UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 1-08323
Cigna Corporation
(Exact name of registrant as specified in its charter)
Delaware |
|
06-1059331 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
900 Cottage Grove Road Bloomfield, Connecticut |
|
06002 |
(Address of principal executive offices) |
|
(Zip Code) |
(860) 226-6000 | ||
Registrants telephone number, including area code | ||
(860) 226-6741 or (215) 761-5511 | ||
Registrants facsimile number, including area code | ||
Not Applicable | ||
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark |
|
YES |
|
NO | |||
· whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
|
R |
|
o | |||
· whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
|
R |
|
o | |||
· whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. | |||||||
Large accelerated filer R |
Accelerated filer o |
Non-accelerated filer o |
Smaller Reporting Company o |
Emerging growth company o | |||
· If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |||||||
· whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
|
o |
|
R | |||
As of October 19, 2018, 243,534,265 shares of the issuers common stock were outstanding.
Cigna Corporation
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Page | ||
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1 | |
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2 | |
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3 | |
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4 | |
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6 | |
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7 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
46 | |
66 | ||
66 | ||
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67 | ||
67 | ||
71 | ||
72 | ||
73 |
As used herein, Cigna or the Company refers to one or more of Cigna Corporation and its consolidated subsidiaries.
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Cigna Corporation
Consolidated Statements of Income
|
|
Unaudited |
|
Unaudited |
| ||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(In millions, except per share amounts) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
8,994 |
|
$ |
8,075 |
|
$ |
27,005 |
|
$ |
24,283 |
|
Fees and other revenues |
|
1,361 |
|
1,266 |
|
4,087 |
|
3,782 |
| ||||
Net investment income |
|
355 |
|
298 |
|
1,036 |
|
909 |
| ||||
Mail order pharmacy revenues |
|
747 |
|
733 |
|
2,222 |
|
2,200 |
| ||||
Realized investment gains (losses) |
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|
|
|
|
|
|
|
| ||||
Other-than-temporary impairments on fixed maturities |
|
(1) |
|
(6) |
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(19) |
|
(15) |
| ||||
Other realized investment gains (losses), net |
|
1 |
|
123 |
|
(17) |
|
229 |
| ||||
Net realized investment gains (losses) |
|
- |
|
117 |
|
(36) |
|
214 |
| ||||
TOTAL REVENUES |
|
11,457 |
|
10,489 |
|
34,314 |
|
31,388 |
| ||||
Benefits and expenses |
|
|
|
|
|
|
|
|
| ||||
Global Health Care medical costs |
|
5,360 |
|
4,845 |
|
16,098 |
|
14,684 |
| ||||
Other benefit expenses |
|
1,443 |
|
1,342 |
|
4,322 |
|
4,044 |
| ||||
Mail order pharmacy costs |
|
602 |
|
612 |
|
1,776 |
|
1,819 |
| ||||
Other operating expenses |
|
2,971 |
|
2,838 |
|
8,666 |
|
7,905 |
| ||||
Amortization of other acquired intangible assets |
|
48 |
|
28 |
|
99 |
|
88 |
| ||||
TOTAL BENEFITS AND EXPENSES |
|
10,424 |
|
9,665 |
|
30,961 |
|
28,540 |
| ||||
Income before income taxes |
|
1,033 |
|
824 |
|
3,353 |
|
2,848 |
| ||||
Income taxes |
|
|
|
|
|
|
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|
| ||||
Current |
|
248 |
|
231 |
|
837 |
|
821 |
| ||||
Deferred |
|
11 |
|
31 |
|
17 |
|
62 |
| ||||
TOTAL INCOME TAXES |
|
259 |
|
262 |
|
854 |
|
883 |
| ||||
Net income |
|
774 |
|
562 |
|
2,499 |
|
1,965 |
| ||||
Less: Net income (loss) attributable to noncontrolling interests |
|
2 |
|
2 |
|
6 |
|
(6) |
| ||||
SHAREHOLDERS NET INCOME |
|
$ |
772 |
|
$ |
560 |
|
$ |
2,493 |
|
$ |
1,971 |
|
Shareholders net income per share |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
3.18 |
|
$ |
2.25 |
|
$ |
10.28 |
|
$ |
7.79 |
|
Diluted |
|
$ |
3.14 |
|
$ |
2.21 |
|
$ |
10.14 |
|
$ |
7.67 |
|
Dividends declared per share |
|
$ |
- |
|
$ |
- |
|
$ |
0.04 |
|
$ |
0.04 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
Cigna Corporation
Consolidated Statements of Comprehensive Income
|
|
Unaudited |
|
Unaudited |
| ||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(In millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
| ||||
Shareholders net income |
|
$ |
772 |
|
$ |
560 |
|
$ |
2,493 |
|
$ |
1,971 |
|
Shareholders other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
| ||||
Net unrealized (depreciation) appreciation, securities |
|
- |
|
(22) |
|
(420) |
|
52 |
| ||||
Net unrealized appreciation (depreciation), derivatives |
|
2 |
|
- |
|
(11) |
|
(3) |
| ||||
Net translation of foreign currencies |
|
(29) |
|
34 |
|
(136) |
|
173 |
| ||||
Postretirement benefits liability adjustment |
|
13 |
|
10 |
|
31 |
|
36 |
| ||||
Shareholders other comprehensive (loss) income, net of tax |
|
(14) |
|
22 |
|
(536) |
|
258 |
| ||||
Shareholders comprehensive income |
|
758 |
|
582 |
|
1,957 |
|
2,229 |
| ||||
Comprehensive income (loss) attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) attributable to redeemable noncontrolling interests |
|
2 |
|
2 |
|
6 |
|
(1) |
| ||||
Net (loss) attributable to other noncontrolling interests |
|
- |
|
- |
|
- |
|
(5) |
| ||||
Other comprehensive (loss) attributable to redeemable noncontrolling interests |
|
(9) |
|
- |
|
(19) |
|
- |
| ||||
Total comprehensive (loss) income attributable to noncontrolling interests |
|
(7) |
|
2 |
|
(13) |
|
(6) |
| ||||
TOTAL COMPREHENSIVE INCOME |
|
$ |
751 |
|
$ |
584 |
|
$ |
1,944 |
|
$ |
2,223 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
Cigna Corporation
|
|
Unaudited |
| ||||
|
|
As of |
|
As of |
| ||
|
|
September 30, |
|
December 31, |
| ||
(In millions, except per share amounts) |
|
2018 |
|
2017 |
| ||
Assets |
|
|
|
|
| ||
Investments |
|
|
|
|
| ||
Fixed maturities, at fair value (amortized cost, $22,869; $21,867) |
|
$ |
23,268 |
|
$ |
23,138 |
|
Equity securities |
|
579 |
|
588 |
| ||
Commercial mortgage loans |
|
1,867 |
|
1,761 |
| ||
Policy loans |
|
1,421 |
|
1,415 |
| ||
Other long-term investments |
|
1,739 |
|
1,518 |
| ||
Short-term investments |
|
102 |
|
199 |
| ||
Total investments |
|
28,976 |
|
28,619 |
| ||
Cash and cash equivalents |
|
24,032 |
|
2,972 |
| ||
Premiums, accounts and notes receivable, net |
|
3,609 |
|
3,380 |
| ||
Reinsurance recoverables |
|
5,780 |
|
6,046 |
| ||
Deferred policy acquisition costs |
|
2,350 |
|
2,237 |
| ||
Property and equipment |
|
1,559 |
|
1,563 |
| ||
Deferred tax assets, net |
|
132 |
|
39 |
| ||
Goodwill |
|
6,129 |
|
6,164 |
| ||
Other assets, including other intangibles |
|
2,227 |
|
2,316 |
| ||
Separate account assets |
|
8,162 |
|
8,423 |
| ||
TOTAL ASSETS |
|
$ |
82,956 |
|
$ |
61,759 |
|
Liabilities |
|
|
|
|
| ||
Contractholder deposit funds |
|
$ |
8,069 |
|
$ |
8,196 |
|
Future policy benefits |
|
9,652 |
|
10,040 |
| ||
Unpaid claims and claim expenses |
|
5,259 |
|
5,168 |
| ||
Global Health Care medical costs payable |
|
2,955 |
|
2,719 |
| ||
Unearned premiums |
|
683 |
|
724 |
| ||
Total insurance and contractholder liabilities |
|
26,618 |
|
26,847 |
| ||
Accounts payable, accrued expenses and other liabilities |
|
7,541 |
|
7,290 |
| ||
Short-term debt |
|
9 |
|
240 |
| ||
Long-term debt |
|
25,041 |
|
5,199 |
| ||
Separate account liabilities |
|
8,162 |
|
8,423 |
| ||
TOTAL LIABILITIES |
|
67,371 |
|
47,999 |
| ||
Contingencies Note 16 |
|
|
|
|
| ||
Redeemable noncontrolling interests |
|
30 |
|
49 |
| ||
Shareholders Equity |
|
|
|
|
| ||
Common stock (par value per share, $0.25; shares issued, 296; authorized, 600) |
|
74 |
|
74 |
| ||
Additional paid-in capital |
|
2,985 |
|
2,940 |
| ||
Accumulated other comprehensive (loss) |
|
(1,857) |
|
(1,082) |
| ||
Retained earnings |
|
18,474 |
|
15,800 |
| ||
Less treasury stock, at cost |
|
(4,121) |
|
(4,021) |
| ||
TOTAL SHAREHOLDERS EQUITY |
|
15,555 |
|
13,711 |
| ||
Total liabilities and shareholders equity |
|
$ |
82,956 |
|
$ |
61,759 |
|
SHAREHOLDERS EQUITY PER SHARE |
|
$ |
63.88 |
|
$ |
56.20 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
Cigna Corporation
Consolidated Statements of Changes in Total Equity
Unaudited For the three months ended September 30, 2018 |
|
Common |
|
Additional |
|
Accumulated |
|
Retained |
|
Treasury |
|
Shareholders |
|
Other Non- |
|
Total |
|
Redeemable |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at June 30, 2018 |
|
$ |
74 |
|
$ |
2,974 |
|
$ |
(1,843) |
|
$ |
17,722 |
|
$ |
(4,184) |
|
$ |
14,743 |
|
$ |
- |
|
$ |
14,743 |
|
$ |
39 |
|
Effect of issuing stock for employee benefit plans |
|
|
|
11 |
|
|
|
(20) |
|
63 |
|
54 |
|
|
|
54 |
|
|
| |||||||||
Other comprehensive (loss) |
|
|
|
|
|
(14) |
|
|
|
|
|
(14) |
|
|
|
(14) |
|
(9) |
| |||||||||
Net income |
|
|
|
|
|
|
|
772 |
|
|
|
772 |
|
|
|
772 |
|
2 |
| |||||||||
Other transactions impacting noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
(2) |
| |||||||||
BALANCE AT SEPTEMBER 30, 2018 |
|
$ |
74 |
|
$ |
2,985 |
|
$ |
(1,857) |
|
$ |
18,474 |
|
$ |
(4,121) |
|
$ |
15,555 |
|
$ |
- |
|
$ |
15,555 |
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
Additional |
|
Accumulated |
|
|
|
|
|
|
|
Other Non- |
|
|
|
Redeemable |
| |||||||||
For the three months ended September 30, 2017 |
|
Common |
|
Paid-in |
|
Comprehensive |
|
Retained |
|
Treasury |
|
Shareholders |
|
controlling |
|
Total |
|
controlling |
| |||||||||
(In millions) |
|
Stock |
|
Capital |
|
(Loss) |
|
Earnings |
|
Stock |
|
Equity |
|
Interests |
|
Equity |
|
Interests |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at June 30, 2017 as reported |
|
$ |
74 |
|
$ |
2,922 |
|
$ |
(1,146) |
|
$ |
15,102 |
|
$ |
(2,406) |
|
$ |
14,546 |
|
$ |
1 |
|
$ |
14,547 |
|
$ |
58 |
|
Cumulative effect of accounting for revenue recognition (1) |
|
|
|
|
|
|
|
(24) |
|
|
|
(24) |
|
|
|
(24) |
|
|
| |||||||||
Balance at June 30, 2017 as retrospectively adjusted |
|
74 |
|
2,922 |
|
(1,146) |
|
15,078 |
|
(2,406) |
|
14,522 |
|
1 |
|
14,523 |
|
58 |
| |||||||||
Effect of issuing stock for employee benefit plans |
|
|
|
7 |
|
|
|
(72) |
|
128 |
|
63 |
|
|
|
63 |
|
|
| |||||||||
Other comprehensive income |
|
|
|
|
|
22 |
|
|
|
|
|
22 |
|
|
|
22 |
|
|
| |||||||||
Net income |
|
|
|
|
|
|
|
560 |
|
|
|
560 |
|
|
|
560 |
|
2 |
| |||||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
(1,046) |
|
(1,046) |
|
|
|
(1,046) |
|
|
| |||||||||
Other transactions impacting noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
- |
|
(1) |
|
(1) |
|
(8) |
| |||||||||
BALANCE AT SEPTEMBER 30, 2017 |
|
$ |
74 |
|
$ |
2,929 |
|
$ |
(1,124) |
|
$ |
15,566 |
|
$ |
(3,324) |
|
$ |
14,121 |
|
$ |
- |
|
$ |
14,121 |
|
$ |
52 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
(1) See Note 2 for further information about adjustments resulting from the Companys adoption of new accounting standards in 2018.
Cigna Corporation
Consolidated Statements of Changes in Total Equity
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
Redeemable |
| |||||||||
Unaudited |
|
|
|
Additional |
|
Other |
|
|
|
|
|
|
|
Other Non- |
|
|
|
Non- |
| |||||||||
For the nine months ended September 30, 2018 |
|
Common |
|
Paid-in |
|
Comprehensive |
|
Retained |
|
Treasury |
|
Shareholders |
|
controlling |
|
Total |
|
controlling |
| |||||||||
(In millions) |
|
Stock |
|
Capital |
|
(Loss) |
|
Earnings |
|
Stock |
|
Equity |
|
Interests |
|
Equity |
|
Interests |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2017 as retrospectively adjusted |
|
$ |
74 |
|
$ |
2,940 |
|
$ |
(1,082) |
|
$ |
15,800 |
|
$ |
(4,021) |
|
$ |
13,711 |
|
$ |
- |
|
$ |
13,711 |
|
$ |
49 |
|
Cumulative effect of accounting for financial instruments and hedging (1) |
|
|
|
|
|
(10) |
|
68 |
|
|
|
58 |
|
|
|
58 |
|
|
| |||||||||
Reclassification adjustment related to U.S. tax reform legislation (1) |
|
|
|
|
|
(229) |
|
229 |
|
|
|
- |
|
|
|
- |
|
|
| |||||||||
Effect of issuing stock for employee benefit plans |
|
|
|
45 |
|
|
|
(106) |
|
175 |
|
114 |
|
|
|
114 |
|
|
| |||||||||
Other comprehensive (loss) |
|
|
|
|
|
(536) |
|
|
|
|
|
(536) |
|
|
|
(536) |
|
(19) |
| |||||||||
Net income |
|
|
|
|
|
|
|
2,493 |
|
|
|
2,493 |
|
|
|
2,493 |
|
6 |
| |||||||||
Common dividends declared (per share: $0.04) |
|
|
|
|
|
|
|
(10) |
|
|
|
(10) |
|
|
|
(10) |
|
|
| |||||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
(275) |
|
(275) |
|
|
|
(275) |
|
|
| |||||||||
Other transactions impacting noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
(6) |
| |||||||||
BALANCE AT SEPTEMBER 30, 2018 |
|
$ |
74 |
|
$ |
2,985 |
|
$ |
(1,857) |
|
$ |
18,474 |
|
$ |
(4,121) |
|
$ |
15,555 |
|
$ |
- |
|
$ |
15,555 |
|
$ |
30 |
|
|
|
|
|
|
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Accumulated |
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Redeemable |
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Additional |
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Other |
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Other non- |
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Non- |
| |||||||||
For the nine months ended September 30, 2017 |
|
Common |
|
Paid-in |
|
Comprehensive |
|
Retained |
|
Treasury |
|
Shareholders |
|
controlling |
|
Total |
|
controlling |
| |||||||||
(In millions) |
|
Stock |
|
Capital |
|
(Loss) |
|
Earnings |
|
Stock |
|
Equity |
|
Interests |
|
Equity |
|
Interests |
| |||||||||
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|
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|
|
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|
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|
|
|
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| |||||||||
Balance at December 31, 2016 as reported |
|
$ |
74 |
|
$ |
2,892 |
|
$ |
(1,382) |
|
$ |
13,855 |
|
$ |
(1,716) |
|
$ |
13,723 |
|
$ |
4 |
|
$ |
13,727 |
|
$ |
58 |
|
Cumulative effect of accounting for revenue recognition (1) |
|
|
|
|
|
|
|
(24) |
|
|
|
(24) |
|
|
|
(24) |
|
|
| |||||||||
Balance at December 31, 2016 as retrospectively adjusted |
|
74 |
|
2,892 |
|
(1,382) |
|
13,831 |
|
(1,716) |
|
13,699 |
|
4 |
|
13,703 |
|
58 |
| |||||||||
Effect of issuing stock for employee benefit plans |
|
|
|
40 |
|
|
|
(226) |
|
380 |
|
194 |
|
|
|
194 |
|
|
| |||||||||
Other comprehensive income |
|
|
|
|
|
258 |
|
|
|
|
|
258 |
|
|
|
258 |
|
- |
| |||||||||
Net income (loss) |
|
|
|
|
|
|
|
1,971 |
|
|
|
1,971 |
|
(5) |
|
1,966 |
|
(1) |
| |||||||||
Common dividends declared (per share: $0.04) |
|
|
|
|
|
|
|
(10) |
|
|
|
(10) |
|
|
|
(10) |
|
|
| |||||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
(1,988) |
|
(1,988) |
|
|
|
(1,988) |
|
|
| |||||||||
Other transactions impacting noncontrolling interests |
|
|
|
(3) |
|
|
|
|
|
|
|
(3) |
|
1 |
|
(2) |
|
(5) |
| |||||||||
BALANCE AT SEPTEMBER 30, 2017 |
|
$ |
74 |
|
$ |
2,929 |
|
$ |
(1,124) |
|
$ |
15,566 |
|
$ |
(3,324) |
|
$ |
14,121 |
|
$ |
- |
|
$ |
14,121 |
|
$ |
52 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
(1) See Note 2 for further information about adjustments resulting from the Companys adoption of new accounting standards in 2018.
Cigna Corporation
Consolidated Statements of Cash Flows
|
|
Unaudited |
| ||||
|
|
Nine Months Ended September 30, |
| ||||
(In millions) |
|
2018 |
|
2017 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
2,499 |
|
$ |
1,965 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
438 |
|
425 |
| ||
Realized investment losses (gains) |
|
36 |
|
(214) |
| ||
Deferred income taxes |
|
17 |
|
62 |
| ||
Net changes in assets and liabilities, net of non-operating effects: |
|
|
|
|
| ||
Premiums, accounts and notes receivable |
|
(243) |
|
(190) |
| ||
Reinsurance recoverables |
|
100 |
|
144 |
| ||
Deferred policy acquisition costs |
|
(195) |
|
(209) |
| ||
Other assets |
|
339 |
|
(156) |
| ||
Insurance liabilities |
|
408 |
|
988 |
| ||
Accounts payable, accrued expenses and other liabilities |
|
113 |
|
221 |
| ||
Current income taxes |
|
73 |
|
7 |
| ||
Debt extinguishment costs |
|
- |
|
321 |
| ||
Distributions from partnership investments |
|
128 |
|
114 |
| ||
Other, net |
|
(69) |
|
33 |
| ||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
3,644 |
|
3,511 |
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Proceeds from investments sold: |
|
|
|
|
| ||
Fixed maturities and equity securities |
|
1,930 |
|
1,376 |
| ||
Investment maturities and repayments: |
|
|
|
|
| ||
Fixed maturities and equity securities |
|
1,394 |
|
1,444 |
| ||
Commercial mortgage loans |
|
181 |
|
253 |
| ||
Other sales, maturities and repayments (primarily short-term and other long-term investments) |
|
588 |
|
1,486 |
| ||
Investments purchased or originated: |
|
|
|
|
| ||
Fixed maturities and equity securities |
|
(4,461) |
|
(4,292) |
| ||
Commercial mortgage loans |
|
(288) |
|
(272) |
| ||
Other (primarily short-term and other long-term investments) |
|
(660) |
|
(722) |
| ||
Property and equipment purchases |
|
(346) |
|
(340) |
| ||
Acquisitions, net of cash acquired |
|
- |
|
(33) |
| ||
Other |
|
(12) |
|
- |
| ||
NET CASH (USED IN) INVESTING ACTIVITIES |
|
(1,674) |
|
(1,100) |
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Deposits and interest credited to contractholder deposit funds |
|
816 |
|
965 |
| ||
Withdrawals and benefit payments from contractholder deposit funds |
|
(872) |
|
(1,079) |
| ||
Net change in short-term debt |
|
(109) |
|
(16) |
| ||
Payments for debt extinguishment |
|
- |
|
(313) |
| ||
Repayment of long-term debt |
|
(131) |
|
(1,250) |
| ||
Net proceeds on issuance of long-term debt |
|
19,884 |
|
1,584 |
| ||
Repurchase of common stock |
|
(310) |
|
(1,961) |
| ||
Issuance of common stock |
|
41 |
|
111 |
| ||
Other, net |
|
(204) |
|
(9) |
| ||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
19,115 |
|
(1,968) |
| ||
Effect of foreign currency rate changes on cash and cash equivalents |
|
(25) |
|
28 |
| ||
Net increase in cash and cash equivalents |
|
21,060 |
|
471 |
| ||
Cash and cash equivalents, January 1, |
|
2,972 |
|
3,185 |
| ||
Cash and cash equivalents, September 30, |
|
$ |
24,032 |
|
$ |
3,656 |
|
Supplemental Disclosure of Cash Information: |
|
|
|
|
| ||
Income taxes paid, net of refunds |
|
$ |
767 |
|
$ |
812 |
|
Interest paid |
|
$ |
167 |
|
$ |
197 |
|
The accompanying Notes to the Consolidated Financial Statements (unaudited) are an integral part of these statements.
CIGNA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TABLE OF CONTENTS
Note |
Footnote |
Page |
|
|
|
BUSINESS AND CAPITAL STRUCTURE |
| |
8 | ||
8 | ||
14 | ||
15 | ||
16 | ||
INSURANCE INFORMATION |
| |
18 | ||
19 | ||
20 | ||
INVESTMENTS |
| |
23 | ||
30 | ||
33 | ||
36 | ||
36 | ||
WORKFORCE MANAGEMENT AND COMPENSATION |
| |
38 | ||
COMPLIANCE, REGULATION AND CONTINGENCIES |
| |
39 | ||
39 | ||
RESULTS DETAILS |
| |
42 |
Note 1 Description of Business
Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as Cigna, the Company, we, our or us) is a global health services organization dedicated to a mission of helping individuals improve their health, well-being and sense of security. To execute on our mission, Cignas evolved strategy is to Go Deeper, Go Local and Go Beyond with a differentiated set of medical, dental, disability, life and accident insurance and related products and services offered by our insurance and other subsidiaries. The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations, unions and associations. Cigna also offers commercial health and dental insurance, Medicare and Medicaid products and health, life and accident insurance coverages to individuals in the United States and selected international markets. In addition to its ongoing operations described above, Cigna also has certain run-off operations.
The financial results of the Companys businesses are reported in the following segments:
Global Health Care aggregates the Commercial and Government operating segments due to their similar economic characteristics, products and services and regulatory environment:
· |
The Commercial operating segment (Commercial segment) encompasses both the U.S. commercial and certain international health care businesses serving employers and their employees, other groups and individuals. Products and services include medical, dental, behavioral health, vision, prescription drug benefit plans, health advocacy programs and other products and services to insured and self-insured customers. |
|
|
· |
The Government operating segment (Government segment) offers Medicare Advantage and Medicare Part D plans to seniors. This segment also offers Medicaid plans in selected markets. |
Global Supplemental Benefits includes supplemental health, life and accident insurance products offered primarily in selected international markets and in the United States.
Group Disability and Life provides group long-term and short-term disability and group life, accident and specialty insurance products and related services.
Other Operations consist of:
· |
corporate-owned life insurance (COLI); |
· |
run-off reinsurance business that is predominantly comprised of guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit (GMIB) business effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska (Berkshire) in 2013; |
· |
deferred gains recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business; and |
· |
run-off settlement annuity business. |
Corporate reflects amounts not allocated to operating segments, such as net interest expense (defined as interest on corporate debt less net investment income on investments not supporting segment operations), interest on uncertain tax positions, intersegment eliminations, compensation cost for stock options and related excess tax benefits, expense associated with frozen pension plans and certain litigation matters and costs for corporate projects, including overhead.
Note 2 Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of Cigna Corporation and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Amounts recorded in the Consolidated Financial Statements necessarily reflect managements estimates and assumptions about medical costs, investment valuation, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment. Certain reclassifications have been made to prior year amounts to conform to the current presentation.
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 Companys 2017 Annual Report on Form 10-K (2017 Form 10-K). The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates. This and certain other factors, including the seasonal nature of portions of the health care and related benefits business, as well as competitive and other market conditions, call for caution in estimating full-year results based on interim results of operations.
Recent Accounting Pronouncements
The Companys 2017 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.
The following tables provide information about recently adopted and recently issued or changed accounting guidance (applicable to Cigna) that have occurred since the Company filed its 2017 Form 10-K.
Recently Adopted Accounting Guidance
Accounting Standard and |
|
Requirements and Effects of Adopting New Guidance |
Revenue from Contracts with Customers (Accounting Standards Update (ASU) 2014-09 and related amendments)
Adopted as of January 1, 2018 |
|
Requires:
· Revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services · Additional revenue-related disclosures
Effects of adoption:
· Applies to the Companys service and mail order pharmacy contracts with customers · Adopted through full retrospective restatement · Cumulative effect adjustment of $24 million after-tax was recorded, reducing the December 31, 2016 balance of retained earnings. Adjustment established a contract liability for service fee revenue billed that must be deferred and allocated to services performed after a customer contract terminates. Subsequent changes in the contract liability and the related impact to net income and per share amounts since adoption were immaterial. · Immaterial reclassifications were made to prior periods in the Consolidated Statements of Income to conform to the current presentation. The ASU and related interpretive guidance provide clarification on topics including whether all or a part of a contract is within its scope, and the definition of a customer. Companies are required to identify and evaluate distinct performance obligations within their contracts. These clarifications resulted in reclassifications within the Global Health Care segment affecting premiums, fees and other revenues, Global Health Care medical costs, and other operating expenses and had no impact on recognition patterns or net income. · Prior period balances in the Companys footnote disclosures have been updated to reflect adjustments resulting from the adoption of this ASU.
|
Accounting Standard and |
|
Requirements and Effects of Adopting New Guidance |
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01 and related amendments)
Adopted as of January 1, 2018 |
|
Requires entities to measure equity investments at fair value in net income if they are neither consolidated nor accounted for under the equity method
Effects of adoption:
· Certain limited partnership interests previously carried at cost of approximately $200 million were increased to fair value of approximately $275 million on January 1, 2018. Subsequent changes in fair value are reported in net investment income. · Changes in fair value for equity securities that have a readily determinable fair value that were previously reported in accumulated other comprehensive income are now reported in net realized investment gains. · Cumulative effect adjustment of $62 million after-tax was recorded, increasing the opening balance of retained earnings in 2018. · See Notes 9 and 10 for updated disclosures about equity securities.
|
Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
Early adopted as of January 1, 2018 |
|
Guidance:
· Relaxes requirements for financial and nonfinancial hedging strategies to be eligible for hedge accounting and changes how companies assess effectiveness · Amends presentation and disclosure requirements to improve transparency about the uses and results of hedging programs
Effects of adoption:
· An immaterial amount of retained earnings was reclassified to accumulated other comprehensive income, decreasing the opening balance in 2018, for a portion of the hedging instruments that was previously excluded from the assessment of hedge effectiveness for fair value hedges. · See Note 11 for the Companys disclosures about derivatives.
|
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)
Early adopted as of January 1, 2018 |
|
Guidance:
· Allows companies to reclassify the tax effects stranded in accumulated other comprehensive income to retained earnings as a result of H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (referred to throughout this Form 10-Q as U.S. tax reform or U.S. tax reform legislation) · Requires additional disclosures of the Companys accounting policy for releasing income tax effects from accumulated other comprehensive income · Allows companies to apply the guidance retrospectively or in the period of adoption
Effects of adoption: Accumulated other comprehensive income of $229 million was reclassified to retained earnings, increasing the opening balance in 2018. See Note 13 for additional information including accounting policy disclosures.
|
In addition to the standards listed above, the Company adopted the following guidance in first quarter 2018 with no material impact to our financial statements: Intra-Entity Transfers of Assets Other than Inventory (ASU 2016-16), Clarifying the Definition of a Business (ASU 2017-01), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), Statement of Cash Flows: Restricted Cash (ASU 2016-18), Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05) and Stock Compensation Scope of Modification Accounting (ASU 2017-09).
Accounting Guidance Not Yet Adopted
Accounting Standard and |
|
Requirements and Expected Effects of Guidance Not Yet Adopted |
Leases (ASU 2016-02 and related amendments)
Required as of January 1, 2019 |
|
Requires:
· Balance sheet recognition of assets and liabilities arising from leases, including leases embedded in other contracts · Additional disclosures of the amount, timing and uncertainty of cash flows from leases · Modified retrospective approach for leases in effect as of and after the date of adoption with a cumulative-effect adjustment recorded in retained earnings
Expected effects:
· The Company is continuing to evaluate the impact this standard will have on its financial statements. · While we continue to refine the estimated impact of this standard, the Company currently expects an increase to assets and liabilities of approximately $500 million. The actual increase in assets and liabilities will depend on the volume, terms and discount rates of leases in place at the time of adoption. · The Company plans to elect the optional practical expedient to retain the current classification of leases, and therefore, does not anticipate a material impact to the Consolidated Statements of Income or Cash Flows. · The Company is implementing a new lease system and also expects that adoption of the new standard will require changes to internal control over financial reporting. · The Company intends to adopt this new guidance as of the adoption date and will not present comparative periods in the financial statements, as recently allowed.
|
Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12)
Required as of January 1, 2021 |
|
Requires (for insurance entities that issue long-duration contracts):
· Cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-pay contract to be reconsidered at least annually with any changes reflected in net income. · Discount rate assumptions to be reviewed quarterly (based on an upper-medium grade (low-credit-risk) fixed-income instrument yield that maximizes the use of observable market inputs) with any changes reflected in other comprehensive income. · Deferred policy acquisition costs to be amortized on a constant-level basis over the expected term of the related contract. · Fair value measurement of all market risk benefits. · Additional disclosures, including liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement. · Transition methods at adoption vary. - Changes to the liability for future policy benefits will use a modified retrospective approach (applied to all contracts on the basis of their carrying amounts as of the beginning of the earliest period presented), with an option to elect a full retrospective transition under certain criteria. - Deferred policy acquisition costs are to be transitioned consistent with the method applied to the liability for future policyholder benefits. - Market risk benefits are required to transition using retrospective application.
Expected effects:
· The Company is evaluating the impact of this newly-issued guidance, but it is expected to have a significant impact on our processes, controls, systems and financial results. The new guidance will apply to insurance products predominantly sold in the Companys businesses other than the Global Health Care segment.
|
Updates to Significant Accounting Policies
The Companys 2017 Form 10-K includes discussion of significant accounting policies in Note 2 or the applicable Notes to the Consolidated Financial Statements. Significant updates to these policies resulting from the adoption of new accounting guidance in 2018 are provided as follows:
· |
ASU 2016-01 (Recognition and Measurement of Financial Assets and Liabilities): see Notes 9 and 10 |
|
|
· |
ASU 2017-12 (Targeted Improvements to Accounting for Hedging Activities): see Note 11 |
|
|
· |
ASU 2014-09 (Revenue from Contracts with Customers), also referred to as Financial Accounting Standards Boards Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers and related guidance (ASC 606): see below |
The majority of the Companys revenues are not subject to the guidance in ASC 606, including premiums from insurance contracts and fees for investment-related products accounted for under insurance guidance (ASC 944). ASC 606 applies to the Companys service and mail order pharmacy contracts with clients. See Note 17 for disaggregated revenue from external customers by segment and by major product or service identified with applicable accounting guidance (ASC 944 or ASC 606).
Accounting for Contracts with Customers Service and Mail Order Pharmacy Arrangements
Service Fees and Expenses
The majority of the Companys service fees are derived from administrative services only (ASO) arrangements that allow corporate clients to self-fund claims and assume the risk of medical or other benefit costs. Most of the Companys ASO arrangements are for Global Health Care medical and specialty services, including pharmacy benefits and, to a lesser extent, ASO services in its Group Disability and Life and Global Supplemental Benefits segments. Generally, the Companys ASO arrangements are short-term. Contract modifications typically occur on renewal and are prospective in nature.
In return for fees from these clients, the Company provides or makes available various services supporting benefit management and claims administration. In addition, Global Health Cares services include access to the Companys participating provider networks, disease management, utilization management, and cost containment services.
In general, the Company considers these services to be a combined performance obligation to provide cost effective administration of plan benefits over the contract period. Fees are billed, due and recognized monthly at contracted rates based on current membership or utilization. This recognition pattern aligns with the benefits from services provided to clients. These revenues are reported in fees and other revenues in the Consolidated Statements of Income.
For most ASO arrangements, the Company is required to perform services for a limited period after a client cancels. If these services will not be separately billed to the client as they are performed, the Company estimates and defers a portion of compensation attributable to this service obligation received in advance. Deferred revenue is recorded as a contract liability in accounts payable, accrued expenses and other liabilities and recognized when the related services are performed.
The Company may also provide performance guarantees that result in refunds to clients only if certain service standards, clinical outcomes or financial metrics are not met. If these standards, outcomes and metrics are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. The Company defers revenue by recording a liability for estimated payouts associated with these guarantees within accounts payable, accrued expenses and other liabilities. The amount of revenue deferred is estimated for each type of guarantee, using either a most likely amount or expected value method depending upon the nature of the guarantee and the information available to estimate refunds. Estimates are refined each reporting period as additional information on the Companys performance becomes available, and upon final reconciliation and settlement at the end of the guarantee period. Amounts accrued and paid for performance guarantees during the reporting periods were not material.
Service fees are recognized net of estimated pharmaceutical manufacturer rebates payable to ASO clients using our network of retail pharmacies. Net rebates retained by the Company from pharmaceutical manufacturers resulting from ASO client utilization at retail pharmacies represent compensation for pharmacy services and are reflected as fee revenue. Rebates generally represent a per script amount from the manufacturer and are determined based on scripts filled during the reporting period.
Expenses associated with administrative programs and services are recognized in other operating expenses as incurred.
Mail Order Pharmacy Revenues and Costs
Mail order pharmacy revenues are due and recognized as each prescription is shipped. Mail order pharmacy revenues are presented net of estimated pharmaceutical manufacturer rebates payable to ASO clients that use our mail order business. Rebates are generally determined based on actual prescriptions filled during the reporting period.
Mail order pharmacy costs are recognized as each prescription is shipped and include the cost of prescriptions sold and other costs to operate this business (including supplies, shipping and handling), net of estimated pharmaceutical rebates from manufacturers for prescriptions filled through our mail order business.
Contract Balances
The following table provides information about receivables and contract liabilities from service and mail order pharmacy contracts with clients. The allowance for doubtful accounts for receivables and the Companys contract assets were not material as of the dates presented.
(In millions) |
|
September 30, 2018 |
|
December 31, 2017 |
| ||
Receivables, net |
|
$ |
898 |
|
$ |
885 |
|
Contract liabilities |
|
$ |
50 |
|
$ |
54 |
|
Revenue recognized that was included in the contract liability balance at the beginning of the reporting period was not material for the three months and nine months ended September 30, 2018 and 2017.
The amount of revenue recognized from performance obligations satisfied in prior periods was not material for the three months and nine months ended September 30, 2018 and 2017.
The incremental costs of obtaining ASO and mail order pharmacy contracts (such as sales commissions) are expensed as incurred and the Company does not disclose information about remaining performance obligations for these contracts in accordance with elections made by the Company as they are generally short-term with original expected durations of one year or less.
Note 3 Mergers and Acquisitions
Proposed Acquisition of Express Scripts
On March 8, 2018, the Company entered into an Agreement and Plan of Merger, as amended by Amendment No. 1, dated as of June 27, 2018 (as amended, the Merger Agreement) with Express Scripts Holding Company (Express Scripts), Halfmoon Parent, Inc., a direct wholly owned subsidiary of the Company (New Cigna), Halfmoon I, Inc., a direct wholly owned subsidiary of New Cigna (Cigna Merger Sub), and Halfmoon II, Inc., a direct wholly owned subsidiary of New Cigna (Express Scripts Merger Sub). Subject to the terms and conditions of the Merger Agreement, the Company will acquire Express Scripts in a cash and stock transaction through (1) the merger of Cigna Merger Sub with and into the Company, with the Company surviving as a direct wholly owned subsidiary of New Cigna and (2) the merger of Express Scripts Merger Sub with and into Express Scripts, with Express Scripts surviving as a direct wholly owned subsidiary of New Cigna (collectively, the Merger). New Cigna will be renamed Cigna Corporation immediately after the Merger.
Upon completion of the Merger, Cigna stockholders will receive one share of New Cigna common stock in exchange for each share of Cigna common stock held immediately prior to the Merger, and Express Scripts stockholders will receive (1) 0.2434 of a share of New Cigna common stock and (2) the right to receive $48.75 in cash, without interest, subject to applicable withholding taxes (the Merger Consideration), in exchange for each share of Express Scripts common stock held immediately prior to the Merger. Upon completion of the Merger, shares of New Cigna common stock are expected to be listed for trading on the New York Stock Exchange.
In August 2018, the stockholders of each of Cigna and Express Scripts gave the requisite stockholder approvals for the Merger. In September 2018, the Antitrust Division of the U.S. Department of Justice (DOJ) cleared the Merger, terminating the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Completion of the Merger remains subject to certain state regulatory approvals and filings required in connection with the transaction, including clearances from certain departments of insurance, and the satisfaction or valid waiver of all closing conditions. The Merger is not subject to a financing condition. The Company intends to fund the cash portion of the Merger Consideration through a combination of cash on hand, assumed Express Scripts debt and new debt issuance. See Note 5 for additional information about the financing of the Merger. The Merger is expected to be completed by December 31, 2018.
The Merger Agreement provides for certain termination rights and fees for both the Company and Express Scripts. If the Merger Agreement is terminated under certain circumstances and within 12 months after the date of such termination the Company enters into an agreement regarding a sale of a majority of the Companys assets or equity or consummates such a sale, then the Company will be required to pay a $1.6 billion termination fee to Express Scripts prior to or contemporaneously with such a transaction. Express Scripts has reciprocal obligations under specified circumstances to pay a $1.6 billion termination fee to the Company.
Additionally, in the event that the Merger Agreement is terminated by either the Company or Express Scripts due to (1) a legal restraint relating to a regulatory law prohibiting consummation of the Merger having become final and non-appealable or (2) the Merger not having been consummated on or prior to December 8, 2018 (subject to an extension to June 8, 2019 if extended by the Company or Express Scripts under certain circumstances); and, in the case of clause (2), at the time of such termination, all of the conditions to the Companys obligation to consummate the Merger have been satisfied or waived other than those that relate to the absence of a legal restraint relating to a regulatory law or the receipt of a regulatory approval, the Company may be required to pay Express Scripts a reverse termination fee of $2.1 billion.
Other transactions
In May 2018, the Company announced an agreement to acquire OnePath Life NZ Limited from ANZ Bank New Zealand Limited, a part of Australia and New Zealand Banking Group Limited, for NZ$700 million (approximately $460 million as of September 30, 2018). The Company expects that the transaction will be completed no later than the first quarter of 2019, subject to final regulatory approval.
Transaction-related costs
The Company has incurred costs detailed in the table below in connection with the proposed acquisition of Express Scripts, the terminated merger with Anthem, Inc. (Anthem) and other transactions. These costs consisted primarily of fees for legal, advisory and other professional services, amortization of the Bridge Facility fees in 2018 and interest expense on the debt issued to fund the Express Scripts merger net of investment income earned on the proceeds of the debt issuance.
|
|
Three Months Ended |
| ||||||||||
|
|
September 30, 2018 |
|
September 30, 2017 |
| ||||||||
(In millions) |
|
Before-tax |
|
After-tax |
|
Before-tax |
|
After-tax |
| ||||
Interest expense on newly issued debt |
|
$ |
33 |
|
$ |
26 |
|
$ |
- |
|
$ |
- |
|
Net investment income on debt proceeds |
|
(13) |
|
(10) |
|
- |
|
- |
| ||||
All other transaction-related costs |
|
108 |
|
92 |
|
9 |
|
6 |
| ||||
Transaction-related costs, net |
|
$ |
128 |
|
$ |
108 |
|
$ |
9 |
|
$ |
6 |
|
|
|
Nine Months Ended |
| ||||||||||
|
|
September 30, 2018 |
|
September 30, 2017 |
| ||||||||
(In millions) |
|
Before-tax |
|
After-tax |
|
Before-tax |
|
After-tax |
| ||||
Interest expense on newly issued debt |
|
$ |
33 |
|
$ |
26 |
|
$ |
- |
|
$ |
- |
|
Net investment income on debt proceeds |
|
(13) |
|
(10) |
|
- |
|
- |
| ||||
All other transaction-related costs |
|
298 |
|
251 |
|
88 |
|
67 |
| ||||
Tax (benefit) - previously non-deductible costs |
|
- |
|
- |
|
- |
|
(59) |
| ||||
Transaction-related costs, net |
|
$ |
318 |
|
$ |
267 |
|
$ |
88 |
|
$ |
8 |
|
In the second quarter of 2017, the Company recognized an incremental tax benefit of $59 million for costs that became deductible upon the termination of its merger agreement with Anthem. When the Express Scripts acquisition is consummated, a portion of the costs related to that acquisition will not be deductible for federal income tax purposes, as is currently reflected in the Companys financial results.
Basic and diluted earnings per share (EPS) were computed as follows:
|
|
Three Months Ended |
| ||||||||||||||||
|
|
September 30, 2018 |
|
September 30, 2017 |
| ||||||||||||||
(Shares in thousands, dollars in millions, except per |
|
Basic |
|
Effect of |
|
Diluted |
|
Basic |
|
Effect of |
|
Diluted |
| ||||||
Shareholders net income |
|
$ |
772 |
|
|
|
$ |
772 |
|
$ |
560 |
|
|
|
$ |
560 |
| ||
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average |
|
242,577 |
|
|
|
242,577 |
|
249,242 |
|
|
|
249,242 |
| ||||||
Common stock equivalents |
|
|
|
3,535 |
|
3,535 |
|
|
|
4,168 |
|
4,168 |
| ||||||
Total shares |
|
242,577 |
|
3,535 |
|
246,112 |
|
249,242 |
|
4,168 |
|
253,410 |
| ||||||
EPS |
|
$ |
3.18 |
|
$ |
(0.04) |
|
$ |
3.14 |
|
$ |
2.25 |
|
$ |
(0.04) |
|
$ |
2.21 |
|
|
|
Nine Months Ended |
| ||||||||||||||||
|
|
September 30, 2018 |
|
September 30, 2017 |
| ||||||||||||||
(Shares in thousands, dollars in millions, except per |
|
Basic |
|
Effect of |
|
Diluted |
|
Basic |
|
Effect of |
|
Diluted |
| ||||||
Shareholders net income |
|
$ |
2,493 |
|
|
|
$ |
2,493 |
|
$ |
1,971 |
|
|
|
$ |
1,971 |
| ||
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average |
|
242,404 |
|
|
|
242,404 |
|
252,980 |
|
|
|
252,980 |
| ||||||
Common stock equivalents |
|
|
|
3,343 |
|
3,343 |
|
|
|
4,078 |
|
4,078 |
| ||||||
Total shares |
|
242,404 |
|
3,343 |
|
245,747 |
|
252,980 |
|
4,078 |
|
257,058 |
| ||||||
EPS |
|
$ |
10.28 |
|
$ |
(0.14) |
|
$ |
10.14 |
|
$ |
7.79 |
|
$ |
(0.12) |
|
$ |
7.67 |
|
The following outstanding employee stock options were not included in the computation of diluted earnings per share for the three months and nine months ended September 30, 2018 and 2017 because their effect was anti-dilutive.
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||||
(In millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
Anti-dilutive options |
|
0.9 |
|
- |
|
0.9 |
|
1.2 |
|
The Company held approximately 52.6 million shares of common stock in Treasury as of September 30, 2018, and 48.6 million shares as of September 30, 2017.
The outstanding amounts of debt and capital leases were as follows:
|
|
September 30, |
|
December 31, |
| ||
(In millions) |
|
2018 |
|
2017 |
| ||
Short-term |
|
|
|
|
| ||
Commercial paper |
|
$ |
- |
|
$ |
100 |
|
Current maturities of long-term debt |
|
- |
|
131 |
| ||
Other, including capital leases |
|
9 |
|
9 |
| ||
Total short-term debt |
|
$ |
9 |
|
$ |
240 |
|
Long-term |
|
|
|
|
| ||
$250 million, 4.375% Notes due 2020 |
|
$ |
247 |
|
$ |
249 |
|
$300 million, 5.125% Notes due 2020 |
|
298 |
|
299 |
| ||
$1,000 million, Floating Rate Notes due 2020 |
|
996 |
|
- |
| ||
$1,750 million, 3.2% Notes due 2020 |
|
1,741 |
|
- |
| ||
$78 million, 6.37% Notes due 2021 |
|
78 |
|
78 |
| ||
$300 million, 4.5% Notes due 2021 |
|
296 |
|
299 |
| ||
$1,000 million, Floating Rate Notes due 2021 |
|
995 |
|
- |
| ||
$1,250 million, 3.4% Notes due 2021 |
|
1,244 |
|
- |
| ||
$750 million, 4% Notes due 2022 |
|
746 |
|
745 |
| ||
$100 million, 7.65% Notes due 2023 |
|
100 |
|
100 |
| ||
$17 million, 8.3% Notes due 2023 |
|
17 |
|
17 |
| ||
$700 million, Floating Rate Notes due 2023 |
|
696 |
|
- |
| ||
$3,100 million, 3.75% Notes due 2023 |
|
3,082 |
|
- |
| ||
$900 million, 3.25% Notes due 2025 |
|
895 |
|
894 |
| ||
$2,200 million, 4.125% Notes due 2025 |
|
2,185 |
|
- |
| ||
$600 million, 3.05% Notes due 2027 |
|
594 |
|
594 |
| ||
$259 million, 7.875% Debentures due 2027 |
|
259 |
|
258 |
| ||
$3,800 million, 4.375% Notes due 2028 |
|
3,771 |
|
- |
| ||
$45 million, 8.3% Step Down Notes due 2033 |
|
45 |
|
45 |
| ||
$191 million, 6.15% Notes due 2036 |
|
190 |
|
190 |
| ||
$2,200 million, 4.8% Notes due 2038 |
|
2,176 |
|
- |
| ||
$121 million, 5.875% Notes due 2041 |
|
119 |
|
119 |
| ||
$317 million, 5.375% Notes due 2042 |
|
315 |
|
315 |
| ||
$1,000 million, 3.875% Notes due 2047 |
|
988 |
|
988 |
| ||
$3,000 million, 4.9% Notes due 2048 |
|
2,961 |
|
- |
| ||
Other, including capital leases |
|
7 |
|
9 |
| ||
Total long-term debt |
|
$ |
25,041 |
|
$ |
5,199 |
|
Notes. In September 2018, New Cigna issued $20.0 billion of senior unsecured notes at maturities ranging from 18 months to 30 years (the Notes). The various tranches of the Notes are included in the table above and can be identified as those having no balance at December 31, 2017. Of the Notes issued, the Company would be required to redeem $17 billion at a redemption price equal to 101% of the principal amount plus accrued interest if the Merger does not close. The proceeds of these mandatory redeemable notes and a portion of the proceeds of the notes due 2048, both of which reported in cash and cash equivalents, are restricted in order to redeem the debt if necessary. The proceeds of all the notes are intended to be used to pay a portion of the cash consideration for the Merger, to repay certain indebtedness of Express Scripts and its subsidiaries and/or to pay related fees and expenses. Proceeds not required for these purposes may be used by New Cigna for general corporate purposes. Interest is payable semi-annually in the case of the fixed rate notes and quarterly in the case of the floating rate notes. Following closing of the Merger, the notes will be guaranteed by the Company and Express Scripts Holding Company (collectively the Guarantors), and guarantees will terminate when certain conditions are met, primarily when the debt issued by the Guarantors is collectively less than 20% of the debt issued by New Cigna and its subsidiaries in the aggregate.
Bridge Facility. In March 2018, in connection with the proposed Merger, the Company and New Cigna entered into a commitment letter (the Commitment Letter) with Morgan Stanley Senior Funding, Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd and 21 additional banks, to provide a $26.7 billion 364-day senior unsecured bridge facility (the Bridge Facility). The Bridge Facility commitment has been reduced to $3.9 billion as of September 30, 2018 after issuing the Notes in the third quarter of 2018 (described above) and entering into the Term Loan Credit Agreement (described below). The Bridge Facility commitment may be used to finance the Merger, repay certain existing Express Scripts debt or pay related fees and expenses.
The Bridge Facility contains customary covenants and restrictions, including a financial covenant that the Company or New Cigna may not permit its leverage ratio which is the ratio of total consolidated debt to total consolidated capitalization to be greater than 60%. These covenants and restrictions will apply only if New Cigna draws upon the Bridge Facility at closing. The Bridge Facility expires at the Merger closing if not drawn upon.
The Company accrued approximately $140 million in fees upon entering into the Commitment Letter. The Company paid $111 million during the nine months ended September 30, 2018 and expects to pay the remainder of the fees over the balance of 2018. The fees were capitalized in other assets and are being amortized to operating expenses over the period the Bridge Facility is outstanding. The Company recorded amortization of the Bridge Facility fees of $50 million during the three months and $135 million during the nine months ended September 30, 2018.
Revolving Credit Agreement. On April 6, 2018, in connection with the proposed Merger, the Company and New Cigna entered into the Revolving Credit and Letter of Credit Agreement (the Revolving Credit Agreement) that matures on April 6, 2023 and is diversified among 23 banks.
Prior to the Merger, the Company can borrow up to $1.5 billion for general corporate purposes, of which up to $500 million is available for the issuance of letters of credit. On and after the Merger, New Cigna can borrow up to $3.25 billion for general corporate purposes, of which up to $500 million is available for the issuance of letters of credit. The Revolving Credit Agreement also includes an option to increase the facility amount by up to $500 million and an option to extend the termination date for additional one year periods, subject to the consent of the banks.
The Revolving Credit Agreement contains customary covenants and restrictions, including a financial covenant that the Company or New Cigna may not permit its leverage ratio to be greater than 50% prior to the Merger or 60% after the Merger. Prior to the Merger, the debt issued in the third quarter of 2018 is excluded from determining the leverage ratio.
Term Loan Credit Agreement. On April 6, 2018, the Company and New Cigna entered into a Term Loan Credit Agreement (the Term Loan Credit Agreement) that is diversified among 26 banks. The Term Loan Credit Agreement provides for a three-year unsecured term loan facility in aggregate principal amount of $3.0 billion, which will be available to finance the Merger, repay certain existing indebtedness of Express Scripts, and pay fees and expenses in connection with the Merger.
The Term Loan Credit Agreement contains customary covenants and restrictions, including a financial covenant that the Company or, after the Merger, New Cigna may not permit its leverage ratio to be greater than 60%.
Prior to the Merger, the Company is the borrower under the Bridge Facility, the Revolving Credit Agreement and the Term Loan Credit Agreement. On and after the Merger, New Cigna will be the borrower under each of these agreements. In certain circumstances, certain subsidiaries of the Company or, after the Merger, New Cigna will be required to guarantee each others obligations under the Bridge Facility, the Term Loan Credit Agreement and the Revolving Credit Agreement.
The Company was in compliance with its debt covenants as of September 30, 2018.
In the third quarter of 2017, the Company completed a cash tender offer to purchase $1.0 billion of aggregate principal amount of certain of its outstanding debt securities. The Company recorded a pre-tax loss of $321 million ($209 million after-tax), consisting primarily of premium payments on the tender.
Note 6 Global Health Care Medical Costs Payable
Medical costs payable for the Global Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities. See Note 7 to the Consolidated Financial Statements in the Companys 2017 Form 10-K for further information about the assumptions and estimates used to establish this liability.
Activity in medical costs payable was as follows:
|
|
Nine Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||
(In millions) |
|
2018 |
|
2017 |
| ||
Beginning balance |
|
$ |
2,719 |
|
$ |
2,532 |
|
Less: Reinsurance and other amounts recoverable |
|
265 |
|
275 |
| ||
Beginning balance, net |
|
2,454 |
|
2,257 |
| ||
Incurred costs related to: |
|
|
|
|
| ||
Current year |
|
16,287 |
|
14,952 |
| ||
Prior years |
|
(189) |
|
(268) |
| ||
Total incurred |
|
16,098 |
|
14,684 |
| ||
Paid costs related to: |
|
|
|
|
| ||
Current year |
|
13,915 |
|
12,689 |
| ||
Prior years |
|
1,925 |
|
1,730 |
| ||
Total paid |
|
15,840 |
|
14,419 |
| ||
Ending balance, net |
|
2,712 |
|
2,522 |
| ||
Add: Reinsurance and other amounts recoverable |
|
243 |
|
261 |
| ||
Ending balance |
|
$ |
2,955 |
|
$ |
2,783 |
|
Reinsurance and other amounts recoverable in the above table includes amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business for which the Company administers the plan benefits but the right of offset does not exist. See Note 8 for additional information on reinsurance.
The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $ 2.8 billion at September 30, 2018 and $ 2.6 billion at September 30, 2017. The remaining balance in both periods reflects amounts due for physician incentives and other medical care expenses and services payable.
For the periods ended September 30, incurred costs related to prior years were attributable to the following factors:
|
|
Nine Months Ended |
| ||||||||
(Dollars in millions) |
|
September 30, 2018 |
|
September 30, 2017 |
| ||||||
|
|
$ |
|
%(1) |
|