020 and $4.0 billion as of December 31, 2019 in assets supporting the Company’s pension plans, including $0.3 billion classified in Level 3 as of June 30, 2020 and $0.2 billion classified in Level 3 as of December 31, 2019.
Separate account assets classified as Level 1 primarily include exchange-listed equity securities. Level 2 assets primarily include:
•corporate and structured bonds valued using recent trades of similar securities or pricing models that discount future cash flows at estimated market interest rates as described above; and
•actively-traded institutional and retail mutual fund investments.
Separate account assets classified in Level 3 primarily support Cigna’s pension plans and include certain newly-issued, privately-placed, complex, or illiquid securities that are priced using methods discussed above, as well as commercial mortgage loans. Activity, including transfers into and out of Level 3, was not material for the three and six months ended June 30, 2020 and 2019.
Separate account investments in securities partnerships, real estate, and hedge funds are generally valued based on the separate account’s ownership share of the equity of the investee (NAV as a practical expedient) including changes in the fair values of its underlying investments. Substantially all of these assets support the Cigna Pension Plans. The following table provides additional information on these investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
|
|
|
Unfunded Commitment as of June 30, 2020
|
|
Redemption Frequency
(if currently eligible)
|
|
Redemption Notice
Period
|
(In millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Securities partnerships
|
$
|
499
|
|
|
$
|
531
|
|
|
$
|
314
|
|
|
Not applicable
|
|
Not applicable
|
Real estate funds
|
224
|
|
|
220
|
|
|
—
|
|
|
Quarterly
|
|
30 - 90 days
|
Hedge funds
|
4
|
|
|
5
|
|
|
—
|
|
|
Up to annually, varying by fund
|
|
30 - 90 days
|
Total
|
$
|
727
|
|
|
$
|
756
|
|
|
$
|
314
|
|
|
|
|
|
As of June 30, 2020, the Company does not have plans to sell any of these assets at less than fair value. These investments are structured to satisfy longer-term investment objectives. Securities partnerships are contractually
unredeemable, and the underlying investment assets are expected to be liquidated by the fund managers within ten years after inception.
B.Assets and Liabilities Measured at Fair Value under Certain Conditions
Some financial assets and liabilities are not carried at fair value each reporting period, but may be measured using fair value only under certain conditions such as when investments become impaired, including investment real estate and commercial mortgage loans and certain equity securities with no readily determinable fair value. Equity securities with no readily determinable fair value are also measured at fair value when there are observable price changes from orderly transactions with the same issuer. For the six months ended June 30, 2020, there were immaterial losses relating to price changes for equity securities with no readily determinable fair value and no impaired investments written down to their fair values. For the six months ended June 30, 2019, there were immaterial gains relating to price changes for equity securities with no readily determinable fair value and no impaired investments written down to their fair values . Carrying values represented less than 1% of total investments as of both June 30, 2020 and June 30, 2019.
C.Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
The following table includes the Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements at June 30, 2020 and December 31, 2019. In addition to universal life products and finance leases, financial instruments that are carried in the Company’s Consolidated Financial Statements at amounts that approximate fair value are excluded from the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
(In millions)
|
Classification in Fair Value Hierarchy
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
Commercial mortgage loans
|
Level 3
|
|
$
|
1,990
|
|
|
$
|
1,942
|
|
|
$
|
1,989
|
|
|
$
|
1,947
|
|
Long-term debt, including current maturities, excluding finance leases
|
Level 2
|
|
$
|
40,310
|
|
|
$
|
35,054
|
|
|
$
|
39,439
|
|
|
$
|
36,375
|
|
Fair values of off-balance sheet financial instruments were not material as of June 30, 2020 and December 31, 2019.
Note 13 – Variable Interest Entities
When the Company becomes involved with a variable interest entity and when there is a change in the Company’s involvement with an entity, the Company must determine if it is the primary beneficiary and must consolidate the entity. The Company is considered the primary beneficiary if it has the power to direct the entity’s most significant economic activities and has the right to receive benefits or obligation to absorb losses that could be significant to the entity. The Company evaluates the following criteria:
•the structure and purpose of the entity;
•the risks and rewards created by, and shared through, the entity; and
•the Company’s ability to direct its activities, receive its benefits and absorb its losses relative to the other parties involved with the entity including its sponsors, equity holders, guarantors, creditors and servicers.
The Company determined it was not a primary beneficiary in any material variable interest entities as of June 30, 2020 or December 31, 2019. The Company’s involvement in variable interest entities for which it is not the primary beneficiary is described below.
Securities limited partnerships and real estate limited partnerships. The Company owns interests in securities limited partnerships and real estate limited partnerships that are defined as variable interest entities. These partnerships invest in the equity or mezzanine debt of privately-held companies and real estate properties. General partners unaffiliated with the Company control decisions that most significantly impact the partnership’s operations and the limited partners do not have substantive kick-out or participating rights. The Company’s maximum exposure to loss from these entities of $3.8 billion across approximately 150 limited partnerships as of June 30, 2020, included $1.9 billion reported in Long-term investments and commitments to contribute an additional $1.9 billion. The Company’s noncontrolling interest in each of these limited partnerships is generally less than 15% of the partnership ownership interests.
Other asset-backed and corporate securities. In the normal course of its investing activities, the Company also makes passive investments in certain asset-backed and corporate securities that are issued by variable interest entities whose sponsors or issuers are unaffiliated with the Company. The Company receives fixed-rate cash flows from these investments and the maximum potential exposure to loss is limited to our carrying amount of $0.7 billion as of June 30, 2020 that is reported in debt securities. The Company’s combined ownership interests are insignificant relative to the total principal amounts issued by these entities.
The Company is involved with various other variable interest entities with immaterial carrying values and maximum exposures to loss.
The Company has not provided, and does not intend to provide, financial support to any of the variable interest entities beyond what it is contractually required to provide. The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.
Note 14 – Accumulated Other Comprehensive Income (Loss) (“AOCI”)
AOCI includes unrealized appreciation on securities and derivatives (excluding appreciation on investments supporting future policy benefit liabilities of the run-off settlement annuity business) (See Note 11), foreign currency translation and the net postretirement benefits liability adjustment. AOCI includes the Company’s share from unconsolidated entities reported on the equity method. Generally, tax effects in AOCI are established at the currently enacted tax rate and reclassified to net income in the same period that the related pre-tax AOCI reclassifications are recognized. Changes in the components of AOCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Securities and Derivatives
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
547
|
|
|
$
|
460
|
|
|
$
|
975
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation on securities and derivatives
|
|
920
|
|
|
442
|
|
|
340
|
|
|
1,007
|
|
Tax (expense)
|
|
(197)
|
|
|
(94)
|
|
|
(69)
|
|
|
(216)
|
|
Net appreciation on securities and derivatives
|
|
723
|
|
|
348
|
|
|
271
|
|
|
791
|
|
Reclassification adjustment for losses (gains) included in shareholders' net income (net realized investment losses (gains))
|
|
(19)
|
|
|
(6)
|
|
|
13
|
|
|
(7)
|
|
Tax (expense) benefit
|
|
5
|
|
|
1
|
|
|
(3)
|
|
|
1
|
|
Net losses (gains) reclassified from AOCI to net income
|
|
(14)
|
|
|
(5)
|
|
|
10
|
|
|
(6)
|
|
Other comprehensive income, net of tax
|
|
709
|
|
|
343
|
|
|
281
|
|
|
785
|
|
Ending balance
|
|
$
|
1,256
|
|
|
$
|
803
|
|
|
$
|
1,256
|
|
|
$
|
803
|
|
|
|
|
|
|
|
|
|
|
Translation of foreign currencies
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(446)
|
|
|
$
|
(245)
|
|
|
$
|
(275)
|
|
|
$
|
(221)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation of foreign currencies
|
|
65
|
|
|
(42)
|
|
|
(95)
|
|
|
(67)
|
|
Tax (expense) benefit
|
|
5
|
|
|
—
|
|
|
(10)
|
|
|
(1)
|
|
Net translation of foreign currencies
|
|
70
|
|
|
(42)
|
|
|
(105)
|
|
|
(68)
|
|
Less: Net translation of foreign currencies attributable to noncontrolling interests
|
|
(2)
|
|
|
(2)
|
|
|
(6)
|
|
|
(4)
|
|
Shareholders' net translation of foreign currencies
|
|
72
|
|
|
(40)
|
|
|
(99)
|
|
|
(64)
|
|
Ending balance
|
|
$
|
(374)
|
|
|
$
|
(285)
|
|
|
$
|
(374)
|
|
|
$
|
(285)
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits liability
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(1,628)
|
|
|
$
|
(1,497)
|
|
|
$
|
(1,641)
|
|
|
$
|
(1,508)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amortization of net losses from past experience and prior service costs (interest expense and other)
|
|
18
|
|
|
16
|
|
|
36
|
|
|
31
|
|
Reclassification adjustment for settlement (interest expense and other)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Tax (expense) benefit
|
|
(4)
|
|
|
5
|
|
|
(9)
|
|
|
(9)
|
|
Net adjustments reclassified from AOCI to net income
|
|
14
|
|
|
21
|
|
|
27
|
|
|
32
|
|
Valuation update
|
|
(73)
|
|
|
(8)
|
|
|
(73)
|
|
|
(8)
|
|
Tax benefit
|
|
17
|
|
|
1
|
|
|
17
|
|
|
1
|
|
Net change due to valuation update
|
|
(56)
|
|
|
(7)
|
|
|
(56)
|
|
|
(7)
|
|
Other comprehensive (loss) income, net of tax
|
|
(42)
|
|
|
14
|
|
|
(29)
|
|
|
25
|
|
Ending balance
|
|
$
|
(1,670)
|
|
|
$
|
(1,483)
|
|
|
$
|
(1,670)
|
|
|
$
|
(1,483)
|
|
Note 15 - Organizational Efficiency Plan
The Company is continuously evaluating ways to deliver our products and services more efficiently and at a lower cost. During the fourth quarter of 2019, we committed to a plan to increase our organizational alignment and operational efficiency and reduce costs. As a result, we recognized a charge in Selling, general and administrative expenses of $207 million pre-tax ($162 million after-tax) in the fourth quarter of 2019 and an additional $31 million pre-tax ($24 million after-tax) in the first quarter 2020, primarily for severance costs related to headcount reductions. As of June 30, 2020 we expect most of the severance to be paid by the end of 2021.
Note 16 – Leases
Operating and finance lease right of use ("ROU") assets and lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
June 30, 2020
|
|
December 31, 2019
|
Operating leases:
|
|
|
|
Operating lease ROU assets
|
$
|
544
|
|
|
$
|
536
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
158
|
|
|
$
|
166
|
|
Other non-current liabilities
|
482
|
|
|
465
|
|
Total operating lease liabilities
|
$
|
640
|
|
|
$
|
631
|
|
|
|
|
|
Finance leases:
|
|
|
|
Property and equipment, gross
|
$
|
98
|
|
|
$
|
110
|
|
Accumulated depreciation
|
(35)
|
|
|
(23)
|
|
Property and equipment, net
|
$
|
63
|
|
|
$
|
87
|
|
|
|
|
|
Short-term debt
|
$
|
22
|
|
|
$
|
27
|
|
Long-term debt
|
43
|
|
|
61
|
|
Total finance lease liabilities
|
$
|
65
|
|
|
$
|
88
|
|
Note 17 – Income Taxes
Income Tax Expense
The 20.0% effective tax rate for the six months ended June 30, 2020 was lower than the 21.5% rate for the same period in 2019. This decrease is primarily attributable to incremental tax benefits including the remeasurement of deferred state income taxes and the settlement of uncertain tax positions. This decrease was partially offset by return of the nondeductible health insurer tax.
Note 18 – Contingencies and Other Matters
The Company, through its subsidiaries, is contingently liable for various guarantees provided in the ordinary course of business.
A.Financial Guarantees: Retiree and Life Insurance Benefits
The Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits. For the majority of these benefits, the sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. If employers fail to do so, the Company or an affiliate of the buyer of the retirement benefits business has the right to redirect the management of the related assets to provide for benefit payments. As of June 30, 2020, employers maintained assets that exceeded the benefit obligations under these arrangements of approximately $455 million. An additional liability is established if management believes that the Company will be required to make payments under the guarantees; there were no additional liabilities required for these guarantees, net of reinsurance, as of June 30, 2020. Separate account assets supporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy.
The Company does not expect that these financial guarantees will have a material effect on the Company’s consolidated results of operations, liquidity or financial condition.
B.Certain Other Guarantees
The Company had indemnification obligations as of June 30, 2020 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by the Company, such as representations for the presentation of financial statements, filing of tax returns, compliance with law or identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. The Company does not believe that it is possible to determine the maximum potential amount due under these obligations because not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities for these indemnification obligations as of June 30, 2020.
C.Guaranty Fund Assessments
The Company operates in a regulatory environment that may require its participation in assessments under state insurance guaranty association laws. The Company’s exposure to assessments for certain obligations of insolvent insurance companies to policyholders and claimants is based on its share of business written in the relevant jurisdictions.
There were no material effects for existing or new guaranty fund assessments for the six months ended June 30, 2020.
D.Legal and Regulatory Matters
The Company is routinely involved in numerous claims, lawsuits, regulatory inquiries and audits, government investigations, including under the federal False Claims Act and state false claims acts initiated by a government investigating body or by a qui tam relator’s filing of a complaint under court seal, and other legal matters arising, for the most part, in the ordinary course of managing a global health service business. Additionally, the Company has received and is cooperating with subpoenas or similar processes from various governmental agencies requesting information, all arising in the normal course of its business. Disputed tax matters arising from audits by the Internal Revenue Service or other state and foreign jurisdictions, including those resulting in litigation, are accounted for under GAAP guidance for uncertain tax positions. Further information on income tax matters can be found in Note 17.
Pending litigation and legal or regulatory matters that the Company has identified with a reasonably possible material loss and certain other material litigation matters are described below. For those matters that the Company has identified with a reasonably possible material loss, the Company provides disclosure in the aggregate of accruals and range of loss, or a statement that such information cannot be estimated. The Company’s accruals for the matters discussed below under “Litigation Matters” and "Regulatory Matters" are immaterial. Due to numerous uncertain factors presented in these cases, it is not possible to estimate an aggregate range of loss (if any) for these matters at this time. In light of the uncertainties involved in these matters, there is no assurance that their ultimate resolution will not exceed the amounts currently accrued by the Company. An adverse outcome in one or more of these matters could be material to the Company’s results of operations, financial condition or liquidity for any particular period. The outcomes of lawsuits are inherently unpredictable and we may be unsuccessful in these ongoing litigation matters or any future claims or litigation.
Litigation Matters
Risk Corridors and CSR Litigation with the Federal Government. As a result of the Supreme Court decision in April 2020, the Company filed suit in early May against the United States in the U.S. Court of Federal Claims seeking to recover two types of payments the Federal Government owes Cigna under the risk corridors and cost-sharing reduction (“CSR”) programs of the ACA. In aggregate, the complaint seeks to recover more than $315 million: $120 million in risk corridors payments and more than $195 million in CSR payments. Cigna’s complaint is pending and we await the Federal Government’s response.
Cigna Litigation with Anthem. In February 2017, the Company delivered a notice to Anthem terminating the 2015 merger agreement and notifying Anthem that it must pay the Company the $1.85 billion reverse termination fee pursuant to the terms of the merger agreement. Also in February 2017, the Company filed suit against Anthem in the Delaware Court of Chancery (the “Chancery Court”) seeking declaratory judgments that the Company’s termination of the merger agreement was valid and that Anthem was not permitted to extend the termination date. The complaint also sought payment of the reverse termination fee and additional damages in an amount exceeding $13 billion, including the lost premium value to the Company’s shareholders caused by Anthem’s willful breaches of the merger agreement. Anthem has countersued, alleging its own claims for damages.
On February 15, 2017, the Chancery Court granted Anthem’s motion for a temporary restraining order and temporarily enjoined the Company from terminating the merger agreement. In May 2017, the Chancery Court denied Anthem’s motion for a preliminary injunction to enjoin Cigna from terminating the merger agreement but stayed its ruling pending Anthem’s determination as to whether to seek an appeal. Anthem subsequently notified Cigna and the Chancery Court that it did not intend to appeal the Chancery Court’s decision. As a result, the merger agreement was terminated.
The litigation between the parties remains pending. A trial was held during the first quarter of 2019. Oral arguments on post-trial briefs were held on November 26, 2019. In February 2020, the Chancery Court requested additional post-trial briefing, which has been completed. In June 2020, the Company was notified by the Chancery Court that its decision had been delayed, due in part to COVID-19 complexities. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.
Express Scripts Litigation with Anthem. In March 2016, Anthem filed a lawsuit in the United States District Court for the Southern District of New York alleging various breach of contract claims against Express Scripts relating to the parties’ rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties including allegations that Express Scripts failed to negotiate new pricing concessions in good faith, as well as various alleged service issues. Anthem also requested that the court enter declaratory judgment that Express Scripts is required to provide Anthem competitive benchmark pricing, that Anthem can terminate the agreement, and that Express Scripts is required to provide Anthem with post-termination services at competitive benchmark pricing for one year following any termination by Anthem. Anthem claims it is entitled to $13 billion in additional pricing concessions over the remaining term of the agreement, as well as $1.8 billion for one year following any contract termination by Anthem and $150 million damages for service issues (“Anthem’s Allegations”). On April 19, 2016, in response to Anthem’s complaint, Express Scripts filed its answer denying Anthem’s Allegations in their entirety and asserting affirmative defenses and counterclaims against Anthem. The court subsequently granted Anthem’s motion to dismiss two of six counts of Express Scripts’ amended counterclaims. The current scheduling order runs through the completion of summary judgment briefing in March 2021. There is no tentative trial date. We believe in the merits of our claims and dispute Anthem’s claims, and we intend to vigorously defend ourselves and pursue our claims.
Regulatory Matters
Civil Investigative Demand. The U.S. Department of Justice (“DOJ”) is conducting an industry-wide investigation of Medicare Advantage organizations’ risk adjustment practices under Medicare Parts C and D including medical chart reviews and health exams. For certain other Medicare Advantage organizations, the investigation has resulted in litigation. The Company is currently responding to information requests (civil investigative demands) received from the DOJ (U.S. Attorney’s Offices for the Eastern District of Pennsylvania and the Southern District of New York). We will continue to cooperate with the DOJ’s investigation.
Disability claims regulatory matter. The Company is subject to an agreement with the Departments of Insurance for Maine, Massachusetts, Pennsylvania, Connecticut and California (together, the “Lead States”), originally entered into in 2013, that relates to the Company’s long-term disability claims handling practices. The agreement provides for enhanced procedures related to documentation and disposition. Cigna has cooperated fully with the Lead States and we believe we have addressed the requirements of the agreement. The Lead States initiated a re-examination of our practices. In April 2020, the re-examination was closed with a determination that the Company is in material compliance and no adverse regulatory action was, or is expected to be, taken.
Note 19 – Segment Information
See Note 1 for a description of our segments. A description of our basis for reporting segment operating results is outlined below. Intersegment revenues primarily reflect pharmacy related transactions between the Health Services and Integrated Medical segments.
The Company uses “pre-tax adjusted income from operations” and “adjusted revenues” as its principal financial measures of segment operating performance because management believes they best reflect the underlying results of business operations and permit analysis of trends in underlying revenue, expenses and profitability. Pre-tax adjusted income from operations is defined as income before taxes excluding realized investment results, amortization of acquired intangible assets, special items and, for periods prior to 2020, earnings contribution from transitioning clients Anthem Inc. and Coventry Health Care, Inc. (the “transitioning clients”). As of December 31, 2019, the transition of these clients was substantially complete; therefore, beginning in 2020, we no longer exclude results of transitioning clients from our adjusted revenues and adjusted income from operations. Income or expense amounts that are excluded from adjusted income from operations because they are not indicative of underlying performance or the responsibility of operating segment management include:
•Realized investment gains (losses) including changes in market values of certain financial instruments between balance sheet dates, as well as gains and losses associated with invested asset sales.
•Amortization of acquired intangible assets because these relate to costs incurred for acquisitions.
•Results of transitioning clients, for periods prior to 2020, because those results were not indicative of ongoing results.
•Special items, if any, that management believes are not representative of the underlying results of operations due to the nature or size of these matters.
The Company does not report total assets by segment because this is not a metric used to allocate resources or evaluate segment performance.
Adjusted revenues is defined as revenues excluding: 1) revenue contribution from transitioning clients for periods prior to 2020; 2) the Company’s share of certain realized investment results of its joint ventures reported in the International Markets segment using the equity method of accounting; and 3) special items, if any.
The following tables present the special items recorded by the Company for the three and six months ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
|
Description of special item charges (benefits) and financial statement line item(s)
|
|
After-tax
|
|
Before-tax
|
|
After-tax
|
|
Before-tax
|
Debt extinguishment costs (Debt extinguishment costs)
|
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Integration and transaction-related costs (Selling, general and administrative expenses)
|
|
99
|
|
|
130
|
|
|
115
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Charges associated with litigation matters (Selling, general and administrative expenses)
|
|
—
|
|
|
—
|
|
|
64
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total impact from special items
|
|
$
|
110
|
|
|
$
|
144
|
|
|
$
|
179
|
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
|
Description of Special Item Charges (Benefits) and Financial Statement Line Item(s)
|
|
After-tax
|
|
Before-tax
|
|
After-tax
|
|
Before-tax
|
Debt extinguishment costs (Debt extinguishment costs)
|
|
$
|
151
|
|
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Integration and transaction-related costs (Selling, general and administrative expenses)
|
|
173
|
|
|
227
|
|
|
223
|
|
|
291
|
|
Charge for organizational efficiency plan (Selling, general and administrative expenses)
|
|
24
|
|
|
31
|
|
|
—
|
|
|
—
|
|
Charges associated with litigation matters (Selling, general and administrative expenses)
|
|
19
|
|
|
25
|
|
|
64
|
|
|
81
|
|
Contractual adjustment for a former client (Pharmacy revenues)
|
|
(66)
|
|
|
(87)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total impact from special items
|
|
$
|
301
|
|
|
$
|
395
|
|
|
$
|
287
|
|
|
$
|
372
|
|
Summarized segment financial information for the three and six months ended June 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Health Services
|
|
Integrated Medical
|
|
International Markets
|
|
Group Disability and Other
|
|
Corporate and Eliminations
|
|
Total
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
27,714
|
|
|
$
|
8,684
|
|
|
$
|
1,466
|
|
|
$
|
1,178
|
|
|
$
|
—
|
|
|
$
|
39,042
|
|
Inter-segment revenues
|
|
885
|
|
|
504
|
|
|
—
|
|
|
6
|
|
|
(1,395)
|
|
|
|
Net investment income
|
|
3
|
|
|
49
|
|
|
26
|
|
|
144
|
|
|
1
|
|
|
223
|
|
Total revenues
|
|
28,602
|
|
|
9,237
|
|
|
1,492
|
|
|
1,328
|
|
|
(1,394)
|
|
|
39,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment results from certain equity method investments
|
|
—
|
|
|
—
|
|
|
(60)
|
|
|
—
|
|
|
—
|
|
|
(60)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenues
|
|
$
|
28,602
|
|
|
$
|
9,237
|
|
|
$
|
1,432
|
|
|
$
|
1,328
|
|
|
$
|
(1,394)
|
|
|
$
|
39,205
|
|
Income (loss) before taxes
|
|
$
|
771
|
|
|
$
|
1,543
|
|
|
$
|
390
|
|
|
$
|
129
|
|
|
$
|
(544)
|
|
|
$
|
2,289
|
|
Pre-tax adjustments to reconcile to adjusted income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) attributable to noncontrolling interests
|
|
(3)
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
(8)
|
|
Net realized investment losses
|
|
—
|
|
|
(26)
|
|
|
(73)
|
|
|
1
|
|
|
—
|
|
|
(98)
|
|
Amortization of acquired intangible assets
|
|
481
|
|
|
6
|
|
|
7
|
|
|
2
|
|
|
—
|
|
|
496
|
|
Special items
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
Integration and transaction-related costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
130
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax adjusted income (loss) from operations
|
|
$
|
1,249
|
|
|
$
|
1,523
|
|
|
$
|
319
|
|
|
$
|
132
|
|
|
$
|
(400)
|
|
|
$
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Health Services
|
|
Integrated Medical
|
|
International Markets
|
|
Group Disability and Other
|
|
Corporate and Eliminations
|
|
Total
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
27,337
|
|
|
$
|
8,668
|
|
|
$
|
1,343
|
|
|
$
|
1,131
|
|
|
$
|
—
|
|
|
$
|
38,479
|
|
Inter-segment revenues
|
|
633
|
|
|
189
|
|
|
—
|
|
|
7
|
|
|
(829)
|
|
|
|
Net investment income
|
|
17
|
|
|
111
|
|
|
40
|
|
|
171
|
|
|
1
|
|
|
340
|
|
Total revenues
|
|
27,987
|
|
|
8,968
|
|
|
1,383
|
|
|
1,309
|
|
|
(828)
|
|
|
38,819
|
|
Revenue contributions from transitioning clients
|
|
(4,450)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,450)
|
|
Net realized investment results from certain equity method investments
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenues
|
|
$
|
23,537
|
|
|
$
|
8,968
|
|
|
$
|
1,389
|
|
|
$
|
1,309
|
|
|
$
|
(828)
|
|
|
$
|
34,375
|
|
Income (loss) before taxes
|
|
$
|
1,108
|
|
|
$
|
989
|
|
|
$
|
195
|
|
|
$
|
155
|
|
|
$
|
(689)
|
|
|
$
|
1,758
|
|
Pre-tax adjustments to reconcile to adjusted income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transitioning clients
|
|
(655)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(655)
|
|
(Income) attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
Net realized investment (gains) losses
|
|
—
|
|
|
(17)
|
|
|
8
|
|
|
(8)
|
|
|
—
|
|
|
(17)
|
|
Amortization of acquired intangible assets
|
|
709
|
|
|
18
|
|
|
8
|
|
|
2
|
|
|
—
|
|
|
737
|
|
Special items
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration and transaction-related costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155
|
|
|
155
|
|
Charges associated with litigation matters
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax adjusted income (loss) from operations
|
|
$
|
1,162
|
|
|
$
|
990
|
|
|
$
|
207
|
|
|
$
|
149
|
|
|
$
|
(453)
|
|
|
$
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Health Services
|
|
Integrated Medical
|
|
International Markets
|
|
Group Disability and Other
|
|
Corporate and Eliminations
|
|
Total
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
53,970
|
|
|
$
|
17,952
|
|
|
$
|
2,886
|
|
|
$
|
2,350
|
|
|
$
|
—
|
|
|
$
|
77,158
|
|
Inter-segment revenues
|
|
1,859
|
|
|
970
|
|
|
—
|
|
|
11
|
|
|
(2,840)
|
|
|
—
|
|
Net investment income
|
|
28
|
|
|
175
|
|
|
66
|
|
|
306
|
|
|
1
|
|
|
576
|
|
Total revenues
|
|
55,857
|
|
|
19,097
|
|
|
2,952
|
|
|
2,667
|
|
|
(2,839)
|
|
|
77,734
|
|
Net realized investment results from certain equity method investments
|
|
—
|
|
|
—
|
|
|
(50)
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
Special items
|
|
(87)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(87)
|
|
Adjusted revenues
|
|
$
|
55,770
|
|
|
$
|
19,097
|
|
|
$
|
2,902
|
|
|
$
|
2,667
|
|
|
$
|
(2,839)
|
|
|
$
|
77,597
|
|
Income (loss) before taxes
|
|
$
|
1,465
|
|
|
$
|
2,683
|
|
|
$
|
624
|
|
|
$
|
201
|
|
|
$
|
(1,287)
|
|
|
$
|
3,686
|
|
Pre-tax adjustments to reconcile to adjusted income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) attributable to noncontrolling interests
|
|
(7)
|
|
|
—
|
|
|
(10)
|
|
|
—
|
|
|
—
|
|
|
(17)
|
|
Net realized investment losses
|
|
—
|
|
|
22
|
|
|
(27)
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Amortization of acquired intangible assets
|
|
960
|
|
|
17
|
|
|
14
|
|
|
3
|
|
|
—
|
|
|
994
|
|
Special items
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
199
|
|
199
|
Integration and transaction-related costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
227
|
|
|
227
|
|
Charge for organizational efficiency plan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
31
|
|
Charges associated with litigation matters
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
Contractual adjustment for a former client
|
|
(87)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(87)
|
|
Pre-tax adjusted income (loss) from operations
|
|
$
|
2,331
|
|
|
$
|
2,722
|
|
|
$
|
601
|
|
|
$
|
209
|
|
|
$
|
(805)
|
|
|
$
|
5,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Health Services
|
|
Integrated Medical
|
|
International Markets
|
|
Group Disability and Other
|
|
Corporate and Eliminations
|
|
Total
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
53,534
|
|
|
$
|
17,578
|
|
|
$
|
2,727
|
|
|
$
|
2,240
|
|
|
$
|
—
|
|
|
$
|
76,079
|
|
Inter-segment revenues
|
|
1,370
|
|
|
351
|
|
|
—
|
|
|
14
|
|
|
(1,735)
|
|
|
|
Net investment income (loss)
|
|
32
|
|
|
234
|
|
|
78
|
|
|
351
|
|
|
(9)
|
|
|
686
|
|
Total revenues
|
|
54,936
|
|
|
18,163
|
|
|
2,805
|
|
|
2,605
|
|
|
(1,744)
|
|
|
76,765
|
|
Revenue contribution from transitioning clients
|
|
(8,939)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,939)
|
|
Net realized investment results from certain equity method investments
|
|
—
|
|
|
—
|
|
|
(22)
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
Adjusted revenues
|
|
$
|
45,997
|
|
|
$
|
18,163
|
|
|
$
|
2,783
|
|
|
$
|
2,605
|
|
|
$
|
(1,744)
|
|
|
$
|
67,804
|
|
Income (loss) before taxes
|
|
$
|
2,050
|
|
|
$
|
2,146
|
|
|
$
|
417
|
|
|
$
|
248
|
|
|
$
|
(1,315)
|
|
|
$
|
3,546
|
|
Pre-tax adjustments to reconcile to adjusted income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transitioning clients
|
|
(1,315)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,315)
|
|
(Income) attributable to noncontrolling interests
|
|
(1)
|
|
|
—
|
|
|
(8)
|
|
|
—
|
|
|
—
|
|
|
(9)
|
|
Net realized investment (gains)
|
|
—
|
|
|
(22)
|
|
|
(15)
|
|
|
(18)
|
|
|
—
|
|
|
(55)
|
|
Amortization of acquired intangible assets
|
|
1,422
|
|
|
36
|
|
|
19
|
|
|
3
|
|
|
—
|
|
|
1,480
|
|
Special items
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration and transaction-related costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
291
|
|
|
291
|
|
Charges associated with litigation matters
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
81
|
|
Pre-tax adjusted income (loss) from operations
|
|
$
|
2,156
|
|
|
$
|
2,160
|
|
|
$
|
413
|
|
|
$
|
233
|
|
|
$
|
(943)
|
|
|
$
|
4,019
|
|
Revenue from external customers includes pharmacy revenues, premiums and fees and other revenues. The following table presents these revenues by product, premium and service type for the three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Products (Pharmacy revenues) (ASC 606)
|
|
|
|
|
|
|
|
|
Network revenues
|
|
13,090
|
|
|
12,758
|
|
|
25,232
|
|
|
25,031
|
|
Home delivery and specialty revenues
|
|
$
|
12,183
|
|
|
$
|
12,272
|
|
|
$
|
23,897
|
|
|
$
|
24,056
|
|
Other
|
|
1,291
|
|
|
1,258
|
|
|
2,533
|
|
|
2,380
|
|
Total pharmacy revenues
|
|
26,564
|
|
|
26,288
|
|
|
51,662
|
|
|
51,467
|
|
Insurance premiums (ASC 944)
|
|
|
|
|
|
|
|
|
Integrated Medical premiums
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Health Insurance
|
|
3,090
|
|
|
3,065
|
|
|
6,551
|
|
|
6,104
|
|
Stop loss
|
|
1,152
|
|
|
1,067
|
|
|
2,313
|
|
|
2,136
|
|
Other
|
|
283
|
|
|
241
|
|
|
572
|
|
|
519
|
|
Government
|
|
|
|
|
|
|
|
|
Medicare Advantage
|
|
1,904
|
|
|
1,610
|
|
|
3,785
|
|
|
3,217
|
|
Medicare Part D
|
|
420
|
|
|
400
|
|
|
882
|
|
|
925
|
|
Other
|
|
1,063
|
|
|
1,013
|
|
|
2,129
|
|
|
2,078
|
|
Total Integrated Medical premiums
|
|
7,912
|
|
|
7,396
|
|
|
16,232
|
|
|
14,979
|
|
International Markets premiums
|
|
1,344
|
|
|
1,301
|
|
|
2,719
|
|
|
2,605
|
|
Domestic disability, life and accident premiums
|
|
1,124
|
|
|
1,069
|
|
|
2,240
|
|
|
2,116
|
|
Other premiums
|
|
26
|
|
|
37
|
|
|
55
|
|
|
74
|
|
Total premiums
|
|
10,406
|
|
|
9,803
|
|
|
21,246
|
|
|
19,774
|
|
Services (ASC 606)
|
|
|
|
|
|
|
|
|
Fees
|
|
1,979
|
|
|
2,376
|
|
|
4,133
|
|
|
4,766
|
|
Other external revenues
|
|
93
|
|
|
12
|
|
|
117
|
|
|
72
|
|
Total services
|
|
2,072
|
|
|
2,388
|
|
|
4,250
|
|
|
4,838
|
|
Total revenues from external customers
|
|
$
|
39,042
|
|
|
$
|
38,479
|
|
|
$
|
77,158
|
|
|
$
|
76,079
|
|
The Health Services segment may provide certain financial and performance guarantees, including a minimum level of discounts a client may receive, generic utilization rates and various service levels. Clients may be entitled to receive compensation if we fail to meet these guarantees. Actual performance is compared to the contractual guarantee for each measure throughout the period and the Company defers revenue for any estimated payouts within Accrued expenses and other liabilities (current). These estimates are adjusted at the end of the guarantee period. Historically, adjustments to original estimates have not been material. The performance guarantee liability was $0.9 billion as of June 30, 2020 and $1.0 billion as of December 31, 2019.